How well do real estate investment companies do in Portugal?

Increased housing affordability problems are well-known in the European Union (EU) and Portugal. According to a study by the International Monetary Fund, Portugal ranks ninth in house price increases in 2020 and third in price-to-income (an indicator of housing unaffordability). Within the EU, Portugal ranks second in house price increases (adjusted for inflation) from 2016 to 2020.

In a sectorial context of price increases and affordability concerns, it is common for governments to resort to taxing excessive profits. Government intervention is usual in markets with a linkage between industry-specific assets and market profitability, where windfall taxes can be levied. One example is the European fossil fuel industry, and the food retail sector windfall taxation approved in 2022.

There is a gap in the research regarding non-listed real estate investment companies’ earnings sensitivity to house price growth. It is unclear whether their accounting earnings growth varies with house price changes and whether an increase in the price of the industry-specific asset leads to increased profits that could be subject to windfall taxation. We develop a model to test whether the accounting return on equity (ROE) of real estate investment companies that buy and sell properties in Portugal depends on Portugal’s house price growth, controlling for gross domestic product growth.

We analyzed 37,761 companies’ ROEs from 2012 to 2021, finding that an increase in house prices does not translate into an increase in the aggregate ROE. The results are robust to a reduced survivorship-biased sample, meaning that even the most successful real estate investment companies do not depend on house price growth for their accounting ROE.

Policy decision-makers should know that the real estate investment industry does not generate excess profits due to house price growth that could be subject to windfall taxes.

Click here to go to the paper by António Manuel Cunha, Ana Pinto Borges, and Miguel Ferreira.