What returns and risk should investors expect from private property (real estate, privately owned infrastructure, collectibles and non-corporate business equity), characterized by infrequent trading, inexact market values and noisy returns? In their March 2021 paper entitled “Real and Private-Value Assets”, William Goetzmann, Christophe Spaenjers and Stijn Van Nieuwerburgh survey current research on private property returns and risks. They provide a rough value of U.S. private property and summarize research findings from 11 papers, focusing on: measurement of risk, return and liquidity; and, (2) drivers of variation in valuations and investment behavior. Based on relevant government and association data and recent/current papers, they find that:
- In the U.S. private property is worth about $85 trillion, segmented as follows:
- $65.4 trillion for real estate ($31.2 trillion residential, $32.8 trillion commercial and $2.6 trillion agricultural).
- $6.9 trillion for infrastructure (privately owned roads, bridges, airports, electrical grids, schools and hospitals).
- $5.5 trillion for collectibles (jewelry, fine art, antique furniture and classic cars).
- $6.1 trillion for non-corporate business equity (excluding real estate held by these businesses).
- From new research:
- There is no single, unambiguous market value for a house or a work of art, but rather combinations of price and speed of execution (time on the market).
- Based on detailed archival price and income data, geometric (compound) average annual real returns for housing are: 2.8% for for Paris during 1871–1943, 4.8% for Amsterdam during 1900–1979 and 2.3% for the UK during 1901-1983.
- In the UK, Both commercial and agricultural real estate outperform housing during 1900-1980, with commercial (agricultural) exhibiting relatively high income yield (capital gain).
- Much of the risk of real estate investments is idiosyncratic (house-specific). Average annual Sharpe ratio on individual houses is 0.44 for a 2-year holding period, increasing to 0.57 for a 15-year holding period. Marketwide (asset class) annual housing Sharpe ratio is 0.79. For income-producing property, capital gain variation drives short-term idiosyncratic risk, but income variation is important at long horizons.
- Both infrastructure and real estate private equity funds exhibit similarly poor risk-adjusted returns and offer little diversification of investor portfolios.
- Houses in climate change believer localities sell at a discount.
- Art produced by women generally underperforms art produced by men, depending on country gender inequality metrics.
- Emphasis on environmental, social and corporate governance (ESG) considerations by public pension infrastructure investors partially explains their underperformance, indicating willingness to trade financial returns for social benefits.
In summary, evidence suggests that private property investments are higher-risk than indicated by marketwide statistics.
Cautions regarding findings include:
- Calculations are apparently gross of transaction costs, which are a material part of selling price for such illiquid assets.
- Residential housing prices apparently do not account for the value and upkeep costs of living in houses.
- There may be considerable country/region-level and era-level variation in private property investment performance.
