Super Normal Profits from Real Estate Development

Background Information

In the stock market, an investor is always Seeking Alpha, meaning they want to outperform the market on a risk-return basis. Earning a positive alpha is seen as being a successful investor. What’s interesting is that the entire Real Estate industry seems to be earning positive alpha! What’s the reason why the entire industry is earning Super Normal Profits?

Researchers at MIT studied over 20,000 REITs financial statements and stock performance to understand whether real estate development companies have systematic higher Price to Earnings ratios if they hold more developable land or have more assets under construction.


Key Findings

After controlling for the leverage ratio, the average cap rate of their holdings assets, the amount of cash the firm holds, and whether the firm is self managed or managed by a third party, they found statistically significant results that land holdings and projects under construction lead to a systematic positive NPV.

On the project level, new construction leads to a 30% positive NPV, taking into the normal returns that should be achieved calculated by using the Weighted Average Cost of Capital (WACC). Holding developable land also leads to a positive NPV after selling, representing a 16% NPV.


Development Land

Cost = $1,000,000

NPV = $160,000

Construction Project

Cost = $10,000,000

NPV = $3,000,000



The NPV of $160,000 and $3,000,000 is after all expenses, overhead and normal profits. This means that Developers are earning 16% more by simply acquiring and selling land and 30% more by building the assets.

This paper showed that real estate development companies earn a positive NPV by holding and developing new assets. They found that these positive returns are only present in large cities, by large developers, who manage their projects in-house.


Source: Geltner, David and Kumar, Anil and Van de Minne, Alex, Is there Super-normal Profit in Real Estate Development? (June 12, 2020). University of Connecticut School of Business Research Paper No. 19-14, Available at SSRN: or

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