Understanding risk-adjusted returns in real estate investment are crucial, but little is known about the risk-adjusted returns for direct real estate. This paper examines risk-adjusted total returns by developing an extended capital asset pricing model (CAPM) to investigate whether direct real estate returns compensate for their risk levels. Based on a panel dataset of the residential property transaction in 62 Territorial Authorities of New Zealand from 2002Q1 to 2018Q4, a direct real estate portfolio performance in the single-factor CAPM model is compared with the national housing markets stock markets and REITs markets in New Zealand before the pandemic. The results demonstrate that the direct real estate returns outperform the market returns with a significant positive alpha and beta smaller than one but positive. The alpha is further evaluated by the five-factor CAPM model, which includes the factors of liquidity risk, value risk, time risk, credit-rating risk, and currency risk. The assessment shows that most of the excess return (alpha) can be attributed to direct real estate market risks.