Real Estate: The Income/Appreciation Story

September 05, 2014

Income and appreciation are the two main components of returns to any investment, including real estate. Core real estate returns, as measured by the NCREIF Property Index (NPI), have been driven by the appreciation component over the past several years, and this has naturally been accompanied by a compression in capitalization rates.

In this week’s Chart of the Week, we look at the income and appreciation components of core real estate returns and how they have contributed to total returns over the past twenty years. We can see that income has historically contributed approximately 60% to the total returns of core real estate.

The income component has been below this long-term average for most of the quarterly periods since real estate’s performance returned to positive territory in 2010, as appreciation and cap-rate compression have been the main stories since the rebound from the financial crisis. However, with the expectation for a rising-rate environment on the horizon and an end to cap rate compression looming near, we anticipate that income will start to represent a larger fraction of total returns over the medium term. This should provide comfort to investors with allocations to core real estate funds and even core-plus and value-add real estate funds that have meaningful exposure to healthy, stabilized, income-generating properties.