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