Rental Income and Cap Rates: a Comparison of the Lisbon and Porto Housing Markets
Journal of Urban and Regional Analysis, vol. VIII, 2, 2016, p. 179 - 202 RENTAL INCOME AND CAP RATES: A COMPARISON OF THE LISBON AND PORTO HOUSING MARKETS António C. MOREIRA*, Fernando O. TAVARES**, Elisabeth T. PEREIRA* *DEGEIT, GOVCOPP, Aveiro University, Portugal **ESTGA, Aveiro University, Portugal Abstract: The goal of this article is to analyse the relationship between rental income and capitalisation rates when real estate value is assessed in parishes of the Lisbon and Porto municipalities. Based on housing market values in euros per square metre during the 2006-2009 period, the income approach was used to compare the two main types of apartments (i.e. B2, or two-bedroom, and B1, or one-bedroom) in Lisbon and Porto. We used the capital asset pricing model to calculate the risk measure. The cluster analysis was used to group the Lisbon and Porto parishes according to their rental income and capitalisation rates. Regressions were used to model both geographical markets. Clear differences were found between Porto and Lisbon, the results being more robust for the Porto municipality in regard to B2 apartments. Moreover, rental income is inversely proportional to capitalisation rates for B1 apartments for Porto parishes, which means that there is an initial overinvestment. Key Words: real estate appraisal, income approach, cap rates, real estate investor, cluster analysis, Lisbon, Porto. Introduction The real estate market is of vital importance to market economies on both provisional rent and investment levels. For example, the housing market is one of the most important markets in the United States (Carrillo 2013). Real estate is the first source of bank loan guarantees and a lifelong family investment, thereby contributing to social wellbeing.
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