The characteristic of REITs to quickly reprice based on sentiment, due to their publicly traded nature, was very evident in 2022. This isn’t uncommon. In times of uncertainty, REIT share prices will often deviate from the actual market prices of the underlying property they hold . This means they can trade above or below the intrinsic value of the pool of real estate itself.
A price/book ratio of one would mean that the trading price of the REIT exactly reflects the current NAV. Less than one suggests the REIT is either undervalued or that investors expect its price to decline. Greater than one suggests the REIT is either overvalued or that it might be expected to grow in price. Theoretically, a REIT should trade at a price that is a slight premium above its NAV considering the benefit of its high liquidity versus physical ownership of real estate.
In all, what does this tell us? First, there is a relatively strong long-term case for investing in commercial real estate, depending on the investor. Second, publicly traded investments can be subject to rapid speculation based on fear and greed . Third, it reinforces why some choose to own real estate through the RELP structure, believing that the investment price and NAV will be closer to real market rates.
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Source: financialpost - 🏆 7. / 85 Read more »