The Rate of Return on Real Estate: Long-Run Micro-Level Evidence
50 Pages Posted: 25 Jun 2019 Last revised: 26 Sep 2019
Date Written: September 25, 2019
Direct real estate investments are less profitable and more risky in the long run than previously thought. We hand-collect property-level financial data for four large U.K. institutional investors—Oxbridge colleges—for the period 1901–1970. Gross income yields initially fluctuate around 5%, but then trend downward (upward) for agricultural and residential (commercial) real estate. Net yields are about one third below gross yields on average. Long-term real income growth rates are close to zero. These findings imply real annualized net total returns of less than 4% across all property types. Moreover, real estate investments are associated with considerable idiosyncratic risks.
Keywords: real estate, property prices, rental yields, long-run returns, idiosyncratic risks
JEL Classification: G11, G12, G23, N20, R30
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