Green Street Analyst Says Asset Values at Previous Market Peaks

Andrew McCulloch, managing director and head of real estate analytics at Green Street Advisors, joined REIT.com for a video interview at REITWorld 2014: NAREIT’s Annual Convention for All Things REIT at the Atlanta Marriott Marquis.

Green Street recommends that all investors should follow the REIT market, regardless of whether they invest in the sector. McCulloch explained that private investors benefit from keeping a close eye on REITs because the REIT market is a very good predictor of private market asset values. He explained that if REITs trade at a big premium to NAV for a long period, private market assets tend to rise. The opposite is true if REIT shares are trading at a large discount to NAV, he added.

“If I’m a private market investor, REIT pricing is just another tool in my toolkit,” McCulloch said.

McCulloch also commented on the recent run-up in real estate valuations.

According to Green Street’s Commercial Property Price Indices, asset values for all the major property sectors are at or above 2007 levels, McCulloch observed.

For asset types such as malls and apartments, values are 20 to 30 percent above 2007 levels, he said. Office and hotel valuation levels are about back to 2007 levels, McCulloch noted, while other major property types are somewhere in between.

Looking ahead, while values may look “skinny in an absolute sense,” when compared with corporate and government bonds “they actually look attractive,” McCulloch said. He added that Green Street expects that the wide spread between expected returns on real estate and those of fixed income will put continued downward pressure on capitalization rates and upward pressure on asset values.

McCulloch also pointed out that most real estate investors underestimate capital expenditure requirements, which creates “systematic mispricing” in the market. As a result, McCulloch said Green Street advises investors to overweight property types with low capital expenditures, such as apartments, self-storage and manufactured housing.