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Property Investment Analysis Report

JIACHENG MA (B-B0-0485-9)


Hong Kong Property Investment Analysis Report

Catalogue 1. Introduction. 2. Current Real Estate Market Conditions. (SWOT analysis) 1) Hong Kong Real Estate SWOT Analysis (Overall). 2) Economics SWOT analysis. 3) Political SWOT analysis. 4) Business Environment SWOT analysis. 3. Long-term Historical Performance. 1) Return and Risk Trade off. 

Capital gains.

Rental yields and stock dividend yields

2) Risk and Return on Quarterly Basis, Annually Basis, and Five-Year Basis. 

Capital gains only.

Total returns.

3) Conclusions on Risk and Return. 4) Correlations. 4. Comparisons with benchmarks and security market line. 1) Comparisons with benchmarks. 2) Pricing of Each Asset-Security Market Line (SML Model). 5. Comparisons between performance of real estate and performance of alternative investment vehicles. 1) Banking. 2) Securities. 3) Insurance. 4) Real estate. 5) Summary 6. Mean-Variance efficient frontier with and without the inclusion of the real estate. 7. Limitation 8. Conclusion and decision.

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Hong Kong Property Investment Analysis Report

Introduction The real estate market in Hong Kong has long been believed to have consistent demand forces for its relatedly stable economy and efficient market condition. After experiencing those depressions during the 1997 Asia financial crisis and 2008 global financial crisis, Hong Kong has been reflecting on past successes and failures, and is now engaged in a new period of boom. Through the huge increase in retail and industrial rents by rising consumption from the mainland China, at the same time Hong Kong is in face of both opportunities and challenges. This analysis report examines the private domestic, office, retail, and industrial properties in Hong Kong through the years from 2002 to 2013 quarterly or yearly. It covers SWOT analysis, risks and returns analysis, and comparisons of the properties with benchmarks and security market line. It also compares between performance of real estate and performance of alternative investment vehicles such as stocks, bonds, and etc. Besides, based on forecasting sources, we made further predictions on the trends of each factors and real estate. To examine the influence of real estate on the total asset market, we did the mean-variance efficient frontier with and without the conclusion of the real estate. In the return and risk analysis, the statistic output show that the direct property investments produced higher risk-adjusted returns both in short-run or long-run which seems to be a better investment opportunity. However, this result should be seriously affected by the financial crisis and it is expected that the stock return will rebound in the future when economy recover. Thus to see if the financial crisis did have a great impact on the risk and return of stock markets, we further generate two sub-tables describing the total returns before and after the financial crisis in 2008. The later results still support our findings and we also recognized that the returns of stocks did decrease a lot in property stocks and general stocks during the financial crisis with sharply increases in risks. Nevertheless, although the office, retail and flatted factory properties gave us favorable returns with low risk, they suffered from many other costs such as liquidity risk, transaction cost, political risk and so forth which cannot be described through the standard deviation of the returns. In the comparisons of private property with benchmarks and important factors, we use rolling return rate and change rate to show the tendency and relationship among these factors. From the figure we learn that the private property tends to be more stable than any other factors such as Centa City Index, Broad Money, Hang Seng Properties Index and “CPI Plus 5%”. Also, we extend our discussion with a table which shows the correlation of property and related benchmarks. From the table, it illustrates that the private property is in a strong negative relationship with the other factors. Therefore, the private property seems to be a perfectly negative asset to the factors like Centa City Index, Broad Money, “CPI Plus 5%” and a mid-strong negative asset to the factor Hang Seng Properties Index. In comparisons between performance of real estate and performance of alternative investment vehicles, we analyze the characteristics about banking, securities, insurance and real estate one by one and differences between them. This section is divided into three parts: definitions or features, risks, and earnings. Investment is the purchase of an asset or item with the hope that it will generate income or appreciate in the future and be sold at the higher price. There are four major principle of investment: investment activities should be legal, safe, of liquidity, and profitable. Comparing to other assets, we find directly investing into the real estate market is not quite safe and its liquidity is low even though it has a high profitability. Therefore, investors should consider a trade-off and make their final decision. In the mean-variance efficient frontier, we use Excel solver to construct two efficient frontiers, namely “MeanVariance Efficient Frontier without Private Domestic Property” and “Mean-Variance Efficient Frontier with Private Domestic Property”. And lastly, we combine two of the efficient frontiers to find out which portfolio is more efficient.


Hong Kong Property Investment Analysis Report

Data Data employed in the report consist of the prices, and price indices, stock market value, bond market value, risk free rate, general deposit rate, and inflation rate over the period from 2002 to 2013. The data of price, price indices, rental, rental indices, and market yields for each real estate category come from the website of Hong Kong Census and Statistics Department. Besides, this official website also provides us the numbers of completions, and stocks (in unit for private domestic property, and in m2 for other categories) from year 2002 to year 2013. To adjust the unit to m2 used to calculate the market value of private domestic property, we use 70m2/Unit as the multiplier which is the average size of a unit of private domestic property in Hong Kong. The data describing economic factors and market value of bonds are obtained from the database CEIC, which can be accessed from the library website of UM. The stock market value and market capitalization are found in the Yahoo Finance and Google finance. As our data is quoted by day, we use the data of the last day in quarter or year to transit daily data to quarterly and annually data.

