27-05-2021

Long-term total returns and capital gains: Paris (1809-1943) and Amsterdam (1900-1979)

By Piet Eichholtz

Graph 09

Conventional wisdom tells us that long-term real estate investment is a good idea since land is a finite resource. When that supposedly capped supply meets growing demand, prices will inevitably go up. At least, that’s the general idea. That would imply that the capital return is the important component of the total return to real estate. Using new research (Eichholtz et al, 2021) on the total return to rental housing allows us to look at this conventional wisdom with a fresh perspective. The graphs provide that perspective, for Paris and Amsterdam. The black lines depict the development of the cumulative total return, adjusted for inflation. This shows that rental housing has delivered an attractive real return to its investors: an investment worth 100 in Paris housing made in 1809 would be worth approximately 500 times that amount 135 years later. For Amsterdam, an investment of 100 in the year would have multiplied by about 50 in the following 79 years. So far, so good.

But the graphs also show red lines, and these depict the development of the inflation-adjusted capital gain. These lines hardly go up, if at all, so the ever-rising real estate prices of conventional wisdom are a myth when inflation is taken out.

The implication is that total return consists almost exclusively of rental income, which is not very good news for current investors in rental housing (most Dutch pension funds, for example), since rental yields are very low, and if they buy now, they lock in these low yields for the holding period. Food for thought.