By: Fred Wu, Ph.D.
It is sometimes said that the grass is always greener on the other side of the fence. However, for U.S. investors in commercial real estate
, the best opportunities may be right here at home, rather than in the fast-growing Asia Pacific region or the troubled Eurozone.
This, at least, seems to be the case for real estate traded in the public stock markets.(1)
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Exhibit 1 compares the implied cap rates(2) of publicly traded real estate firms in the U.S., Europe, and Asia for the 2005-13 period. It is interesting to note that U.S. cap rates have generally been higher than those in either Europe (excluding the PIGS nations)(3) or the Asia Pacific region (excluding Japan),(4) except for a brief period after 08Q3 when the U.S. mortgage crisis initially hit and the Asian market went into an even bigger panic.
Currently, U.S. cap rates are about 0.4 percentage points higher than those in Europe. Combined with the generally higher growth rate here in the U.S., this suggests that CRE stock market pricing in the U.S. is more attractive than that in Europe.
For Asia Pacific, the comparison is initially less clear. On the one hand, the U.S has higher cap rates, by about 1.3 percentage points. On the other hand, the Asia Pacific region has a higher growth rate.
However, the fact that Asian investors are buying more CRE properties in this country than ever before seems to suggest that, on balance, CRE stock market pricing in the U.S. is still more attractive than that in Asia.
Finally, the countries that make up the PIGS nations do now provide the highest cap rates, at one percentage points above the U.S. average. But there are very good reasons for more generous cap rates. The ongoing economic troubles faced by those countries have made their CRE markets a more suitable playground for investors in distressed properties, rather than typical CRE investors.
(1) The data includes both equity REITs and real estate operating companies. The result is similar if we include only equity REITs.
(2) All cap rate series are value-weighted.
(3) Our European sample includes the firms headquartered in European countries, except those making up the PIGS.
(4) Japan is not included because its economy is at a different growth stage than economies in the rest of Asia, and its sample size is small.
Fred Wu is Director, Research & Development with CoStar Group.
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