Total return

The total return shows the return on a property or a portfolio of properties over one period (e.g. one year) or a series of periods (e.g. 10 years). The basis for calculating the total return is the calculation of the individual annual returns over the analysis period.1
For property investments it is important to include two different return components in the calculation of the total return. These are the net cash flow component and the change in value component. The net cash flow component consists of the rental income actually received less non-recoverable operating costs. The change in value component measures the positive or negative change in the value of the property within an analysis period. Regular (usually annual) valuation is needed for this. The respective reference factor is the fixed capital as the return on property on this basis must compare with other investments.2
The formula established on the international property market was developed by MSCI (formerly IPD) and is:



Figure: Total return
Source: IPD (2012): IPD Index Guide. Edition Eight. Abrufbar im Internet. URL: http://ec.europa.eu/internal_market/consultations/2012/benchmarks/individual-others/ipd-annex1_en.pdf, Stand: 09.08.2015.

Key:
FV = fair value,
CapEx = capital expenditure (e.g. investments),
CapG = capital gains (e.g. sales ),
NI = net income (rental income less non-recoverable operating costs, rental and marketing costs, ground rent and other operating costs)3

A total return can now be calculated on the basis of the returns for individual periods. This can be done arithmetically or geometrically.4

The arithmetic return is calculated from the sum of all returns divided by the number of returns and is thus a simple mean of the returns.5



Figure: Arithmetic return
Source: Thomas, Matthias unter Mitarbeit von Hocke, Stefan; Susemihl, Susanne (2011): Immobilien-Portfoliomanagement. In: Rottke, Nico B.; Thomas, Matthias: Immobilienwirtschaftslehre Band I. Management, Köln, S. 599.

The geometric return transforms the individual annual returns into growth rates and multiplies them by each other. Thus, the compounding effect of the invested capital is taken into account, which counteracts a statistical distortion. The geometric return is calculated as the nth root of the product of n annual return factors:6



Figure: Geometric return
Source: Thomas, Matthias unter Mitarbeit von Hocke, Stefan; Susemihl, Susanne (2011): Immobilien-Portfoliomanagement. In: Rottke, Nico B.; Thomas, Matthias: Immobilienwirtschaftslehre Band I. Management, Köln, S. 599.


Depending on the volatility of the period returns, the arithmetic mean is higher than the geometric mean. This can be illustrated with an example investment of EUR 1,000. In the first period a total return of 100% is generated, in the second one of -50%. According to the geometric mean the total return is 0%, but according to the arithmetic mean it is 25%.
In property portfolio management the geometric mean is therefore preferred as the arithmetic mean can be misleading about the average change in assets over time. However, it should be noted that the variance cannot be derived from the geometric mean as a measure of risk.7

In addition to a backward-looking analysis, a future total return can also be calculated. To do so the total returns of future periods are calculated on the basis of forecast data and aggregated as for the backward-looking analysis.8
  • 1 Vgl. Thomas, Matthias unter Mitarbeit von Hocke, Stefan; Susemihl, Susanne (2011): Immobilien-Portfoliomanagement. In: Rottke, Nico B.; Thomas, Matthias: Immobilienwirtschaftslehre Band I. Management, Köln, S. 599.
  • 2 Vgl. Bone-Winkel, Stephan; Thomas, Matthias; Allendorf, Georg J.; Walbröhl, Victoria; Kurzrock, Björn-Martin (2008): Immobilien-Portfoliomanagement. In: Schulte, Karl-Werner: Immobilienökonomie, Band I, 4. Aufl. München, S. 823-832.
  • 3 Vgl. IPD (2012): IPD Index Guide. Edition Eight. Abrufbar im Internet. URL: http://ec.europa.eu/internal_market/consultations/2012/benchmarks/individual-others/ipd-annex1_en.pdf, Stand: 09.08.2015.
  • 4 Vgl. Thomas, Matthias unter Mitarbeit von Hocke, Stefan; Susemihl, Susanne (2011): Immobilien-Portfoliomanagement. In: Rottke, Nico B.; Thomas, Matthias: Immobilienwirtschaftslehre Band I. Management, Köln, S. 599.
  • 5 Vgl. Thomas, Matthias unter Mitarbeit von Hocke, Stefan; Susemihl, Susanne (2011): Immobilien-Portfoliomanagement. In: Rottke, Nico B.; Thomas, Matthias: Immobilienwirtschaftslehre Band I. Management, Köln, S. 599.
  • 6 Vgl. Thomas, Matthias unter Mitarbeit von Hocke, Stefan; Susemihl, Susanne (2011): Immobilien-Portfoliomanagement. In: Rottke, Nico B.; Thomas, Matthias: Immobilienwirtschaftslehre Band I. Management, Köln, S. 599.
  • 7 Vgl. Thomas, Matthias unter Mitarbeit von Hocke, Stefan; Susemihl, Susanne (2011): Immobilien-Portfoliomanagement. In: Rottke, Nico B.; Thomas, Matthias: Immobilienwirtschaftslehre Band I. Management, Köln, S. 599.
  • 8 Vgl. Thomas, Matthias unter Mitarbeit von Hocke, Stefan; Susemihl, Susanne (2011): Immobilien-Portfoliomanagement. In: Rottke, Nico B.; Thomas, Matthias: Immobilienwirtschaftslehre Band I. Management, Köln, S. 599.
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http://www.corpus-sireo.com/en/glossary/total-return
: 25.06.2019