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

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. AbstractWe provide evidence that direct real estate investments are less proftable 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 fuctuate 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 fndings imply limited long-run capital gains and real annualized net total returns of less than 4% across all property types. Moreover, we fnd 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.JEL Classification: G11, G12, G23, N20, R30.

Seventy-Five Years of Investing for Future Generations

“…The real estate weight in US endowment portfolios remained low during the whole period we studied. This practice contrasts with that of the wealthiest universities in the United Kingdom-namely, Cambridge and Oxford-which historically have devoted a significant proportion of their portfolio to real estate (Chambers, Spaenjers, and Steiner 2019). The maximum real estate allocation in the sample throughout our sample period and graphed in Figure 1 is that of Columbia University.…”

Cost-Benefit Analysis (CBA) of Sustainable Drainage Systems (SUDS) Retrofit: a Case Study

“…SuDS is a generic term that refers to various measures aimed at managing surface water runoff and consequent flooding and pollution problems from urban catchments [9]. SuDS is defined as the management of rainwater, which includes snow and other precipitation, with the aim of reducing damage caused by flooding events, improving the quality of water, the improvement and protection of the environment, the improvement and safety of the health of the residents and the process of ensuring the effective stability and durability of drainage systems [10].…”

“…However, there remains growing interest in the introduction of this technology [9] and stakeholders and researchers have sought to develop modalities on how to make SuDS more acceptable and relevant within the UK [14]. Examples of retrofitting SuDS can be seen in the installation of green roofs, the diversion of roof drainage from a combined sewer system into rain gardens, the conveyance of road runoff via roadside swales into a pond sited in an area of open space [10]. These represent alternative ways of influencing the quality of the water downstream and the problems relating to it, thereby providing a more effective, resilient and sustainable approach.…”

“…A CBA was undertaken by calculating the net value (NV) and the net present value (NPV) of the SuDS retrofit project, assuming investment returns within 10 years, as per [10], [18]. Using the average of the upper and lower benefit intervals (see Fig.…”

International Real Estate Review

“…In Europe, Chambers et al (2019) analyze property-level financial data for the institutional real estate portfolios of four large Oxbridge colleges over the period of 1901-1983 and find that real estate, housing in particular, is a less profitable investment in the long run than previously thought. Cvijanović and Spaenjers (2020) analyze all house and apartment transactions in Paris for the period of 1992-2016 and find that "out-of-country" buyers buy houses at higher prices and resell at substantially lower prices than local investors, and the causal effect of out-of-country demand shocks on property prices is positive but small.…”