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Hong Kong Property Investment Analysis Report

Current Real Estate Market Conditions Hong Kong Real Estate SWOT Analysis Strengths 

Hong Kong is not only capable of attracting foreign investors and residents for its special political and economic condition, but also backed up by strong support from mainland China which provides it a large amount of buying forces. Hong Kong has relatively few corruptions and maintains a good anti-corruption supervisory body that prevents its market from trading unfairness or inside trading.

Weakness 

The price of property is too high to afford in Hong Kong which is ranked at the top of most expensive location in the world. From the chart below, the residential price is booming and its price indices even reached as high as 223.4, three times higher than the lowest price indices.

Although Hong Kong owns a stable and efficient financial market, its dynamic political status makes some facts uncertain.

Opportunities  

The Hong Kong Government has planned several projects to enhance infrastructure condition including transportation, cross-boundary and new urban development. The government also put efforts to speed up the supply of private residential units. “Government data show that 70,000 new units could be available in the next three to four years. Of these, about 60% will be small to medium sized units with saleable areas of less than 753 square feet, meeting the demand from first time home buyers,” said Thomas Lam, director and head of research and consultancy in Hong Kong for Knight Frank.


Hong Kong Property Investment Analysis Report Threats  

Hong Kong mainly relies on foreign investors from US and Europe. However, the ongoing weak economy in US and Europe may constantly affect business functioning in Hong Kong. In face of threats from Mainland properties which keep rising through these years, Hong Kong will have to compete in an unprecedented competitive real estate market.

Economics SWOT analysis Strengths 

Hong Kong has been keeping a very high GDP per capita through these years.

As it currency is pegged to the US dollar, Hong Kong is able to maintain low interest rate as well as no foreign exchange rate risk. Hong Kong possesses a large amount of foreign companies and also is a gateway for foreign investment entering mainland china market. So that it not only takes advantage of opportunities from foreign markets but also benefits from the emerging market in mainland China. Zero tariff policy has been applied in Hong Kong for several years which bring Hong Kong a huge amount of investment opportunities. From the 2013 Index of Economic Freedom, Hong Kong gained a score of 89.3 which indicates its fully free economy and this score out-performs the world average by around 30 points.

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Hong Kong Property Investment Analysis Report

Weakness  

Hong Kong’s living-cost, labor and land costs are too high to attract some small businesses or residences to invest competing with mainland China or other regions. Due to the lack of monetary policy, it is much easier for Hong Kong’s economy to be severely influenced by global financial crisis or economic depression. Moreover, it is vulnerable to hot money and speculation behaviors.

Opportunities  

Mainland Chinese government has given Hong Kong some prestige and granted Hong Kong a number of concessions which can help stabilize Hong Kong’s economy. With the increasing opening level to mainland China, Hong Kong‘s tourism and retail industry is booming.


Hong Kong Property Investment Analysis Report 

The establishments of some main construction projects will further insist Hong Kong’s economy by strengthening the connection between different location in Hong Kong, or between Hong Kong and other cities.

Threats  

Hong Kong’s economy relies too much on the health of global economy. As the economic environments in some cities in mainland China like Shanghai are booming rapidly and become more and more investment-friendly through these years, Hong Kong may lose its competitive advantages.

Political SWOT Analysis Strengths 

Hong Kong maintained a relatively political stability. Public unrest is rare in Hong Kong which greatly reassures both domestic and foreign investors. Besides, China has a big stake in ensuring stability in Hong Kong as well as political leaders have realized that a sound legal system of real estate is important. The government regulations focus on controlling speculation and keeping the market efficient and stable.

Weakness 

Stamp duty rates may frustrate in the future. On Sale or Transfer of Immovable Property in Hong Kong, On 22 February 2013, the Financial Secretary announced that the Government would amend the Stamp Duty Ordinance to adjust the ad valorem stamp duty (AVD) rates. The recent Hong Kong RMB deposit interest rate was over the mainland. Saving money in bank will be better than investing in real estate. Less investment in real estate means the real estate market will cool.

Opportunity 

The Hong Kong government's efforts to stimulate closer integration with the mainland have prompted plans for the construction of transport links.

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Hong Kong Property Investment Analysis Report 

In 2017 The Hong Kong Chief Executive will be elected by General Election. China has said Hong Kong will not be able to directly elect its chief executive until 2017 while full elections for the legislature will not happen before 2020.It shows the timetable of democratization. And the new chief should ensure the continuation of reform and modernization.

Threats 

If no democratic reforms will be put on in the future, the sluggish pace of democratic reforms could eventually lead to public anger.

Business Environment SWOT Analysis Strengths  

Hong Kong offers a relatively stable and efficient business environment which allows investments to be allocated freely without intervened by government’s policy. The legal system in Hong Kong is transparent and fair. Law suit and business conflict can be solved evenly and efficiently here.

