The distinction between value and price is a major theme of the 3Q 2018 Situs RERC Real Estate Report, “Under Pressure,” which was released earlier this month.
As Warren Buffett once said, “Price is what you pay; value is what you get.” Even if values are in¬creasing, prices may be increasing at a faster clip, outpacing these value gains.
High values don’t guarantee that a particular property will be a great investment opportunity – the price has to be right. The key to successful value investing is comparing the intrinsic value of an asset against the market price and then buying when the asset is underpriced and selling when the asset is overpriced.
For the quarterly report, survey respondents rated the value vs. price of overall CRE and of the major property types. The ratings are based on a scale of 1 to 10, with 10 indicating that value far exceeds price. According to the responses, industrial and apartment were the only major property types not overpriced in 3Q 2018.
Here’s how the respondents rated the major property types:
According to Situs RERC institutional investors surveyed, the office sector was slightly overpriced in 3Q 2018. The value vs. price rating declined from 4.9 in 2Q 2018 to 4.8 in 3Q 2018. Over the past year, the office sector has been rated as overpriced, except for a temporary spike (5.3) in 1Q 2018. The rating has remained in the range of 4.5 to 5.5 since 3Q 2009.
After Situs RERC institutional investors indicated that the industrial sector was slightly overpriced in 2Q 2018 with a rating of 4.9, the industrial sector’s rating rose significantly to 5.5 in 3Q 2018. The latest rating reflects a return to the norm, as the sector’s rating has otherwise been over 5.0 in every quarter since 4Q 2009.
The retail sector’s value vs. price rating dropped for the second straight quarter, from 4.8 in 2Q 2018 to 4.5 in 3Q 2018. Retail assets continue to be viewed as overpriced and except for a brief spike in 4Q 2016, have been viewed as increasingly overpriced over the past three years.
The value vs. price rating for the apartment sector remained at 5.1 QoQ in 3Q 2018. It was the third straight quarter in which apartments were viewed as underpriced. The apartment sector joined industrial as the only underpriced sectors in 3Q 2018, according to Situs RERC institutional investors.
Situs RERC survey respondents maintained that the sector was overpriced. The value vs. price rating for the hotel sector decreased slightly from 4.8 in 2Q 2018 to 4.7 in 3Q 2018. The sector has been on a declining value vs. price trend for five years.
Situs RERC’s value vs. price rating for overall CRE declined from 4.6 in 2Q 2018 to 4.3 in 3Q 2018, continuing to stay below average and indicating that the overall CRE market is overpriced relative to value. The rating has not been this low since 4Q 2008 and is considerably lower than the post-recession average of 5.1.
Situs RERC provides a high-level view of the CRE investment environment. We base the value vs. price on our own professional knowledge of the CRE market, data from third-party sources and information collected from industry experts, including our clients and institutional survey respondents.
Last week’s Newswatch provided an in-depth look at results in the quarterly report for return vs. risk regarding the major property types.
Next week in Newswatch, we’ll look at the CRE total return forecast for property types, also based on data gathered for our 3Q 2018 Situs RERC Real Estate Report, “Under Pressure.” Our report is the nation’s longest-running real estate research report offering investment criteria and investor insights on all the major markets and property types.
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