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Why Are REITS Currently So Expensive?

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  • Van Nieuwerburgh, Stijn

Abstract

For the last several years, the price of listed real estate stocks has been unusually high relative to dividends. I explore whether low interest rates or low risk premia can account for the high valuation ratios and find that they cannot. 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 that is far above the growth rates seen in the data. High implied growth rates hold across traditional REIT sectors, but are less extreme for non-traditional REIT sectors. Income growth expectations are also less extreme for an index of international listed real estate. Investors who ignore the recent increase in interest rate risk that we document would need to hold lower, but still unusually large income growth expectations.

Suggested Citation

  • Van Nieuwerburgh, Stijn, 2017. "Why Are REITS Currently So Expensive?," CEPR Discussion Papers 12281, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12281
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    Citations

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    Cited by:

    1. Marton Lotz & Daniel Ruf & Johannes Strobel, 2023. "Uncertainty premia in REIT returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(2), pages 372-407, March.
    2. Arpit Gupta & Stijn Van Nieuwerburgh, 2021. "Valuing Private Equity Investments Strip by Strip," Journal of Finance, American Finance Association, vol. 76(6), pages 3255-3307, December.
    3. Gupta, Arpit & Mittal, Vrinda & Peeters, Jonas & Van Nieuwerburgh, Stijn, 2022. "Flattening the curve: Pandemic-Induced revaluation of urban real estate," Journal of Financial Economics, Elsevier, vol. 146(2), pages 594-636.
    4. W. Scott Frame & Eva Steiner, 2022. "Quantitative easing and agency MBS investment and financing choices by mortgage REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(4), pages 931-965, December.
    5. William N Goetzmann & Christophe Spaenjers & Stijn Van Nieuwerburgh, 2021. "Real and Private-Value Assets [Gendered prices]," The Review of Financial Studies, Society for Financial Studies, vol. 34(8), pages 3497-3526.
    6. Jianfu Shen & Eddie C.M. Hui & Kwokyuen Fan, 2021. "The Beta Anomaly in the REIT Market," The Journal of Real Estate Finance and Economics, Springer, vol. 63(3), pages 414-436, October.
    7. Van Nieuwerburgh, Stijn & Gupta, Arpit, 2019. "Valuing Private Equity Strip by Strip," CEPR Discussion Papers 14241, C.E.P.R. Discussion Papers.
    8. Masud Alam, 2021. "Time Varying Risk in U.S. Housing Sector and Real Estate Investment Trusts Equity Return," Papers 2107.10455, arXiv.org.
    9. Gupta, Arpit & Van Nieuwerburgh, Stijn & Kontokosta, Constantine, 2022. "Take the Q train: Value capture of public infrastructure projects," Journal of Urban Economics, Elsevier, vol. 129(C).
    10. Maurice McCourt, 2022. "Permanent private equity: Market performance and transactions," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(2), pages 339-383, June.
    11. Jaccard, Ivan, 2021. "Leveraged property cycles," Working Paper Series 2539, European Central Bank.
    12. Dragana Cvijanović & Stanimira Milcheva & Alex Minne, 2022. "Preferences of Institutional Investors in Commercial Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 65(2), pages 321-359, August.

    More about this item

    Keywords

    Real estate valuation; Commercial property; Reits; Real estate risk and return; Real estate bubble;
    All these keywords.

    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • R33 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Nonagricultural and Nonresidential Real Estate Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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