Hong Kong / China Real Estate May Help Reduce USA Portfolio Risks

Stephen Chung

Executive Director

Zeppelin Real Estate Analysis Limited

December 2003 

There is a chance that concerned USA real estate investors and funds may make use of the Hong Kong / China real estate markets to reduce their overall portfolio risks and volatility. One reason is that the respective markets seem to show little or no correlation to one another in terms of nominal price trends, and at times even a strong but reverse one. Markets here are limited to the residential sectors and markets in China refer to Beijing, Shanghai, and Hong Kong only. Here are some observations:

1)      Data and Information = mainly from published sources in Hong Kong / China and the USA including governments and professional reports. Admittedly there may be differences in the calculation basis and certain data may not be entirely synchronized. Nonetheless, as a very rough reference, it would still provide some insight.

2)      Beijing = for the past 10 years or so, its correlation to the USA markets seemed weak, and in more recent years, the reading is around 0.23.  Interestingly, its correlations to the Shanghai and Hong Kong markets are also insignificant hovering at 0.08 and 0.10 respectively in recent years.

3)      Shanghai = like Beijing, it has little correlation to the USA markets and even lower than Beijing’s at 0.11. Its relationship to the Hong Kong market is also weak.

4)      Hong Kong = different time periods bring vastly different correlations when compared to the USA markets. Counting from 1983 to now, there is a bit of correlation being at 0.56. Yet, if one starts from the early 1990s, then there is little correlation being at 0.28, and the direction is reverse. What is more is that when one counts only the past 5 years, the correlation becomes very significant at 0.88 yet the direction is reversed, i.e. USA went up, Hong Kong went down. Summing up, Hong Kong residential real estate’s correlation to the USA’s started from having a “both up and down” pattern, to an intermediate “no relationship” pattern, to the more current “one up one down” pattern.

Based on the above, one may contemplate the following:

A)     USA real estate investors may consider adding a certain element of Hong Kong / China real estate to balance out the overall portfolio’s volatility and risks.

B)     Assuming a sizable China real estate investment portfolio, it is better to invest in more than 1 city as Beijing, Shanghai, and Hong Kong for instance demonstrate little correlations between themselves to reduce the volatility and risks in the China portfolio itself.

C)    Based on B, it is somewhat unrealistic to treat all markets in China as being one or uniform. Even cities that are supposedly on the same par, such as Beijing and Shanghai, seem to harbor different real estate characteristics and price patterns.

Recently, there seems to be more interest on China real estate markets from overseas investors. Though it cannot be described as ‘overwhelming’ yet, it is a start nonetheless.

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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