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 ratio is 108%. When this measurement is higher by more than one standard deviation, real estate is considered “undervalued,” and when this measurement is lower by more than one standard deviation, real estate is considered “overvalued.” The current ratio, 113%, indicates that real estate is attractively priced, and is gaining traction – the previous two quarters held constant at 110%. This is a positive indicator, as this quarter, the ratio marches closer towards “undervalued” territory.
Source : CBRE Global Investors