US institutional real estate pricing, as measured by stabilized properties in the NFI-ODCE1, is below levels seen pre-GFC (4.9% vs 5.5%). However, it is important to assess real estate pricing relative to other asset classes (Exhibit 1). The real estate cap rate (for description of various cap rates, see our document entitled "Cap Rate Confusion") is currently 60 basis points below the pre-GFC average rate while 10-year Bbb rated bonds and US Treasury rates are 210 and 240 basis points lower, respectively. Public equities, when one uses the S&P 500 as a proxy, have a similar rate of change as real estate with the S&P cap rate equivalent pricing 60 basis points lower than pre-GFC levels. When breaking down the price and focusing on the strength of earnings, current operating earnings are 24% higher than levels seen in 2006-2007 (USD 27.5 vs USD 22.2 earnings per share). Similarly, NFI-ODCE net operating income (NOI) is 21% higher than that of pre-GFC levels, at USD 3.9 million per property compared to USD 3.2 million per property on a same-store basis.
Source : UBS AG