Hong Kong Residential, Office, Retail, and Industrial: Which is Riskier?

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

October 2008

With the global credit crisis unfolding, some real estate investors in Hong Kong may be wondering how the Hong Kong economy, and thus its real estate market, would be affected.

Here we do NOT offer crystal-ball predictions, instead we perform some rough calculations using market indexes published by the government sources to gauge which market sector(s) will harbor the greatest / greater risks in terms of price adjustments.

The following charts plot the rental and price indexes of 4 major market sectors, namely residential, office, retail, and industrial, over time. These are then compared to their respective averages and the volatility ranges (highs and lows):

Rental indexes 

Assuming the current rental index is to reach its own average and upper and lower volatility levels, we may create the following table: 

Sectors:

 Residential

 Office

 Retail

Industrial

2008 Level

               117.00

               147.00

               119.00

               108.00

High volatility

               116.60

               140.56

               115.94

               116.89

%

-0.34%

-4.38%

-2.57%

8.23%

Average

                 98.17

               111.75

               104.33

                 98.50

%

-16.10%

-23.98%

-12.32%

-8.80%

Low volatility

                 79.73

                 82.94

                 92.72

                 80.11

%

-31.85%

-43.58%

-22.08%

-25.82%

Overall, the office sector may suffer the worst impact compared to the other 3 sectors in terms of rental adjustment. 

Price indexes

Now we shall look at the price indexes and the same calculations were done:

Sectors:

 Residential

 Office

 Retail

Industrial

2008 Level

               123.00

               210.00

               195.00

               231.00

High volatility

               126.47

               178.31

               165.33

               174.49

%

2.82%

-15.09%

-15.22%

-24.46%

Average

                 97.00

               124.58

               125.25

               124.25

%

-21.14%

-40.67%

-35.77%

-46.21%

Low volatility

                 67.53

                 70.85

                 85.17

                 74.01

%

-45.10%

-66.26%

-56.32%

-67.96%

Seemingly, the industrial sector is the riskiest in terms of price adjustments, though followed closely by the office sector.  

Hypothesis

Summing up the rental and price indexes, the office sector may be riskiest of all assuming equal probabilities in occurrence.

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.

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