For mainstream financial asset classes, measuring investment performance is usually based on sale prices. In contrast, direct real estate is well known for being an illiquid and diverse asset class where assets change hands relatively infrequently. Investors and managers therefore typically rely on valuations. But how close do valuations get to actual transactions?
Using data from the Property Council of Australia/MSCI Australia Annual Property Index, we can attempt to answer this question by comparing observed transaction prices against valuations. In 2018, Australian assets sales achieved an average premium over their valuation of 5.9 per cent. Over the longer-term, the premium is slightly lower at 3.6 per cent.
The office sector achieved the highest average premiums in 2018 at 9.8 per cent; at the higher end of its historic range and more than double the long-term average. This is because office markets, particularly in Sydney and Melbourne, have been relatively strong in recent years with low vacancy, strong demand, record high rents and sales results. By contrast, retail assets achieved a slightly negative premium in 2018 at -0.4 per cent meaning, on average, they sold for fractionally less than their valuation. For the retail sector, concerns around the impact of e-commerce have weighted on investor sentiment and contributed to this result.
The premium that we observe tends to be correlated with the real estate cycle, typically widening in fast-moving market conditions, where valuers may struggle to keep pace. That said, they tend to have historically had a positive bias as seen in the positive long-term averages.
For those interested in a deeper discussion of how valuations are tracking against transaction prices in a global context, MSCI produces an annual report on this topic. The latest edition, Private Real Estate: Valuations and Sale Price Comparison Report 2018 Results, is available on MSCI’s website.
Written by Bryan Reid, Vice President, Research, MSCI