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The sharp rise in interest rates has pushed up yields across property sectors and geographies, driving down property values. We employ the P/E (price-to-earnings) ratio, a well-known gauge of public equities valuation, to determine whether property values have fallen to the point where they offer enticing potential returns.

For our analysis, we convert our all-property cap rate to an implied P/E ratio, which is currently at 17.7. We then benchmark the current P/E ratio against the projected five-year forward average return.

The accompanying graph illustrates a negative correlation between the P/E ratio and future returns over a five-year time horizon. A lower P/E ratio indicates that real estate is undervalued and thus offers stronger anticipated returns. Conversely, a higher P/E ratio typically portends weaker future returns.

Examining the market in this way can reveal where we are in the real estate investment cycle. Anticipated future returns often peak when investors begin to place greater emphasis on property earnings, leading to an uptick in the P/E ratio. This is precisely what happened during the 2001-2003 and 2010-2011 downturns, and appears to characterize the market today.

The current P/E ratio of 17.7 may suggest that real estate is relatively cheap compared with the historic P/E average of 18.2. Thus, this could be an attractive time to put fresh capital to work in real estate.