The difference between bond and property yields – often referred to as the yield gap, is frequently used as an indicator of when to invest in property. At times when investors focus on growth rather than return, the yield gap easily becomes irrelevant as a direct measurement, since property yields then are adjusted downwards to compensate for an expected future value increase of the property. Similarly, when investors expect declining property values, the yield is adjusted upwards as to compensate for the expected lower future value.

However, at times when property values are forecast to simply grow with inflation, the yield gap becomes a very interesting source of information regarding the pricing of properties as it then indicates the direct risk premium.

When Stockholm office yields bottomed at 4.25% in 2007, the yield gap, compared with inflation linked government bonds, narrowed down to 180 bps. Since then the gap has broadened and currently stands at closer to 400bps. The last time we saw these levels was in 2002-2005, which also happens to be the period when many of the last decade’s most prosperous property investments where made…