Factors Influencing the Performance of Hong Kong Real Estate Companies
Newell, Graeme, Wing, Chau Kwong, Kei, Wong Siu, McKinnell, Keith, Journal of Real Estate Portfolio Management
Hong Kong real estate companies make a significant contribution to the Hong Kong stock market and general economy. Using a variance decomposition procedure, the proportion of Hong Kong real estate company volatility that is attributable to stock, bond, and real estate factors over 1984-2004 is assessed. Over this period, real estate accounted for 7% of real estate company volatility. Importantly, this level has increased from only 2% over the 1984-1997 period to 11% over the 1997-2004 period, with the contribution by stocks decreasing from 78% to 58%. Overall, this reflects an increased contribution by real estate to Hong Kong real estate company volatility in recent years since the Asian Financial Crisis and the establishment of the Hong Kong Special Administrative Region. These results have significant implications for international real estate securities funds and highlight the need for establishing an active real estate investment trust market in Hong Kong.
Global real estate securities are expected to take on more importance in the future as fund managers and investors seek increased portfolio diversification benefits. This reflects the recent studies highlighting the benefits of including international listed real estate in a mixed-asset portfolio (Steinert and Crowe, 2001; Conover, Friday, and Sirmans, 2002; and Bond, Karolyi, and Sanders, 2003). The global real estate securities sector is expected to increase from $500 billion in 2004 to $1 trillion by 2010, with a number of leading fund managers including ING Clarion, Jones Lang LaSalle, Henderson, and Deutsche actively involved in this sector.
This global real estate investment activity will particularly focus on opportunities in the maturing Asian real estate markets, both through the traditional listed real estate companies on the Asian stock markets (Chau, MacGregor, and Schwann, 2001) and the newly established real estate investment trust (REIT) vehicles in Japan (J-REITs), Singapore (S-REITs), and Korea (K-REITs). Other Asian countries such as Hong Kong, Malaysia, Taiwan, and Thailand have also recently introduced REIT vehicles. Importantly, international diversification has been shown to be more effective in the Asian real estate markets than in the European real estate markets for investors in the United States (Bond et al., 2003), as well as there being long-term diversification opportunities by investing in real estate companies in several Asian countries (Garvey, Santy, and Stevenson, 2001).
Amongst the Asian countries, Hong Kong is a major economic force, having been transformed from a manufacturing-based economy to a services-based economy over the last twenty-five years (Newell, Chau, and Wong, 2004). This sees Hong Kong as mature investment market and providing an economic gateway to the expanding investment opportunities in China. This economic prosperity has seen Hong Kong consistently ranked amongst the most competitive economies in the world. For example, Hong Kong is currently ranked 6th in the world for overall economic growth competitiveness (HMD, 2004), as well as rating highly for world competitiveness (17th), microeconomic competitiveness (19th), macroeconomic competitiveness (3rd), and IT competitiveness (18th) (World Economic Forum, 2004). Amongst the Asian economies, only Singapore enjoys a comparable level of international competitiveness. Exhibit 1 provides a social, economic, and financial profile of Hong Kong in December 2004.
Importantly, Hong Kong is a major international financial center. It has the 9th largest stock market by market capitalization, as well as being the second largest stock market in Asia, exceeded only by Japan. As of December 2004, the Hong Kong stock market capitalization was US$862 billion or 2.3% of the world's stock market wealth (www.worldexchange.org). Over 900 companies are listed on the Hong Kong stock market including many China-incorporated enterprises. …