Yield Compression and Risk Premia: A Comparison of the US, UK and Australian Real Estate Markets

David Rees

ERES from European Real Estate Society (ERES)

Abstract: Yield compression pervades commercial real estate markets. As a result, capital growth is high and investment returns are temporarily inflated. Forecasts of future investment returns and formulation of appropriate investment strategies depend on the whether current yields are sustainable. Alternative explanations for yield compression are considered in light of three facts: commercial real estate has historically outperformed other asset classes on a risk adjusted basis; yield compression in real estate has coincided with a decline in real long-term interest rates, and yield compression has been greater for secondary grade real estate assets than for prime assets. Valuations in commercial real estate valuations in three markets ñ the US, UK and Australia - are examined and compared. Yield compression can be interpreted as a response to fundamental financial drivers such as real interest rates and risk-adjusted returns. Therefore while returns and yields will be lower going forward, current yield are consistent with current levels of real interest rates and expected risk adjusted returns.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2007-01-01
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