Weaknesses 

As Hong Kong dollar has long pegged to US Dollar, Hong Kong, as a result, must adjust its monetary policy following US. It is possible that this adjustment may not fit Hong Kong’s condition and results in instability of Hong Kong’s economy. Although Hong Kong has a long history in doing business, as the rises of its competitors like Shanghai and Beijing, Hong Kong is now in face of huge challenges as its past investors may invest into Shanghai or other growing cities.

Opportunities 

Hong Kong is dedicated in a series network extension projects. For instance, the Guangzhou – Shenzhen - Hong Kong Express rail link, which is expected to enhance Hong Kong’s role as the southern gateway to the Mainland, will be completed in 2015. Besides, there are many other infrastructure construction projects in process. Hong Kong has held seminar on Strategies for the Development of Islamic Capital Markets to promote discussions, understanding and experience-sharing in the area of Islamic capital markets. This Seminar focusing on growing interest in Islamic finance in Hong Kong and at global level may take an important role in influencing Hong Kong’s future economy.


Hong Kong Property Investment Analysis Report

Threats 

The ever integrated Hong Kong with Mainland China might become a crucial concern to most investors because Hong Kong’s free and open business environment may be hindered by political pressure from central government as well as the independence of its legal system may also be threatened by potential policy changes. Hong Kong’s environment is another concern to some investors. With increasing population and little afforestation, Hong Kong is now facing serious pollution which is considered a vital factor for many residents and investors. Last year, air pollution in Hong Kong was responsible for more than 3,000 premature deaths and 7 million doctor visits in a city of 7 million.

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Hong Kong Property Investment Analysis Report

Long-term Historical Performance (Risks and Returns) Return and Risk Trade off From the Table 1 shown below which contains several property subsectors we are going to describe, we can get a brief idea about what the overall property market and economy condition look like in Hong Kong historically from the first quarter in 2002 to the third quarter in 2013. The price index of each property type and stock market provides the crucial data for us to calculate the capital gains as presented in Table 2. The capital gains, however, accounts for only a part of total return of specific asset. Rentals or dividends returns (Table 3) are added to the capital gains so that we can get the total returns which are used to do risk-return analysis (Table 4). Capital gains. As the chart indicates (Figure 1), among four main property type flatted factory gives the highest price followed by retail, office and domestic property in order. During 2008, all prices had great drops because of the well-known financial crisis. After then, the property market again started to boom with an increasing price gap between every two property types.

800 700 600 500 400 300 200 100 0

Private Domestic Property Private Office Property

2013-2

2012-3

2011-4

2011-1

2010-2

2009-3

2008-4

2008-1

2007-2

2006-3

2005-4

2005-1

2004-2

2003-3

2002-4

Private Retail Property 2002-1

Price Indices

Figure 1: Time Series of Prices in Each Property Type

Private Flatted Factory Property

Year-Quarter

Figure 2: Time Series of Price in Each Saving Deposit Rate 3.5 3 Price Indices

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2.5

2 1.5

TDep 3 Mo (%)

1

TDep 12 Mo (%)

0.5 0

Year-Quarter


Hong Kong Property Investment Analysis Report The interest rate (Figure 2) experienced extremely high level period from 2006 to 2007. This is partially caused by housing bubble and subprime mortgage crisis. The high interest of savings deposit attracted some risk-adverse investors from the property market somehow. Table 1a: Property and Stock Prices, CPI and Savings Deposit Rates (2002-2013) Price Indices

HSI.P

HSI General Stocks

CPI

TDep 3 Mo (%)

TDep 12 Mo (%)

