History of Home Values

CRE Premium to Treasuries Signal Time to Buy Property?

From Bloomberg today:

U.S. commercial real estate yields are near the highest level relative to Treasury bonds on record, a signal to some investors it’s 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.

That spread is near the record 539 basis points in the first quarter of 2009, when the U.S. was mired in the worst of the financial crisis and property prices sank. Risk-averse investors are seeking the highest-quality office towers, hotels and apartments as the gap widens, according to Nori Gerardo Lietz, partner and chief strategist for private real estate at Partners Group AG in San Francisco.

“The data indicate that real estate is poised for a rebound,” said Gerardo Lietz, who advises pension funds on property investments.

Sounds good huh? Except that we are not in any better an economic or fundamental position now than we were in late 2008 when the cap rate / treasury spread was near an all time high.

The biggest hole in this “spread” investment thesis is the gross reliance of the spread to Treasuries without recognition and appreciation that Treasuries themselves are most likely in a bubble. This is why it is best to take a truly fundamental look at your investments.