Barbara Reinhard, CFA
Senior Managing Director, Chief Investment Officer, Multi-Asset Strategies and Solutions
Back in January, Blackstone said that real estate values were bottoming and that they expected deal activity to pick up in 2024. True to its word, Blackstone recently announced a $10 billion deal to take Apartment Income REIT (NYSE: AIRC) private. In addition, Blackstone Real Estate Income Trust (or BREIT) saw its share buyback request decline for March—down 17% from February and a whopping 85% from a year earlier, although redemption levels remain elevated.
Given all the negative headlines and pessimistic sentiment around the real estate sector, especially commercial real estate, one would expect that the asset class would be trading at cheap valuations. However, that doesn’t seem to be the case. According to BofA Global Research’s latest valuation comp sheet, U.S. REITs trade at a Price/Net Asset Value (NAV) of around 85% and a 2024 Price/Adjusted Funds from Operations (AFFO) of around 16.7x (with an AFFO yield of circa 6%).
Since the 2007-2008 financial crisis, U.S. AFFO yields have averaged around 4-6% and the U.S. REIT equity risk premium (AFFO yield minus real bond yields) has been about 4%, according to Green Street. The current 6% AFFO yield is certainly at the cheap end of the range, but in line with both the historical average and the expected equity risk premium—current U.S. 10yr real yields are around 2.2%, which implies an AFFO yield of about 6.2%. Taken together, the asset class seems to be fairly priced from a valuation perspective and, as a result, we remain underweight.
Maverick Lin contributed to this article.