14165.4

10746.9

102.89

0.62

1.39

14006.7

11132.7

102.44

0.36

0.74

74.4

10765.4

9794.48

101.89

0.38

0.43

72.6

11103.9

9610.8

101.33

0.15

0.25

72.5

9508.43

9005.35

100.89

0.09

0.17

81.5

70

10224.5

9260.57

100

0.08

0.1

84.1

70.7

14383.4

10757.9

98.113

0.08

0.1

67.5

95.3

73.7

14778.7

12361.2

99.001

0.02

0.04

88.6

109.3

80.4

16060.2

13292.7

99.112

0.01

0.04

77.2

97.2

115.2

83.5

14442

12142.3

99.112

0.03

0.23

2004-3

77.8

99.4

118.6

90.7

16524.4

12736.1

98.89

0.11

0.53

2004-4

83.4

112

134.2

99.7

18177.6

13781.6

99.445

0.03

0.41

2005-1

89.9

123.2

144.3

108.6

16372.4

13811.3

99.445

0.34

0.8

2005-2

94.5

135.6

153

122.5

17572

13992.4

99.778

1.14

1.52

2005-3

93.6

137.6

148.9

132.1

19213.1

15071

100.11

1.91

2.27

2005-4

90.1

135.4

151

136.6

17977.8

14733.3

100.78

2.78

3.02

2006-1

91.5

131

151.6

144.3

19483.4

15825.6

101

2.8

3.06

2006-2

93.2

139.5

154.5

154.6

19576.7

16262.3

101.89

2.84

3.1

2006-3

92.7

143.9

153.9

164.5

20808.8

17302.2

102.44

2.83

3.05

2006-4

93.3

142.7

154.1

170.7

23144.1

19083.2

102.89

2.58

2.8

2007-1

96.6

148.5

158.8

176.9

23727.4

19853

102.66

2.58

2.82

2007-2

100.3

156.2

168.7

193.2

25362.5

20908.7

103.22

2.61

2.9

2007-3

104

167.5

176.6

207.8

32515.6

24770.5

104.11

2.63

2.87

2007-4

113.2

189.6

185.9

219.9

38080

29269.6

106.44

2.07

2.52

2008-1

125

206.4

197.2

236.5

28562.2

23545.5

107.44

0.84

0.95

2008-2

125.9

210.4

204.2

244.4

25720.5

24130.2

109.1

0.48

0.86

2008-3

123.2

204.3

193.9

244.7

19117.2

20669.7

108.88

0.54

0.94

2008-4

108

175

173.7

217.9

16974.1

14081.5

108.88

0.33

0.65

2009-1

108

154.6

164.4

196.3

17330.5

13221.9

109.21

0.2

0.47

2009-2

117.1

170.1

181.7

205.1

24565

17356.9

108.99

0.05

0.31

2009-3

127.1

191.6

205.9

222.5

27140.2

20417.6

107.88

0.02

0.19

2009-4

132.9

203

220.6

241.2

28147.4

21815.6

110.66

0.01

0.15

2010-1

140.8

213.5

233.7

258.3

28275.7

20656.7

111.54

0.01

0.15

2010-2

146.4

222.9

248

272.8

25459.3

20334.3

112.1

0.01

0.17

2010-3

154.1

231.4

262.8

289.9

31198.5

21308.2

109.66

0.01

0.16

2010-4

162.3

253.8

284.4

316.4

29980.3

23046.6

113.65

0.01

0.15

2011-1

175.1

276.7

304.6

349

30035

23437.6

115.76

0.01

0.16

2011-2

185.8

301.2

324.6

387.2

27976.8

23267.7

117.87

0.01

0.15

2011-3

185.2

309.4

336.1

401.8

20957.7

20189.2

116.76

0.01

0.15

2011-4

182.1

304.4

344.2

401.9

22812.2

18762.9

120.2

0.01

0.16

2012-1

185.3

302.1

363.2

418.7

24844.4

20875.4

121.86

0.01

0.16

2012-2

202.3

322.8

402.1

461.4

24594.7

19721.7

122.75

0.01

0.16

2012-3

211.6

342

439.3

509.2

29330

20039.9

120.31

0.01

0.15

Yr-Qtr

Private Domestic Property

Private Office Property

Private Retail Property

Private Flatted Factory Property

2002-1

73.8

71.2

84.4

75.4

2002-2

72.2

68.8

86.6

76.9

2002-3

68.6

68.6

86.1

2002-4

65.1

64.9

83

2003-1

62.7

62.1

81

2003-2

59.8

59

2003-3

59.3

61.6

2003-4

64.4

2004-1

73.6

2004-2

Property Stocks

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Hong Kong Property Investment Analysis Report 2012-4

225.7

371.7

477.4

570

31383.1

22109.7

124.75

0.01

0.15

2013-1

237.5

400.3

501.3

636.7

30591.3

23016.5

126.3

0.01

0.15

2013-2

241.2

409.4

508.8

657.5

28436

21977.5

127.75

0.01

0.15

2013-3

245.6

415.3

510.3

672.6

30297.2

22158.3

126.78

0.01

0.16

The Figure 3 shows the percentage capital gains of each sector. It is easy to find out that the property and general stocks market have relatively high absolute returns overtime but also possess high volatility because some of the extreme high returns are negative. The savings deposit rate remained the lowest among all. Considering the effect brought by inflation, we find that capital gains exceeded inflation by a wide margin except savings which is less than inflation for most of time. Among the four properties, flatted factory and office are higher than the other two; private domestic property seems less profitable than others. However, the differences among them are not significant.

Figure 3: Time Series of Capital Gains (%) 50 40 30 Private Domestic Property (%) 20

Capital Gains (%)

Private Office Property (%) Private Retail Property (%)

10

Private Flatted Factory Property (%) 0 -10

2002-1 2002-3 2003-1 2003-3 2004-1 2004-3 2005-1 2005-3 2006-1 2006-3 2007-1 2007-3 2008-1 2008-3 2009-1 2009-3 2010-1 2010-3 2011-1 2011-3 2012-1 2012-3 2013-1

13

Property Stocks (%) General Stocks (%) Inflation Rate Rate (%)

-20

Savings Deposit Rate (%)

-30 -40

Year-Quarter

Table 1b: Quarterly Capital Returns (%) of Property and Stock Prices, Inflation Rate and Savings Deposit Rates (2002-2013) Price Indices

