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Inflation and RE rant: I don't think I have read a single year-end letter this year that didn't have a good bit of handwringing about inflation. Usually accompanied by a chart showing M2 growth.
For RE in particular, all that should matter is inflation *expectations* and the degree to which they are reflected in *today's* prices
Higher expected inflation (lower real returns) you would expect that to be reflected in higher discount rates on NOI and lower valuations.
Higher expected inflation (lower real returns) you would expect that to be reflected in higher discount rates on NOI and lower valuations.
Yet, we see sub-5/4 caps trade everyday, what gives!?
Either there is so much liquidity (undeployed capital and cheap financing) that any deal with a >0% real return is viable
Either there is so much liquidity (undeployed capital and cheap financing) that any deal with a >0% real return is viable
OR actual inflation expectations, as reflected in the market, are below what traditional analysis of the money supply would suggest
OR Finally, it could be that that the private market is a poor reflection of inflation expectations generally since management fees and promotes are not calculated on real return outcomes and therefore less impacted by inflation
Take a publicly traded REIT like $EQR and sparing a lot of work trying to come up with an accurate NAV, let's just take the inverse of EV/EBITDA (14.38) that gets you something closer to a 7-cap on presumably high-quality MF assets
In theory the public/private spread should be reversed because of liquidity premium but some of that can be chalked up to different lvls of leverage.
As an investor you have to wonder what factors go into the public/private spread and how it should inform your own underwriting
As an investor you have to wonder what factors go into the public/private spread and how it should inform your own underwriting
