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Bryan Reid

Bryan Reid

Executive Director, MSCI Research

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Measuring real estate capital growth isn’t rocket science, is it?

Measuring real estate capital growth isn’t rocket science, is it?


Not really, but close attention to measurement is essential for real estate investors and NASA engineers alike.

In September 1999, NASA’s Mars Climate Orbiter was lost, at a reported cost of USD 125 million, due to a mix-up in measurements.1 The incident remains a notorious example of the importance of using the right inputs. While investment in commercial real estate is — for many — less adventurous than space exploration, adept real estate investors also tend to ensure that they properly employ and interpret the metrics they rely on to make portfolio decisions.


Undoing the confusion  

For example, capital growth can cause confusion in real estate investing. Most will understand that an investor’s total return is made up of income return and capital growth; but capital growth is a measure of investment performance — and does not represent the change in the capital value of assets, as is sometimes assumed. This confusion can have subtle but important consequences.

Capital growth — as defined by the CFA Institute’s Global Investment Performance Standards (GIPS) — is the change in value of real estate investments and cash and/or cash-equivalent assets held throughout the measurement period, adjusted for all capital expenditures (subtracted) and net proceeds from sales (added) and computed as a percentage of the capital employed.2 The key part of the definition is the incorporation of capital expenditures and net proceeds; their inclusion recognizes that real estate is an active-management asset class in which ongoing expenditure is required to maintain and operate the assets. For this and other reasons, capital growth is not directly comparable to a pure price index, such as those based on observed transaction prices.


Indexes for capital growth vs. asset-value growth  

We can see this distinction by comparing capital growth and asset-value growth by looking at the MSCI UK Quarterly Property Index. From the pre-financial-crisis peak, asset values fell by 41.1%, but have recovered to just 1.3% below the prior peak (as of September 2018). By contrast, capital growth fell 42.1% peak-to-trough, and the capital-growth index remains about 10% below its mid-2007 level. Therefore, if we were to use the capital-growth index to estimate the recovery in asset prices for property investments since the financial crisis, we could end up with a large underestimate.


Divergence in capital-growth and asset-value-growth measurements  

VIX spikes have led to “flight to quality” factors

Because of ongoing capital expenditure, capital growth will almost always lag asset-value growth; but as we have noted, there is also an income return that plays an important role for real estate investors. If we add income return to the capital growth, the MSCI UK Quarterly Property Index total-return is up 67% since June 2007 (as of September 2018). That means actual investor returns have far outpaced the growth in asset values since 2007.

Given the difference between capital growth and asset-value growth, it is important to know when using one or the other is appropriate. We can view capital growth as a measure of investment return, but only as one component of it. If our goal is to measure a change in capital value without getting lost in space — for example, when comparing capital value against a transaction-price index or a price index for other asset classes — then asset-value growth is likely the more appropriate metric.



1 “Metric mishap caused loss of NASA orbiter.” CNN. Sept. 30, 1999.

2 The CFA Institute’s GIPS standards refer to this metric as “capital return.” In the MSCI Global Methodology Standards for Real Estate Investment, the same measurement is called “capital growth”; we use the latter phrase in this post.



Further Reading

MSCI Real Estate

MSCI Global Methodology Standards for Real Estate Investment

MSCI Real Estate Enterprise Analytics