HSI.P

Yr-Qtr

Private Domestic Property (%)

Private Office Property (%)

Private Retail Property (%)

2002-1

-2.17

-3.37

2.61

Private Flatted Factory Property (%) 1.99

2002-2

-4.99

-0.29

-0.58

2002-3

-5.10

-5.39

-3.60

2002-4

-3.69

-4.31

2003-1

-4.63

2003-2

-0.84

HSI Inflation Rate (%)

Savings Deposit Rate (%)

Property Stocks (%)

General Stocks (%)

-1.12

3.59

-0.44

0.16

-3.25

-23.14

-12.02

-0.54

0.09

-2.42

3.14

-1.88

-0.55

0.10

-2.41

-0.14

-14.37

-6.30

-0.43

0.04

-4.99

0.62

-3.45

7.53

2.83

-0.88

0.02

4.41

3.19

1.00

40.68

16.17

-1.89

0.02

2003-3

8.60

9.58

13.32

4.24

2.75

14.90

0.91

0.02

2003-4

14.29

31.26

14.69

9.09

8.67

7.54

0.11

0.01

2004-1

4.89

9.71

5.40

3.86

-10.08

-8.65

0.00

0.00

2004-2

0.78

2.26

2.95

8.62

14.42

4.89

-0.22

0.01


Hong Kong Property Investment Analysis Report 2004-3

7.20

12.68

13.15

9.92

10.00

8.21

0.56

0.03

2004-4

7.79

10.00

2005-1

5.12

10.06

7.53

8.93

-9.93

0.22

0.00

0.01

6.03

12.80

7.33

1.31

0.33

0.09

2005-2

-0.95

2005-3

-3.74

1.47

-2.68

7.84

9.34

7.71

0.33

0.29

-1.60

1.41

3.41

-6.43

-2.24

0.67

0.48

2005-4

1.55

-3.25

0.40

5.64

8.37

7.41

0.22

0.70

2006-1

1.86

2006-2

-0.54

6.49

1.91

7.14

0.48

2.76

0.88

0.70

3.15

-0.39

6.40

6.29

6.39

0.54

0.71

2006-3

0.65

-0.83

0.13

3.77

11.22

10.29

0.44

0.71

2006-4

3.54

4.06

3.05

3.63

2.52

4.03

-0.22

0.65

2007-1

3.83

5.19

6.23

9.21

6.89

5.32

0.55

0.65

2007-2

3.69

7.23

4.68

7.56

28.20

18.47

0.86

0.65

2007-3

8.85

13.19

5.27

5.82

17.11

18.16

2.24

0.66

2007-4

10.42

8.86

6.08

7.55

-24.99

-19.56

0.94

0.52

2008-1

0.72

1.94

3.55

3.34

-9.95

2.48

1.55

0.21

2008-2

-2.14

-2.90

-5.04

0.12

-25.67

-14.34

-0.20

0.12

2008-3

-12.34

-14.34

-10.42

-10.95

-11.21

-31.87

0.00

0.14

2008-4

0.00

-11.66

-5.35

-9.91

2.10

-6.10

0.30

0.08

2009-1

8.43

10.03

10.52

4.48

41.74

31.27

-0.20

0.05

2009-2

8.54

12.64

13.32

8.48

10.48

17.63

-1.02

0.01

2009-3

4.56

5.95

7.14

8.40

3.71

6.85

2.58

0.01

2009-4

5.94

5.17

5.94

7.09

0.46

-5.31

0.80

0.00

2010-1

3.98

4.40

6.12

5.61

-9.96

-1.56

0.50

0.00

2010-2

5.26

3.81

5.97

6.27

22.54

4.79

-2.18

0.00

2010-3

5.32

9.68

8.22

9.14

-3.90

8.16

3.64

0.00

2010-4

7.89

9.02

7.10

10.30

0.18

1.70

1.86

0.00

2011-1

6.11

8.85

6.57

10.95

-6.85

-0.73

1.82

0.00

2011-2

-0.32

2.72

3.54

3.77

-25.09

-13.23

-0.94

0.00

2011-3

-1.67

-1.62

2.41

0.02

8.85

-7.06

2.95

0.00

2011-4

1.76

-0.76

5.52

4.18

8.91

11.26

1.38

0.00

2012-1

9.17

6.85

10.71

10.20

-1.00

-5.53

0.73

0.00

2012-2

4.60

5.95

9.25

10.36

19.25

1.61

-1.99

0.00

2012-3

6.66

8.68

8.67

11.94

7.00

10.33

3.69

0.00

2012-4

5.23

7.69

5.01

11.70

-2.52

4.10

1.24

0.00

2013-1

1.56

2.27

1.50

3.27

-7.05

-4.51

1.15

0.00

2013-2

1.82

1.44

0.29

2.30

6.55

0.82

-0.76

0.00

Rental yields and stock dividend yields. The rental or dividend yields give us a different look on the market. Seeing from the Figure 4 below, we realize that, during the financial crisis, the yields were higher than those adjacent periods but the trends of property rental yields were above 4% through these 10 years for most of time. On the contrary, stock dividends yields remained stable and low comparing to property rental yields and the general stock dividend yield was even lower than all property rental yields. Flatted factory property has a sharp decrease in its rental yield overtime, while private domestic property is the most stable among four property types.

