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Have real estate returns been overstated?

A new study suggests that the annual growth rate in net total returns from property investments is closer to zero
Have real estate returns been overstated?
  • Previous studies have been too general in analysing rental income and transaction data
  • Holding costs have been overlooked, which can mean the risk to returns is underestimated 
  • Commercial property has outperformed residential in recent decades

Property has long held a special allure for investors. Part of the attraction lies in the theory that placing cash in bricks and mortar offers stable, long-term income that is tied to inflation. Yet what if real estate does not generate the returns that have previously been assumed? That is the conclusion reached in a new study led by HEC Paris professor Christophe Spaenjers.

In a newly released paper The Rate of Return on Real Estate: Long-Run Micro-Level Evidence, Professor Spaenjers and his two co-authors analysed the real estate investments held in the endowments of two Cambridge and two Oxford colleges, from 1901 to 1983. The holdings include commercial and agricultural real estate, and residential property let at open market rents. The findings implied annualised real total returns, net of costs, ranging from approximately 2.3 per cent for residential to 4.5 per cent for agricultural real estate. Not only were capital gains lower over the long term, but the rate of growth in those income returns was also close to zero for all property types: +0.3 per cent for agricultural, -0.3 per cent for commercial, and -1.0 per cent for residential real estate.

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