Regarding to real estate risk premium, I cannot understand why they mention equity risk premium above corp. bond return.
I, of course, read CFAI, but I still don’t understand. Why the reasons are that value fluctuation and the uncertainty of rental growth?
Equity means ownership. Value fluctuation and uncertainty of growth of revenue affects owners, not so much creditors.
Do u mean that the difference shows the value fluctuation of real estate ownership?
Yes.
Let’s say that you own an apartment building with a mortgage. If the value of that building increases, the value of your investment increases, while the value of the mortgage doesn’t change; i.e., the value to the lender doesn’t change. (OK, maybe it does a little, as it means that you’re perhaps a little less likely to default on the mortgage, but if the value of the property doubles, the value of the mortgage doesn’t double; it might go up a few percent.)