Residential real estate in smaller cities more profitable in the long run

Residential real estate in major cities is sought-after and expensive. Investors are rushing to the metropolises because they assume the best prospects for returns there. But far from it: Researchers at the University of Bonn have evaluated data on real estate returns, which show: Over the long term, residential real estate in large cities yielded lower returns on average than real estate in smaller cities.

The researchers analyzed data on house prices and rents in 27 selected major cities in 15 countries. The economists compared yields in major cities with average yields in the rest of the country. In addition to international metropolises such as London, New York and Tokyo, the team also examined German cities such as Berlin, Frankfurt and Hamburg.

The result: residential real estate in the major cities studied generated an average of about one percent less total return per year over the past 150 years. This effect is also evident when looking at shorter periods, for example the past 70 or 30 years.

According to the study, the decisive factor for high returns is rental income, which developed relatively consistently: "Although house prices rose more strongly at times, they also fluctuated more." Overall, rental income accounted for nearly 70 percent of total returns on residential real estate over the past 150 years. Relative to the purchase price, rents are higher on average outside metropolitan areas.

The researchers also explain the fact that residential real estate outside of major cities yields higher returns over the long term with the increased risk that investors take in smaller cities. In large cities, real estate is more liquid, i.e. it is more likely to be sold at any time. Meanwhile, in smaller towns, it can be more difficult to sell property quickly.

The study dispels the preconception that real estate investment is most attractive in big cities. Large investors are already rethinking their approach and are increasingly investing in rental properties in smaller cities.

(Photo: © Elke Detmold, Pixabay)