In developed countries such as US and Europe, there are real estate indexes that provide a measure of average returns on real estate investments. Other countries also have recently developed real estate indexes.

The returns from real estate consist of income and capital appreciation. Measuring the income from a property is easy but assessing appreciation is easy.

Real estate indexes measure return using one of the following two approaches:

1. Measuring Changes in Appraised Values

In this approach specialists appraise the properties periodically, typically once a year. An example index using this approach is National Council of Real Estate Investment Fiduciaries (NCREIF).

2. Using REITs as a Reference

In this approach the price appreciation is calculated by using REITS as a reference.  The total return is equal to income paid to shareholders plus appreciation of the REIT share price. Example REIT indexes are: The National Association of Real Estate Investment Trust (NAREIT), Dow Jones Wilshire, and MSCI.

There are also global indexes that are further broken down by regions and countries.

Adding Real Estate Investments in your portfolio

While considering a real estate investment project, an investor would analyze how the returns from the new investment correlate with its existing portfolio.

Many studies have suggested that real estate investments can provide risk reduction through diversification and protection against inflation.