Bonn research study highlights yield differential in B- and C-cities

A portfolio of residential properties held in smaller towns, both in Germany and in the wider world, might have offered higher yields over the longer term than the hotly-contested properties in large cities, according to an interesting new study which came across REFIRE's desk recently.

Researchers in Bonn have taken a closer look at property yields in major international cities and examined their historical development over the past 150 years. They conclude that they do not necessarily outperform properties in the rest of their respective countries.

Moritz Schularick, a member of the Cluster of Excellence Econtribute Markets & Public Policy at the University of Bonn, and his team examined data from 27 selected major cities in 15 countries. These include metropolises such as London, New York and Tokyo, but also German cities such as Berlin, Frankfurt and Hamburg.

The study scrutinised a range of data from existing databases, city yearbooks, newspaper advertisement and tax and notary records, to build up a comprehensive picture of yields on house prices in both large and small cities over the past 150 years. They conclude that residential real estate in large cities yielded on average 1% less than real estate in smaller cities.

Economics professor Schularick says: "If you had invested in a national portfolio of residential real estate in 1950, it would be worth twice as much today as an equivalent big city portfolio." A key assumption is that the rental income would always have been reinvested.

The study shows that the decisive factor for high returns is rental income, which developed relatively constantly. "House prices did rise more strongly at times, but they also fluctuated more," says Schularick. Overall, rental income accounted for almost 70% percent of the total return on residential real estate over the past 150 years.

A key takeaway from the study is that, relative to the purchase price, rents are higher on average outside the big conurbations.

The higher yields on property outside the big cities is also explained by the higher risk involved by investing in smaller cities. The attraction of investing in big cities is the readily available liquidity, whereas investors often assume that it can be more difficult to sell properties quickly.

Schularick says that many large investors are now rethinking that assumption, and are taking a much closer look at smaller towns. In Germany, that argument is increasingly being made for residential investment in the so-called B- and C-cities.