Practical Applications of Real Estate Returns

Abstract

Practical Applications In Real Estate Returns, from the Fall 2020 issue of The Journal of Alternative Investments, authors Jack Clark Francis (Baruch College) and Roger G. Ibbotson (Yale University) compare real estate investment returns to those from traditional investments like stocks and bonds. Their key focus is on real estate’s total returns—not just capital gains from rising land prices. The authors find that during the study period (1991–2018), farmland had an annualized total return of 11.4%—outperforming stocks—while residential real estate returned 9.0% and commercial real estate returned 8.5%. Most importantly, they find that rents provide the majority of investment returns from all real estate. They therefore warn investors and financial advisors not to base their investment decisions solely on how much real estate prices go up. However, they say real estate investment risk is hard to gauge because the methods used to track real estate price changes cause artificial smoothing. Real estate’s performance also shows a low correlation with that of stocks and bonds—so financial advisors and institutional investors may wish to consider adding real estate to traditional investment portfolios to help with diversification.