14


Hong Kong Property Investment Analysis Report

Figure 4: Property Rental Yields and Stock Dividend Yields (2002-2013) 16 14 12 10 8 6 4 2 0 2002-1 2002-3 2003-1 2003-3 2004-1 2004-3 2005-1 2005-3 2006-1 2006-3 2007-1 2007-3 2008-1 2008-3 2009-1 2009-3 2010-1 2010-3 2011-1 2011-3 2012-1 2012-3 2013-1 2013-3

Rental/ Diviend Yield (%)

15

Year-Quarter Residential Property

Office Property

Retail Property

Flatted Factory Property

General Stocks

Property Stocks

Table 2: Private Property Market Yields and Stock Dividend Yields (2002-2013) Private Office Property (%)

A

B

C

D

E

Avg.

A

B

Avg.

2002-1

6.1

5.1

5.3

5.3

4.8

5.32

7

8.8

7.9

7.9

Private Flatted Factory Property (%) 14.3

2002-2

6.1

5

5.1

5.1

4.6

5.18

7

8.5

7.75

7.6

13.6

2.86

3.08

2002-3

6.2

5.1

5.2

5

4.9

5.28

6.9

8.3

7.6

7.6

13.6

4.15

3.62

2002-4

6.3

5.3

5

4.9

4.7

5.24

7.3

8.6

7.95

7.9

14

3.72

3.38

2003-1

6.4

5.3

5

5

4.6

5.26

7.2

8.6

7.9

7.8

13.9

4.35

4.42

2003-2

6.4

5.3

5.1

4.9

4.7

5.28

6.8

8.5

7.65

7.4

13.4

4.1

3.99

2003-3

6.3

5.3

4.9

4.7

4.3

5.1

6.2

7.9

7.05

7.2

12.9

2.6

3.38

2003-4

5.9

4.9

4.5

4.2

3.9

4.68

5.6

7

6.3

6.5

12.6

2.53

3.02

2004-1

5.4

4.4

4

3.8

3.3

4.18

4.1

5.6

4.85

5.8

11.8

2.37

3.25

2004-2

5.3

4.4

4

3.8

3.3

4.16

3.8

5.6

4.7

5.7

11.7

2.65

3.34

2004-3

5.3

4.4

4

3.8

3.3

4.16

3.8

5.5

4.65

5.7

10.8

2.41

3.15

2004-4

5.1

4.2

3.8

3.5

3.1

3.94

3.6

5.2

4.4

5.1

10

2.19

2.91

2005-1

4.8

3.9

3.7

3.4

3

3.76

3.4

4.8

4.1

4.8

9.3

2.45

3.54

2005-2

4.8

3.9

3.6

3.3

2.9

3.7

3.7

4.1

3.9

4.7

8.5

2.36

3.37

2005-3

5

4.1

3.7

3.4

3.1

3.86

4

4.3

4.15

5

7.9

2.53

3.16

2005-4

5.3

4.3

4

3.5

3.1

4.04

4.3

4.8

4.55

5

7.9

2.7

3.3

2006-1

5.2

4.2

3.8

3.6

3

3.96

4.8

5

4.9

4.9

7.5

2.58

3.48

2006-2

5.2

4.1

3.8

3.5

3.1

3.94

4.4

5.1

4.75

4.7

7.4

2.57

3.39

2006-3

5.3

4.2

3.8

3.5

3.2

4

4.6

4.8

4.7

4.8

7.2

2.57

3.04

2006-4

5.4

4.3

3.8

3.6

3.3

4.08

4.7

5.2

4.95

5

7

2.31

2.69

2007-1

5.2

4.3

3.8

3.6

3.1

4

4.6

5.2

4.9

4.8

6.9

2.32

2.9

2007-2

5.2

4.2

3.8

3.6

3.1

3.98

4.3

4.8

4.55

4.6

6.4

2.17

2.66

2007-3

5.2

4.3

3.8

3.6

3.1

4

4.1

4.7

4.4

4.6

6.1

1.74

2.04

2007-4

4.9

4.2

3.6

3.4

2.9

3.8

3.8

4.3

4.05

4.4

5.9

1.39

2.08

2008-1

4.7

4.1

3.6

3.4

2.9

3.74

3.7

4.3

4

4.2

5.7

1.93

3.07

2008-2

4.8

4.1

3.7

3.4

3

3.8

3.8

4.6

4.2

4.1

5.7

2.14

3.22

Private Domestic Property (%) Yr-Qtr

Private Retail Property (%)

Prop. Stocks (%)

General Stocks (%)

