Hong Kong Residential, Office, Retail, and Industrial: Are They Moving in Step or Are They Not?

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

May 2008

Many Hong Kong real estate investors think they have diversified and reduced their market risks by putting money in residential, office, retail, and / or industrial properties, and probably in different districts of Hong Kong too. Have they? Or have they not?  

Your humble author has assembled a few simple figures from the Ratings and Valuation Department of the Hong Kong Government and compiled a few simple tables and charts below. See if you could figure the answer out: 

(A) Rentals 

HK RE Rental Indexes

1999 = 100

Visual estimates

1Q of Year used

Year

Residential

Office

Retail

Industrial

1997

127

153

121

132

1998

130

160

124

131

1999

102

110

104

110

2000

98

96

100

97

2001

98

105

102

92

2002

88

93

97

87

2003

78

82

92

82

2004

73

73

88

77

2005

81

87

95

82

2006

89

109

102

87

2007

97

126

108

97

2008

117

147

119

108

Max

130

160

124

132

Min

73

73

88

77

Max : Min

                   1.78

                   2.19

                   1.41

                   1.71

Average

                 98.17

               111.75

               104.33

                 98.50

Std Dev

                 18.43

                 28.81

                 11.61

                 18.39

Std Dev/Average

                   0.19

                   0.26

                   0.11

                   0.19

% 2008/1997

92.13%

96.08%

98.35%

81.82%

Max to Av

32.43%

43.18%

18.85%

34.01%

Min to Av

-25.64%

-34.68%

-15.65%

-21.83%

@

Correlations between:

R

R2

Residential

Office

0.96

0.91

Residential

Retail

0.97

0.95

Residential

Industrial

0.97

0.94

Office

Retail

1.00

0.99

Office

Industrial

0.91

0.82

Retail

Industrial

0.92

0.85

@

(B) Prices

HK RE Price Indexes

1999 = 100

Visual estimates

1Q of Year used

Year

Residential

Office

Retail

Industrial

1997

142

223

150

170

1998

159

175

175

158

1999

100

108

103

112

2000

94

92

92

95

2001

78

83

83

83

2002

75

73

81

76

2003

67

68

80

74

2004

68

71

100

76

2005

81

117

141

105

2006

87

133

146

134

2007

90

142

157

177

2008

123

210

195

231

 

 

 

 

 

Max

159

223

195

231

Min

67

68

80

74

Max : Min

                   2.37

                   3.28

                   2.44

                   3.12

Average

                 97.00

               124.58

               125.25

               124.25

Std Dev

                 29.47

                 53.73

                 40.08

                 50.24

Std Dev/Average

                   0.30

                   0.43

                   0.32

                   0.40

Return 2008/1997

-13.38%

-5.83%

30.00%

35.88%

Max to Av

63.92%

79.00%

55.69%

85.92%

Min to Av

-30.93%

-45.42%

-36.13%

-40.44%

@

Correlations between:

R

R2

Residential

Office

0.86

0.73

Residential

Retail

0.71

0.50

Residential

Industrial

0.71

0.50

Office

Retail

0.88

0.78

Office

Industrial

0.92

0.84

Retail

Industrial

0.92

0.85

@

(C)  Insights and Observations

@

1)     Rentals = First, the office sector is most volatile as measured by dividing the standard deviation by the average. Second, the retail sector is the least volatile. Third, the rental gyrations between different sectors could be quite similar as their correlations are quite high. In short, little risk reduction is achieved by investing across these real estate sectors.

@

2)     Prices = First, while the office sector is most volatile as measured by dividing the standard deviation by the average, the industrial sector is a very close match too. Second, the residential sector is the least volatile. Third, while the real estate sectors are quite correlated, they are not as correlated as their respective rental markets are to one another. Also, the residential correlates only with an R2 of 0.50 to the retail and industrial sectors.

@

3)     Rentals to Prices = your humble author has also tested the relationship between the rental and price indexes for each real estate sector and the results are listed below:

@

Correlations between:

R

R2

Residential rent

Residential price

                   0.96

                   0.91

Office rent

Office price

                   0.91

                   0.82

Retail rent

Retail price

                   0.76

                   0.57

Industrial rent

Industrial price

                   0.63

                   0.39

While the correlations for the residential and office sectors are very significant, they are less prominent for the retail and industrial sectors, in particular the latter. This means while a residential or office investor can expect rentals to match the prices over the long run, he or she cannot the same for the retail or industrial sector.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.                                

 Back to Home  /  Back to Simple to Read Stuff Section

@ A Service of Zeppelin Real Estate Analysis Limited of the Zeppelin Group of Companies
Phone (852) 37576388 Fax (852) 37576399 E-mail contact@real-estate-tech.com
Address c/o Zeppelin, Unit 1007, 10/F, CCT Telecom Building, 11 Wo Shing Street, Shatin, NT, Hong Kong
Copyright rests with Zeppelin and/or relevant authors
@