Listed real estate stock prices are changing moment by moment, reflecting investors’ perceptions of the value of public real estate companies and updating constantly as new information is absorbed by the market. This leads to much higher pricing volatility than private real estate, and perhaps a tendency to overreact on both the upside and the downside. But this also means listed real estate stocks can be a leading indicator for private real estate values, as private market transactions are slower and private market index information is at least a quarter out of date when published.
“The REIT market is increasingly a leading indicator,” explains Scott Crowe, chief investment strategist at CenterSquare Investment Management. The firm, which has been tracking implied cap rate changes in the REIT market since 1995, has begun publishing the data in a new analysis, The REIT Cap Rate Perspective, available upon request.
“Often what the REIT market is worried about today, you will see the private market focusing on tomorrow,” says Crowe.
Crowe acknowledges the data is better at suggesting direction than level, as there is some volatility and short-term noise, but says implied REIT cap rates provide a better snapshot of the broader real estate market than the more commonly used discount/premium to net asset value.
“The listed market is directionally correct, but the exact level can be inaccurate,” cautions Crowe.
Still, such information can be very useful for private real estate investors. Implied REIT cap rates have been indicating a wide divergence between retail and industrial values, and forecast the downturn in retail property prices and ongoing surge in industrial asset values.
“For those paying attention, the signals were there,” says Crowe.
Such signals have benefits for investors in both private and public real estate because the spreads between private and public cap rates can create an opportunity for arbitrage, as well as indicate where prices may be headed in the future.
“As a private buyer in the public market, it helps us think about things in terms of the cap rate we can achieve, the growth we can enjoy and the IRR that we can receive, and unchain ourselves from this premium/discount to NAV, which is increasingly a lagging indicator,” says Crowe. “And then on the private market, it’s really useful to notice some turning points in trends for assets.”
Loretta Clodfelter is editor of Institutional Real Estate Americas.