Rental income and cap rates: A comparison of the Lisbon and Porto housing markets

In: Journal of Urban and Regional Analysis, Volume 8, Issue 2, p. 179-202

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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.