Real estate
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Abstract
W hat real returns can be expected from investing in real estate over the long term? What are the risks and uncertainties surrounding these return expectations? How are these returns correlated with returns expected from other asset classes in a diversified portfolio? Numerous empirical studies have been undertaken in an attempt to provide some indication of real estate’s investment performance. Unfortunately, these studies are not directly comparable because they vary in so many dimensions: property type sampled, property location, time period covered, assumptions regarding degree of leverage, taxation, rate of return, and risk measures. Despite these differences, a great deal of valuable information on real estate performance has been collected. The objective of this paper is to draw conclusions about historical real estate returns and risks and their relationship to the performance of other asset classes. To accomplish this objective, we have reviewed and critically analyzed the empirical studies measuring real estate returns, and we have expanded many of them by including more recent data, by recalculating returns over different holding periods to facilitate comparisons, and by adjusting for inflation to produce a common denominator over varying time periods.