The Historical Environment of Real Estate Returns

Executive Summary. Returns on real estate investments have been examined from many historical perspectives. This study provides a comprehensive review of the real estate investment literature according to the following topics: (1) general returns and risk on real estate, relative to other investments; (2) benefits from diversification and portfolio optimization; (3) returns on real estate as measured by REIT performance; and (4) inflation and real estate returns.The results are quite interesting. Most studies that provide a comparison show that real estate has higher absolute returns than debt (such as bonds). The performance of real estate, in comparison to common stocks, is mixed. Slightly more than half of the studies that provide a direct comparison show a higher average return for stocks than for real estate. However, when adjusting for risk, most studies find that real estate investments have a higher return per unit of risk than bonds or stocks. There is a consensus among studies examining the issue that diversification with real estate can enhance risk-adjusted portfolio yield. Findings are mixed, however, on the returns of REITs, relative to other assets, and the inflation-hedging benefits of real estate.