NCREIF Cap Rate to Treasury Spread Update

September 6th, 2010  ::  Posted by CRE Console

Several weeks ago, we posted about cap rate to treasury spreads during a discussion covering technical indicators. Bloomberg has an article along this same vein, titled “Real Estate Premium Near Record to U.S. Bonds Signals Time to Buy Property”.

Capitalization rates, a measure of real estate yields, averaged 7.22 percent in the second quarter, based on an index calculated by the National Council of Real Estate Investment Fiduciaries. That was 429 basis points, or 4.29 percentage points, higher than the yield on 10-year government bonds as of June 30, according to data compiled by Bloomberg. It’s about 475 basis points higher than Treasury yields as of yesterday.

Bloomberg missed this prime opportunity to present a graphic, but, effectively this is what they’re talking about:

Cap Rate to Treasury Spreads

Let’s take this benchmark a step further. Over the last 12 months or so, there has been substantial foreign capital flows into U.S. commercial real estate markets. This risk premia could be one reason why:

Country Risk Premia

The United States’ cap rate to 10-year treasury spread went from 133 basis points in Q2 2007 to 517 basis points in Q2 2010. In other words, U.S. cap rate spreads went from the 2nd lowest in a group of comparable industrialized economies, to the highest over the last 36 months.

What other indicators could be viewed as buy or sell signals in today’s market?

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