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A Note on the Effect of Transactions Costs on Real Estate Investment Return

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    Abstract

    In this paper we develop a model that demonstrates the effect of transaction costs on measuring returns to real estate. Our model reveals that studies not adjusting for transaction costs will overstate risk-adjusted returns. Accordingly, at least part of the reported mean-variance superiority of real estate over investments in corporate or government securities may be due to failing to consider transaction costs. We also illustrate the extent to which the inclusion of transaction costs equalizes mean-variance for investments in real estate and securities.

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    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol06n01/v06p113.pdf
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    Bibliographic Info

    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 6 (1991)
    Issue (Month): 1 ()
    Pages: 113-117

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    Handle: RePEc:jre:issued:v:6:n:1:1991:p:113-117

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    Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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    Web page: http://www.aresnet.org/

    Order Information:
    Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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    1. W. B. Brueggeman & A. H. Chen & T. G. Thihodeau, 1984. "Real Estate Investment Funds: Performance and Portfolio Considerations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(3), pages 333-354.
    2. Constantinides, George M, 1986. "Capital Market Equilibrium with Transaction Costs," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 842-62, August.
    3. Kenneth M. Lusht, 1988. "The Real Estate Pricing Puzzle," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 16(2), pages 95-104.
    4. Merton, Robert C., 1987. "A simple model of capital market equilibrium with incomplete information," Working papers 1869-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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