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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.

Suggested Citation

  • Michael J. Sullivan & Steven M. Cassidy & Charles M. Ermer, 1991. "A Note on the Effect of Transactions Costs on Real Estate Investment Return," Journal of Real Estate Research, American Real Estate Society, vol. 6(1), pages 113-117.
    • Handle: RePEc:jre:issued:v:6:n:1:1991:p:113-117
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    References listed on IDEAS

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    1. George M. Constantinides, 2005. "Capital Market Equilibrium with Transaction Costs," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 7, pages 207-227, World Scientific Publishing Co. Pte. Ltd..
    2. Merton, Robert C, 1987. "A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
    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, June.
    4. James R. Webb, 1984. "Real Estate Investment Acquisition Rules for Life Insurance Companies and Pension Funds: A Survey," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(4), pages 495-520, December.
    5. W. B. Brueggeman & A. H. Chen & T. G. Thibodeau, 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, September.
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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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