Volatility in financial markets and increased risks associated with euro zone sovereign debt issues have heightened investor risk aversion and led to a reduction on the yields for Treasury bonds.

Traditional capital asset pricing models typically adopt Treasury bonds as the risk-free rate. The reduction in Treasury yields has resulted in the capital asset pricing model (CAPM) giving buy signals for equities, property and corporate bonds.

The focus for this article is prime-grade office assets in the Australian financial centers of Sydney and Melbourne. We will attempt to cut through the noise and prove that prime-grade assets are genuinely and not artificially cheap.

THE LONG-TERM PERSPECTIVE

The first part of the analysis considers the long-term average for prime equivalent yields. The graph on page 23, “Sydney and Melbourne CBD Prime Equivalent Yield,” shows the average of the prime equivalent yield range for Sydney and Melbourne from 1980 to second