2.82

2.93


Hong Kong Property Investment Analysis Report 2008-3

4.9

4.2

3.8

3.7

3.1

3.94

4.2

4.7

4.45

4.3

5.7

3.03

3.95

2008-4

5

4.2

3.9

3.8

3.4

4.06

4.8

2009-1

4.6

3.6

3.4

3.2

2.9

3.54

5.2

5.2

5

5.1

5.15

4.7

6

3.41

4.93

4.7

6.3

3.35

5.21

2009-2

4.3

3.5

3.1

2.8

2.5

3.24

2009-3

4.1

3.5

3

2.7

2.4

3.14

4

4.5

3.5

4.1

4.25

4.2

5.8

2.36

3.64

3.8

3.8

5.5

2.14

3.13

2009-4

4.1

3.6

3.1

2.7

2.4

3.18

3.4

4

3.7

3.7

5.2

2.06

2.99

2010-1

4

3.5

3.1

2.7

2.3

3.12

2010-2

4.1

3.6

3.1

2.8

2.5

3.22

3.2

4

3.6

3.6

5

2.16

2.84

3.3

3.9

3.6

3.5

4.9

2.4

3.08

2010-3

4

3.5

3.1

2.8

2.4

2010-4

3.9

3.5

3

2.8

2.5

3.16

3.3

3.9

3.6

3.4

4.7

2.02

2.71

3.14

3.1

3.6

3.35

3.2

4.4

2.1

2.65

2011-1

3.6

3.3

2.9

2.7

2.4

2.98

3

3.3

3.15

3

4

2.17

2.85

2011-2

3.6

3.2

2.9

2011-3

3.8

3.3

2.9

2.6

2.3

2.92

3

3.2

3.1

3

3.8

2.34

2.89

2.7

2.5

3.04

3.1

3.3

3.2

2.9

3.8

3.38

3.7

2011-4

3.8

3.3

2012-1

3.6

3.2

3

2.7

2.5

3.06

3.3

3.4

3.35

2.9

3.8

3.09

3.53

2.8

2.7

2.4

2.94

3.4

3.4

3.4

2.8

3.7

2.71

3.46

2012-2

3.5

3.1

2.8

2.5

2.3

2.84

3.3

3.3

3.3

2.7

3.6

2.8

3.72

2012-3

3.5

2012-4

3.4

3.1

2.8

2.5

2.2

2.82

3.2

3.2

3.2

2.5

3.3

2.4

3.48

3

2.8

2.5

2.2

2.78

3

3

3

2.4

3

2.24

3.18

2013-1 2013-2

3.2

2.9

2.7

2.4

2.2

2.68

2.8

2.8

2.8

2.3

2.7

2.6

3.39

3.1

2.9

2.6

2.4

2.1

2.62

2.8

2.9

2.85

2.4

2.7

2.8

3.59

2013-3

3.1

2.8

2.6

2.4

2.1

2.6

2.9

2.9

2.9

2.4

2.7

2.66

3.26

Risk and Return on Quarterly Basis, Annually Basis, and Five-Year Basis Capital gains only. In Table 3, property returns range from 2.77% to 5.01% in short run; from 12.93% to 23.3% in median run; from 78.56% to 160.69% in long run. Domestic property earned the lowest return, but still succeeded the return of stocks. According to the result, property investments are quite attractive than stock investment for their higher returns and lower risks no matter in short run or long run. Such minimal returns of general stocks and property stocks may be caused by the sharp drop during the financial crisis in 2008 when the general stock prices and property stocks decreased about 31.87% and 25.67% on average respectively. The extreme depression of stock market pulled down its average return (not absolute value) and contributed to a high volatility (risk). Although the financial crisis also forced returns of property investment down to negative returns even more than 10%, comparing to the stocks and financial derivatives markets which were more vulnerable and volatile through years, the property investment returns did not appear so frustrating than the stock market return.

Return (%)

Figure 5a: Returns of Each Sector 180 160 140 120 100 80 60 40 20 0

Quarterly Return Annual Return Five-year Return Private Private Private Private Property General Inflation Savings Domestic Office Retail Flatted Stocks Stocks (CPI) Deposits Property Property Property Factory Property

Sector

16


Hong Kong Property Investment Analysis Report

Figure 5b: Risks (CV) of Each Sector 6

Risks (CV)

5 4 3 Quarterly CV

2

AnnualCV

1

Five-year CV

0 Private Private Private Private Property General Inflation Savings Domestic Office Retail Flatted Stocks Stocks (CPI) Deposits Property Property Property Factory Property Sector

Table 3: Capital Gains Only Quarterly (n=46)

Annual (n=43)

Five-Year (n=27)

Return

SD

CV

Return

SD

CV

Private Domestic Property

2.77

5.05

1.82

12.93

13.81

Private Office Property

4.16

7.38

1.77

19.76

21.40

Return

SD

CV

1.07

78.56

23.54

0.30

1.08

119.49

51.76

0.43

Private Retail Property

4.12

5.24

1.27

19.00

15.93

0.84

109.11

35.21

0.32

Private Flatted Factory Property

5.01

5.23

1.05

23.30

17.38

0.75

160.69

35.16

0.22

Property Stocks

2.68

14.64

5.45

13.03

30.03

2.31

58.66

67.66

1.15

General Stocks

2.18

10.88

4.99

10.28

23.69

2.30

50.74

60.46

1.19

Inflation (CPI)

