ZEPPELIN

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.

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