How exactly should one estimate property investment returns? Investors in property aim to maximize capital gains from price increases and income generated by the property. How are the returns on investment in property determined based on its characteristics, and what kind of market characteristics does it have? Focusing on the Tokyo commercial property market and residential property market, the purpose of this paper was to break down and measure the micro-structure of property investment returns in as much detail as possible. In Japan, the characteristics of property suitable for investment are dubbed “kin-shin-dai” (close, new, and large). That is, investors believe that investment returns are high for properties that are very convenient in terms of transportation (close to the city center), new buildings (relatively new properties), and large-scale real estate (large design or floor space). Therefore, this paper first measured how the asset prices, income, and asset price-income ratios (discount rate) that comprise property investment returns change based on differences in these property characteristics. Second, the reliability/distortion of information that can be observed on the property investment market was measured. Much of the information available on the property investment market is property price information determined by property appraisers. However, it is known that property appraisal prices are unable to appropriately reflect actual property market trends. Therefore, using enterprise value data for REIT investment management companies comprised of REIT investment unit prices (share prices) available on capital markets, this paper proposed a method of estimating property investment returns corresponding to changes in capital markets, as well as clarifying the distortion in property investment returns that are formed based on property appraisal prices. Looking at the results obtained, for commercial property, as building floor space increased, it had the effect of raising both the income and price while lowering the discount rate. In particular, compared to residential property, the results showed that a higher investment return can be obtained from commercial property by investing in larger-scale properties. Building age lowered the asset price and income for both commercial and residential property, but the effect was especially strong for residential property. Furthermore, there was a significant divergence between discount rates and risk premiums formed by asset markets and those formed by capital markets, and the results showed that a greater difference was generated while the market was shrinking. This finding suggests that looking at property investment returns that are estimated based on asset market information alone could lead to erroneous investment decisions.
