Academic journal article Journal of Real Estate Portfolio Management

Returns and Risk on Real Estate and Other Investments: More Evidence

Academic journal article Journal of Real Estate Portfolio Management

Returns and Risk on Real Estate and Other Investments: More Evidence

Article excerpt

Executive Summary. This study reviews the most recent findings on real estate returns, and organizes the reviews into five categories: (1) risk and returns; (2) diversification and portfolio optimization benefits; (3) returns on real estate versus other investments; (4) REITs; and (5) inflation and real estate returns. An annotation of each study is provided and current findings are compared to those of previous studies.

Real estate research is broadening to include topics such as market efficiency, REITs and the power of macroeconomic variables in explaining and predicting real estate returns. Discussed are findings on whether real estate provides diversification benefits, real estate returns versus other investments, REIT return performance and real estate as an inflation hedge.


This study updates the literature on real estate returns and related issues by extending previous literature surveys, specifically Sirmans and Sirmans (1987) and Norman, Sirmans and Benjamin (1995). The literature on real estate returns is organized into five categories and respective summary tables. The categorical topics are: (1) returns on real estate investments; (2) diversification and portfolio optimization benefits of real estate; (3) returns on real estate versus other types of investment; (4) returns on real estate measured by REIT performance; and (5) inflation and real estate returns.

Academic studies have examined real estate returns from many perspectives, both empirically and theoretically. A common area of interest is the investment performance of real estate versus other assets. Often these studies find mixed results on the returns generated by real estate relative to other asset classes. Other studies have examined the optimal level of real estate to hold in a diversified portfolio. Many studies suggest varying the portfolio allocations of real estate over time.

One area of real estate returns in which researchers are in more general agreement is the ability of real estate to offer an inflation hedge. Most historical researchers agree that real assets provide protection against the negative consequences of unexpected inflation. This positive attribute of real estate is likely a primary reason for its inclusion in many portfolios, especially for pension funds. Because real estate returns are often shown to have a low correlation with returns of financial assets, real estate investments are often found to offer a significant diversification alternative for pension fund managers.

Returns On Real Estate Investments

Several issues regarding the general nature of real estate returns focus on real estate market efficiency, as measured by the distribution of returns, the predictability of real estate returns, the macroeconomic variables that may help explain variations in real estate returns, methods of measuring real estate risk and returns, and the returns of specific types of property (such as office properties, foreign real estate or contaminated properties). Other studies seek to supply methods or assistance for better understanding real estate returns and markets. Summaries of articles examining the general nature of real estate returns are found in Exhibit 1.

Several studies examine the returns on singlefamily housing. Case and Shiller (1990) use single family home prices and excess returns in metropolitan areas and find that the single-family housing market is not efficient. They find price changes typically continue in the same pattern for more than one year. Price changes and excess returns for a subsequent year are all positively related to construction costs, real per capita income growth and adult population growth. The single-family housing market is also examined by Crone and Voith (1999) who find evidence to support the idea that the consumption-investment link negates the riskreturn tradeoff. Including a consumption variable in their examination of the commercial real estate, Ling and Naranjo (1997) find a significant risk premium on consumption, contradicting prior findings of abnormal real estate returns in this market. …

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