Green Street Says Non-Traditional Sectors Still Offer Risk Premium

Dirk Aulabaugh, managing director, advisory and consulting, at Green Street Advisors, participated in a video interview at Nareit’s REITworld: 2019 Annual Conference in Los Angeles.

According to Green Street’s estimates, traditional sectors have been priced to deliver a 5.7% return this year, on average, and non-traditional sectors have been priced to deliver 6.5%. This spread has tightened considerably from the 2016 average of 110 basis points.

Aulabaugh noted that in the past couple of years, institutional investors have moved into non-traditional sectors in a quest for yield, which has caused the risk premium to drop. That level of interest is going to continue, he said. “We’re seeing institutional investors all over the globe focus on these non-traditional sectors. Even though the risk premium has shrunk, there is still a risk premium relative to the larger sectors.”

Green Street expects continued convergence of traditional and non-traditional sector yields, Aulabaugh added. “Are they ever going to be on top of the major sectors? The answer is no. There’ll probably always be a premium because the information isn’t as transparent.”

Aulabaugh also said that when stocks are trading at premiums to their net asset value (NAV), Green Street advises companies to issue stock and buy assets in the private market. When stocks are trading at discounts to NAV, Green Street advises companies to sell assets at the private market value and buy back stock or pay down debt.