Real Estate income yields (cap rates) have a relationship over time to Baa Corporate Bond yields. They are both credit sensitive and credit worthy. The average historic cap rate/bond is 107%. When this measurement is higher by one standard deviation, real estate is considered “undervalued”, and when this measurement is lower by one standard deviation, real estate is considered “overvalued”. The current ratio (120%) indicates that real estate is still attractively priced. However, this past quarter, the ratio fell again, this time Q2 2012 levels, due to a slight decrease in average cap rates.
Source : CBRE Global Investors