Why are REITS Currently So Expensive?

Over the last several years, the price of listed real estate stocks has been unusually high relative to dividends. I find that neither low interest rates nor low risk premia can account for the high valuation ratios. Lower interest rates have been offset by rising risk premia to keep expected return...

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Bibliographic Details
Published in:Real estate economics 2019-03, Vol.47 (1), p.18-65
Main Author: Van Nieuwerburgh, Stijn
Format: Article
Language:English
Subjects:
Economic models
Growth rate
Income
Interest rates
Real estate
REITs
Risk premiums
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Summary:Over the last several years, the price of listed real estate stocks has been unusually high relative to dividends. I find that neither low interest rates nor low risk premia can account for the high valuation ratios. Lower interest rates have been offset by rising risk premia to keep expected returns close to average. Instead, the market has priced in future income growth on commercial properties far above the growth rates seen in the data. High implied growth rates are less extreme for nontraditional REIT sectors. Income growth expectations are also less extreme for international listed real estate.
ISSN:1080-8620
1540-6229
DOI:10.1111/1540-6229.12238