the dynamics of retail real estate market in hong kong sun zhuo xiao · chau kwong wing

The dynamics of retail real estate market in Hong Kong

Sun Zhuo Xiao · Chau Kwong Wing

Content

• Background

• Development of Hypothesis

• The methodology

• Data characteristics and sources

• Empirical results

The importance of retail sector in Hong Kong

• By the end of 2013, retail trade industry offers 9.8% job positions and makes 5.0% contribution to the GDP.

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

retail sales(HK$million) GDP in wholesale and retail trade

The importance of the retail property sector

In the aspect of factor of production, in year 2012, the real estate sector contributes 5.8% to the total GDP.

In the stock market, the market share of the real estate sector is even larger, they occupy 14% of the total market value in September of 2013.(Hong Kong Exchange – HKEx).

What might be the driven force behind it?

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0 The retail property price index

Individual Visit Scheme

First introduced in four Guangdong cities on 28 July 2003

Under the Scheme, around 270 million Mainland residents in the 49 cities who have permanent residence identity are eligible to apply for it.

According to the statistics released by the Immigration Department, the ratio of mainland travelers under the scheme accounts for 35% of the total mainland travelers in year 2004,and the ratio continues rising up to 67.1% in the first seven months of 2013.

Till July of 2013, the number of travellers under the scheme reached 116.8 million since the scheme was launched.

The performance of the tourism sector

Yearly tourist capacities for mainland visitors and non-mainland visitors

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

Mainland visitors Non-mainland visitors

Tourist spending from mainland China and other areas of the world

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

50000

100000

150000

200000

250000

300000

The mainland of China South&Southeast Asia North Asia The Americas Europe,Africa&the Middle East Taiwan

Australia,New Zealand&Souht Pacific Macao

33% 40% 51% 65% 58% 56% 56% 58% 62% 69% 69% 71% 75% 31% 40% 54% 57% 54% 55% 55% 57% 61% 63% 67% 71%

Development of Hypotheses

• With the increasing travellers from mainland China, the demand for retail

business increases, therefore, the demand for the retail space increases

correspondingly. At the same time, the supply of retail property space is sticky

because the construction work takes time. In the framework of the demand and

supply mechanism, the retail property price will increase subsequently. Hypothesis1

IVS has a positive impact on the retail property price in Hong Kong.


• The expensive locations for retail property not only exhibit good locations, but also represent convenient transportation, centralized luxury items and brand name shops, abundant subsidiary facilities and well-known reputation. The expensive locations can simply attract more travellers than the cheap locations. It is reasonable to propose that the impact of the IVS policy will be distinct in expensive locations compared with the cheap locations.

• Hong Kong Island and Kowloon districts are classified into the expensive locations and New Territories is classified into cheap location.Hypothesis 2

IVS has a differential impact on the retail property in the expensive

locations and the cheap locations.


• Hypothesis 2a

IVS has a stronger impact on prices of street level shops in expensive locations

compared with those in cheaper locations.

It is reasonable that the purchasing power of the travelers coming at the initial stage of the IVS is higher than the subsequent visitors. In addition, the first beneficiaries of IVS from mainland China are wealthier residents compared with the second and third-tier cities. Their affordability and the probability of buying luxury items are much higher. The luxury items and brand name shops are basically located in the expensive locations of the retail property area.


Time City

Jul 28th, 2003 Dongguan, Foshan, Zhongshan, Jiangmen

Aug 20th, 2003 Guangzhou, Shenzhen, Zhuhai, Huizhou

Sep 1st, 2003 Shanghai, Beijing

Jan 1st, 2004 Shantou, Chaozhou, Meizhou, Zhaoqing, Qingyuan, Yunfu

May 1st, 2004 Shanwei, Maoming, Zhanjiang, Shaoguan, Jieyang, Heyuan, Yangjiang

Jul 1st, 2004 Nanjing, Suzhou, Wuxi, Hangzhou, Ningbo, Taizhou, Fuzhou

Mar 1st, 2005 Tianjin, Chongqing

Nov 1st, 2005 Chengdu, Jinan, Dalian, Shenyang

May 1st, 2006 Nanchang, Changsha, Nanning, Haikou, Guiyang, Kunming

Jan 1st, 2007 Shijiazhuang, Zhengzhou, Changchun, Hefei, Wuhan

The time table of IVS implementation

• With the spread of the IVS policy, less travellers from first-tier cities come

and more travellers from second and third tier cities come who are

generally less wealthier. The attraction of expensive locations becomes

weak and the impact of the policy declines faster in expensive locations.

• Hypothesis 2b

The effect of IVS declines more slowly in cheaper locations than expensive

locations.


