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Not as rosy


Study of four Cambridge and Oxford Colleges co-authored at Cambridge Judge Business School shows that long-term property investment is less profitable than previously thought.

White garden fence covered in pink roses in front of a white clapperboard house with green window shutters.
David Chambers.
Dr David Chambers.

Property is said to be such a sound investment that it has spawned the catch-all expression “safe as houses”. Yet a new study co-authored by Dr David Chambers of Cambridge Judge Business School finds that long-term investing in real estate is not as lucrative as often portrayed.

Using a unique dataset from archives of the property investments of four large Colleges at the Universities of Oxford and Cambridge – including granular information on realised rental income, costs and transaction prices – the study forthcoming in the Review of Financial Studies finds that property is a “less profitable investment in the long run than previously thought”.

Recent studies have estimated average real returns for UK housing and commercial real estate of around 7% or more since the 1970s and 1980s. This new study of the Colleges’ real estate portfolios over the period 1901-1983 paints a different scenario over the longer period – finding an average real net total return of 2.3% for UK residential real estate. The study goes on to conclude that long-term real income growth rates are close to zero for all three property types: residential, commercial and agricultural.

The colleges studied are King’s College and Trinity College in Cambridge, and Christ Church and New College in Oxford. Trinity and Christ Church both date back to founding by King Henry VIII in 1546 with large property endowments.

“The four Colleges studied are world-famous institutions of learning, but we believe that they are also representative of the population of wealthy institutional investors more broadly,” says study co-author David Chambers, Invesco Reader in Finance and Academic Director of the Centre for Endowment Asset Management at Cambridge Judge Business School. “The Colleges devoted resources to the professional management of their property portfolios and managed them in the pursuit of long-term investment returns.”

While news reports often focus only on residential house prices, the authors look at many factors including realised income growth over time, income yields, cost-to-income ratios and net total returns. The paper examines commercial and agricultural property in addition to housing, because the performance of residential real estate alone is an “inadequate proxy” for overall property performance given that other real estate types feature prominently in the portfolios of institutional investors.

“In sum, our results indicate that direct real estate may be a poorer long-term investment than is suggested by the existing academic literature on housing – either studies covering only more recent time periods, or those covering a longer history,” the study says.

“We document that real income growth exhibits substantial cyclicality, mirroring inflation and deflation patterns in the UK economy. Annualised real growth rates are close to zero for all property types: +0.3% for agricultural, -0.3% for commercial, and -1.0% for residential real estate.” The study – entitled “The Rate of Return on Real Estate: Long-Run Micro-Level Evidence” – is co-authored by David Chambers of Cambridge Judge Business School, Christophe Spaenjers of HEC Paris and Eva Steiner of Pennsylvania State University.