The Rate of Return on Real Estate: Long-Run Micro-Level Evidence

48 Pages Posted: 25 Jun 2019 Last revised: 3 Jul 2019

See all articles by David Chambers

David Chambers

University of Cambridge - Judge Business School, Department of Finance & Accounting

Christophe Spaenjers

HEC Paris - Finance Department

Eva Steiner

Cornell SC Johnson College of Business

Date Written: June 20, 2019

Abstract

We provide evidence that direct real estate investments are less profitable and more risky in the long run than previously thought. We hand-collect property-level data on realized income, expenses, and transaction prices from the archives of four large institutional investors in the U.K. — historically important Oxbridge colleges — for the period 1901–1970. Gross income yields mostly fluctuate around 5%, but trend to lower (higher) levels for agricultural and residential (commercial) real estate near the end of our sample period. Operating costs mean that net yields are about one third lower than gross yields on average. Long-term real income growth rates are between -1.0% and 0.0% for the three main property types. Together these findings imply limited long-run capital gains and real annualized net total returns of less than 4% across all property types. Moreover, we find substantial volatility in net income streams and variation in relative price levels across transacted properties, revealing the considerable idiosyncratic risks associated with real estate investments.

Keywords: real estate, property prices, rental yields, long-run returns, idiosyncratic risks

JEL Classification: G11, G12, G23, N20, R30

Suggested Citation

Chambers, David and Spaenjers, Christophe and Steiner, Eva Maria, The Rate of Return on Real Estate: Long-Run Micro-Level Evidence (June 20, 2019). HEC Paris Research Paper No. FIN-2019-1342. Available at SSRN: https://ssrn.com/abstract=3407236 or http://dx.doi.org/10.2139/ssrn.3407236

David Chambers

University of Cambridge - Judge Business School, Department of Finance & Accounting ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
44 (0)1223 339700 (Phone)

Christophe Spaenjers (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Eva Maria Steiner

Cornell SC Johnson College of Business ( email )

465B Statler Hall
Ithaca, NY 14853
United States

HOME PAGE: http://https://sha.cornell.edu/faculty-research/faculty/ems457/

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