At first glance, real estate seems like a straightforward asset: a property has value, and that value grows or declines over time. Look closer, though, and the same type of real estate can be valued very differently depending on whether it is held privately or traded publicly.

This disconnect, known as the valuation gap, is one of the most often misunderstood features of modern finance. Knowing where it comes from helps investors read property prices more accurately.

What Are Private vs Public Real Estate?

Private real estate refers to physical properties or funds that are not traded on public markets. These are typically valued through appraisals, which rely on periodic assessments.

Public real estate includes assets like Real Estate Investment Trusts (REITs), companies that own property and whose shares are traded on stock exchanges. Their prices fluctuate daily based on market sentiment, interest rates, and investor expectations. Both represent underlying property value, but their pricing mechanisms are fundamentally different, and that is where the gap begins.

Why Do Valuation Gaps Exist?

Three forces explain most of the gap: how often values are updated, how easily the assets can be sold, and how much investor sentiment drives prices.

Appraisal Smoothing vs Market Volatility

Private real estate valuations are often updated only quarterly. This leads to what is known as appraisal smoothing: prices appear more stable because they lag behind real market conditions. Public real estate reacts almost immediately when interest rates rise or investor sentiment shifts, so public markets move first and private markets catch up later.

Liquidity Premium and Discount

Liquidity matters too. Public real estate is highly liquid, since shares can be bought or sold quickly. Private real estate is much harder to exit, and a transaction often takes months to complete. Investors may pay a premium for that liquidity, while private assets can appear more stable without being more accurately priced.

Investor Sentiment and Market Psychology

Public markets are heavily influenced by sentiment. Fear, optimism, and macroeconomic expectations can push REIT prices above or below the underlying value of their assets. Private valuations rely more on historical data, so they reflect what has already happened, while public prices reflect what investors think will happen.

When the Gap Widens

Valuation gaps tend to expand during periods of economic uncertainty. Rising interest rates can quickly push down public real estate prices, while private valuations may stay elevated until appraisals catch up.

In 2022, for example, the FTSE Nareit All Equity REITs Index lost about 24.9%, while the NCREIF ODCE index of private core funds still reported a gross return of 7.47%. The private index only turned negative in the final quarter of that year.

Economist Brad Case, formerly senior vice president of research at Nareit, the US REIT association, has argued in his research and commentary that public real estate acts as a leading indicator for private values, because REIT prices adjust faster to new information. So the gap is often a matter of timing rather than a contradiction.

What It Means for Investors

Understanding this gap can lead to smarter decisions. If public real estate is trading at a significant discount, it may signal that private valuations are due for adjustment. Conversely, if public markets are overly optimistic, they may be pricing in growth that has not materialized yet.

Experienced investors often compare both markets to identify mispricing and potential entry points. Neither number is wrong: private markets emphasize stability and long-term fundamentals, while public markets emphasize speed and expectations.

So, Lykkers, the next time you hear that real estate values are stable or falling, check which market the figure comes from. Before buying into a private fund, look at how recently its properties were appraised and compare that with how listed REITs holding similar assets have moved since. A wide difference suggests the reported value may still adjust.