Academic journal article
By Tay, Richard S.; Lau, Clement K.; Leung, Marie S.
Journal of Real Estate Literature , Vol. 7, No. 2
The purpose of this article is to assess the generality of previous empirical findings on the determinants of retail rent in shopping centers and validate their substantive robustness using data from Hong Kong. Consistent with previous findings, the rental rate of a retail unit is positively related to its customer-generating power and the size of the shopping center but negatively related to its own size. In contrast to previous findings, it is positively associated with chain stores and the age of the shopping center but not significantly related to several provisions in the lease.
The robust economic performance of Hong Kong over the last decade has increased the population's standard of living. As a result, the retail sales in Hong Kong have witnessed a' strong growth, with an annual compounded growth rate of 12.79 percent in the past five years, reaching a total of U.S. $27 billion in 1995.1 Furthermore, this growth in the retail sector is accompanied by a shift in the shopping habits of the people from the traditional department stores to shopping centers. After the completion of the first shopping center in Hong Kong, Swire House, in 1960, shopping centers of various sizes were built across the territory. By 1995, the total gross floor area of shopping centers in Hong Kong, with sizes greater than 100,000 sq. ft., amounted to about 26 million sq. ft., with another 11 million sq. ft. scheduled to be completed between 1996 and 2000.2
Despite its increasing importance, relatively little research has been conducted to analyze the rental market for shopping center space in Hong Kong. Empirical studies on the property market in Hong Kong have mainly focused on the office and residential sectors (Cheung, Tsang, and Mak, 1995; Mok, Chen, and Cho, 1995). In a review of the literature, Eppli and Benjamin (1994) concluded that empirical literature on leasing in general was scant, probably because data on leases were not easily obtainable. Furthermore, most of the empirical literature on shopping center leases was on the United States market.
Several stylized facts, however, have emerged in the literature. First, retail space in larger shopping centers commands higher rent due to its higher customer-generating power (Benjamin, Boyle, and Sirmans 1992; Sirmans and Gauidry, 1993; Gatzlaff, Sirmans, and Diskin, 1994). Second, the age of a shopping center is inversely related to the rent charged because older centers suffer physical neglect, inappropriate tenant mix, and older facilities (Sirmans and Gauidry, 1993; Gatzlaff, Sirmans, and Diskin, 1994). Third, owing to economies of scale in leasing, the rent charged is inversely related to the size of the retail space (Benjamin, Boyle, and Sirmans, 1990, 1992). Fourth, tenants with greater ability to generate customer traffic (often referred to as anchor tenants), are charged lower rent because of their positive externalities on overall sales in the shopping center (Gatzlaff, Sirmans, and Diskin, 1994). Fifth, chain stores are charged lower rent since they have lower probability of default (Benjamin, Boyle, and Sirmans, 1990, 1992). Lastly, rent liability is also dependent on lease provisions such as the lease term, which is found to have a negative impact on rent (Benjamin, Boyle, and Sirmans, 1990, 1992).
The purpose of this article is to assess the generality of these stylized facts in the context of a different business environment and setting, and validate its substantive robustness. More important we attempt to provide additional explanations for the factors that are hypothesized to have an impact on rent by adopting a bilateral bargaining approach to rent determination and relaxing the assumption of homogeneous retail space. Some of the hypotheses developed from our model are consistent with the stylized facts, while others are in contrast. We then estimate a model of rent determination for shopping centers in the Central District of Hong Kong and find that most of our hypotheses are supported by the data. …