Do real estate investment companies profit from house price growth? Evidence from Portugal

Purpose - This study aims to study the sensitivity of nonlisted real estate investment companies’ accounting earnings to house prices. This study evaluates whether house price changes determined these companies’ return on equity (ROE) or if other factors influenced the industry’s profitability beyond house price growth. Design/methodology/approach - The authors collected a ten-year sample with the aggregate ROE of Portugal’s real estate investment companies, split by regions, and data on house prices and the per capita gross domestic product as a control variable. The authors ran a national-level time series with the canonical cointegrating regression estimator, which is robust to a small sample size; the authors also performed a regression on regional-level panel data with the common correlated effects mean group estimator, thus allowing slope coefficient heterogeneity and controlling for cross-sectional dependence. The authors also ran ordinary least squares regressions as a means of comparison. Findings - This study found that an increase in the house price is not translated into an increase in the aggregate ROE. The results are robust with a reduced survivorship-biased sample, meaning that even the best-succeeded real estate investment companies do not have their accounting ROE dependent on house price growth. Research limitations/implications - The sample size is small and specific to one country. This paper did not study the housing market structure to verify whether it operates under monopolistic competition, which could further explain the attained results. Practical implications - Policy decision-makers should know that there are no excess profits in the real estate investment companies’ industry because of house price growth that could be subject to windfall taxes. Originality/value - To the best of the authors’ knowledge, the connections between house prices and real estate investment companies’ accounting earnings have never been studied.