Annual Return Calculation

The formula for the annual return calculation from returns of shorter time periods, such as months or quarters, is not a simplistic one.

According to the methodology followed by the National Association of Real Estate Fiduciaries (NCREIF) the calculation of time-weighted annual/annualized returns from quarterly returns is carried out by chain linking quarterly rates of return. The assumption behind the chain linking formula is that within the estimated one-year period returns from each quarter are «reinvested» in the property in subsequent quarters up to the end of the one-year period. The return calculated in this way is referred to as compounded return because of the reinvestment assumption.

The formula for the annual return calculation, is :

R_A= (1+Q₁R) x (1+Q₂R) x (1+Q₃R) x (1+Q₄R) - 1

Where
R_A = Annual Return
Q₁R = Return for Q1
Q₂R = Return for Q2
Q₃R = Return for Q3
Q₄R = Return for Q4

The same formula applies for calculating the return for any aggregage time period from returns of subperiods. For example, the formula for the estimation of the compounded annual return from monthly returns is:

[(1+ M₁R) x (1+ M₂R) x .... x (1+ M₁₂R)] - 1

where:

M₁R = Monthly return for first month
M₂R = Monthly return for second month
M₁₂R = Monthly return for twelfth month

Annual Return Calculation Example

In order to demonstrate the application of the formula for the calculation of the annual return consider a property investment with the following estimated quarterly rates of return:

Q₁R =2%
Q₂R = 2.5%
Q₃R = 1.5%
Q₄R = 3%

Then the compounded annual return can be calculated as:

R_A = (1.02 x 1.025 x 1.015 x 1.03) – 1 = 9.3%

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Potential Gross Income Multiplier (PGIM)
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Band-of-Investment Formula for Estimating a Market/Required Capitalization Rate
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Annual Rental Income of Occupied Multi-Tenant Property
Multi-Period Lease Rate Growth Formula with Intertemporally Variable CPI Forecast
Multi-period Lease Rate Growth Formula with Constant CPI Forecast
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