The methodology to conduct the study

• Ordinary least squares regression analysis in the preliminary process

OLS is an approach for estimating the unknown coefficients in a linear regression model. Assume there is a single linear relationship among the variables in the form of

• =a+

Data characteristics and sourcesVariable Description Definition Data Source

P Price Price for retail property in HK and three districts of Hong Kong

Rating and valuation department

RRS Real Retail Sales Retail sales value in Hong Kong divided by CPI

Hong Kong Monthly digest of Statistics by Census and Statistics Department

SPA Newly Completely Space Completions based on the issue of an occupation permit

Hong Kong Property Review by Rating and Valuation Department

IVS Individual Visit Scheme Launched in July of 2003 Government PolicyIVS*@trend Dummy variable Equal to 0 before 2003, and equal to 1

thereafterThe time trend of IVS

EXC Effective Exchange rate Index

The effective exchange rate index (EERI) for the HKD is an index which measures movements in the weighted average of the exchange rate of the HKD against the currencies of major trading partners of Hong Kong.

Hong Kong Monthly digest of Statistics

HIBOR3M Hong Kong Interbank Offered Rate 3 month

As a proxy for interest rate Hong Kong Monetary Authority

IS Income to space ratio Income to space ratio is calculated as GDP divided by the retail stock at the year end.

Hong Kong GDP : Hong Kong yearly digest of Statistics

Stock completed at the yearend: Hong Kong Property Review

V Vacancy rate Vacancy rate at year end Hong Kong Property Review by Rating and Valuation Department

ST Stock Stock at year end Rating and Valuation deparetment

Empirical model

• (2)

• (3)

• (4)

• (1)H1

H2

Empirical model

• The second step is to differentiate the price equation of the Hong Kong Island with the New Territories and the price equation of Kowloon with New Territories.

• The two equations are achieved as

• (5)

• (6)

Empirical result for Hypothesis 1Variable Coefficient Prob.

Intercept 0.945386 0.0000

∆lnRRS(-1) 0.783715 0.0308

∆lnSPA(3) -0.098693 0.0491

IVS 2.664560 0.0000

Exchange -0.011434 0.0147

IVS*@TREND -0.108621 0.0000

IS 0.045353 0.0456

V -2.433189 0.0708

∆lnHibor3M -0.011186 0.0672

MA(1) -0.999791 0.0126

Adjusted R-squared 0.8468

Empirical result for Hypothesis 2Hong Kong

Island

Kowloon New Territories

Intercept 0.313590***

(0.0000)


(0.0049)


(0.0372)

∆lnRRS 0.662637**

(0.0463)

∆lnRRS 0.800022***

(0.0310)

∆lnRRS 0.962337***

(0.0195)

∆lnHKISPA -0.087118***

(0.0047)

∆lnKLSPA -0.048317

(0.1138)

∆lnNTSPA -0.007407

(0.8414)

IVS 0.352727***

(0.0008)

IVS 0.530759***

(0.0000)

IVS 0.002263

(0.9858)

IVS*@trend -0.004780***

(0.0010)

IVS*@trend -0.007462***

(0.0000)

IVS*@trend -0.000174

(0.9196)

Exchange -0.002845***

(0.0000)

Exchange -0.002757***

(0.0051)

Exchange -0.001259*

(0.0529)

∆lnHibor3M -0.106405***

(0.0006)

∆lnHibor3M -0.129705***

(0.0009)

∆lnHibor3M -0.002496

(0.9488)

AR(1) 0.308840***

(0.0063)

AR(1) 0.475426***

(0.0000)

AR(1) 0.401008***

(0.0001)

MA(1) -0.978014***

(0.0000)

MA(1) -0.999946***

(0.0000)

MA(1) -0.999925***

(0.0000)

Empirical results for Hypotheses 2a and 2b

Variable Coefficient Prob. C 0.059429 0.1715

DLOG(RRS) 0.274711 0.3756

DLOG(HKISPA(10))-DLOG(NTSPA(10))

-0.015488 0.3599

IVS 0.148877* 0.0789

IVS*@TREND -0.001996* 0.0832

EXCHANGE -0.000560 0.1645

DLOG(HIBOR3M)

-0.049470 0.0482

AR(1) 0.028711 0.8121

MA(1) -0.970422 0.0000

Variable Coefficient Prob. C 0.117761 0.0429

DLOG(RRS) -0.002603 0.9944

DLOG(KLSPA(10))-DLOG(NTSPA(10))

0.002606 0.8890

IVS 0.354036*** 0.0005

IVS*@TREND -0.004981*** 0.0002

EXCHANGE -0.001090 0.0421

DLOG(HIBOR3M)

-0.080765 0.0128

AR(1) 0.118123 0.3467

MA(1) -0.999840 0.0000

Conclusions• IVS has a positive impact on the retail property price in

Hong Kong

• IVS has a differential impact on retail property price in the expensive locations and cheap locations

•The impact is stronger in expensive locations

•The impact declines slowly in cheap locations

Conclusions

Thank you

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Questions?

the dynamics of retail real estate market in hong kong sun zhuo xiao · chau kwong wing

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