Real Estate Income Returns

(annual all property income returns by country)

Source: MSCI

Source: MSCI


Real Estate Income Returns Decline Even as Total Return Climbs

Global income yields on commercial properties narrowed in 2015 to near historical lows, according to MSCI’s global annual property report.

IPD Global Annual Property Index showed that income return narrowed to 5.1% last year. In the overwhelming majority of the markets in the 25-country index income yields held at close to historic lows; particularly in the five largest markets: France, Germany, Japan, the UK and USA; where income return stood below the index’s global return.

The only exceptions to this trend were Ireland, Spain and to some degree Germany where income returns in each of the three was not the lowest in the historical range.

Despite historically low rental income, the total return in the index rose to 10.7% as strong value growth allowed for the best performance since 2007. This was also the first time since 2006 that capital value growth made up more than half of the total return.

“This trend was a product of investors’ strong appetite to acquire real estate assets, and the weight of capital going into real estate resulted in yield compression,” says Jim Valente, Executive Director, MSCI.

Since 2010, the contribution of income return to total return has steadily declined; and healthy capital growth has contributed to rising total return.

“Over the long term, however, real estate generates most of its performance through income. Over the past 15 years, for instance, income stream contributed over 80% to total return,” Valente said. “And while income return has dropped over the last five years, it held above 5% in 2015 and real estate significantly outperformed equities and bonds.”