0.46

1.29

2.78

2.03

2.43

1.20

11.64

5.34

0.46

Savings Deposits

0.17

0.26

1.51

0.97

1.12

1.15

7.45

6.45

0.87

Total returns. We added up capital gains and rental/ dividend yields together to get the total returns as shown in Table 4 below. From the time series plots for each sector (Figure 6), we found that the general and property stocks presented the highest absolute average return. After concerning those negative returns, however, the stocks did not give great average returns because of their significant disappointing performances during the financial crisis. As a result, property investment stood out for its relatedly high return-to-risk ratio comparing to stocks and savings.

Figure 6: Total Returns (%) of Each Sector 50.00 40.00

Private Domestic Property

30.00

Private Office Property

20.00

Private Retail Property

10.00

Private Flatted Factory Property

0.00 -10.00 -20.00

2002-1 2002-4 2003-3 2004-2 2005-1 2005-4 2006-3 2007-2 2008-1 2008-4 2009-3 2010-2 2011-1 2011-4 2012-3 2013-2

Total Return (%)

17

General Stocks Inflation (CPI)

-30.00 -40.00

Property Stocks

Savings Deposits Year-Quarter


Hong Kong Property Investment Analysis Report Table 4: Quarterly Total Gains (%) (2002 -2013) Yr-Qtr

Private Domestic Property Total Gains

Private Office Property Total Gains

Private Retail Property Total Gains

Private Flatted Factory Property Total Gains

2002-1

-0.84

-1.40

4.58

5.56

2002-2

-3.69

1.65

1.32

0.15

2002-3

-3.78

-3.49

-1.70

0.98

2002-4

-2.38

-2.33

-0.43

3.36

2003-1

-3.31

-3.02

2.57

0.03

2003-2

0.48

6.32

5.04

2003-3

9.88

11.34

15.12

2003-4

15.46

32.83

16.32

12.24

2004-1

5.94

10.92

6.85

6.81

2004-2

1.82

3.44

4.38

11.55

2004-3

8.24

13.84

14.58

2004-4

8.78

11.10

8.80

2005-1

6.06

11.09

2005-2

-0.03

2.45

2005-3

-2.77

-0.56

2005-4

2.56

2006-1

2.85

2006-2 2006-3

Property Stocks Total Gains

General Stocks Total Gains

Inflation (CPI) Total Gains

Savings Deposits Total Gains

-0.42

4.32

-0.44

0.16

-22.43

-11.25

-0.54

0.09

4.18

-0.97

-0.55

0.10

-13.44

-5.45

-0.43

0.04

8.62

3.94

-0.88

0.02

4.35

41.70

17.17

-1.89

0.02

7.47

3.40

15.75

0.91

0.02

9.30

8.29

0.11

0.01

-9.48

-7.84

0.00

0.00

15.08

5.73

-0.22

0.01

12.62

10.61

9.00

0.56

0.03

11.43

-9.38

0.94

0.00

0.01

7.23

15.12

7.94

2.20

0.33

0.09

-1.50

9.96

9.93

8.55

0.33

0.29

2.66

5.38

-5.80

-1.45

0.67

0.48

-2.11

1.65

7.61

9.05

8.24

0.22

0.70

7.71

3.14

9.01

1.12

3.63

0.88

0.70

0.45

4.34

0.79

8.25

6.94

7.24

0.54

0.71

1.65

0.34

1.33

5.57

11.87

11.05

0.44

0.71

2006-4

4.56

5.30

4.30

5.38

3.10

4.71

-0.22

0.65

2007-1

4.83

6.41

7.43

10.94

7.47

6.04

0.55

0.65

2007-2

4.68

8.37

5.83

9.16

28.75

19.13

0.86

0.65

2007-3

9.85

14.29

6.42

7.35

17.55

18.67

2.24

0.66

2007-4

11.37

9.87

7.18

9.02

-24.65

-19.04

0.94

0.52

2008-1

1.66

2.94

4.60

4.77

-9.47

3.25

1.55

0.21

2008-2

-1.19

-1.85

-4.02

1.55

-25.14

-13.54

-0.20

0.12

2008-3

-11.35

-13.23

-9.34

-9.53

-10.45

-30.89

0.00

0.14

2008-4

1.02

-10.41

-4.18

-8.41

2.95

-4.87

0.30

0.08

2009-1

9.31

11.31

11.70

6.06

42.58

32.58

-0.20

0.05

2009-2

9.35

13.70

14.37

9.93

11.07

18.54

-1.02

0.01

2009-3

5.35

6.90

8.09

9.78

4.25

7.63

2.58

0.01

2009-4

6.74

6.10

6.86

8.39

0.97

-4.56

0.80

0.00

2010-1

4.76

5.30

7.02

6.86

-9.42

-0.85

0.50

0.00

2010-2

6.06

4.71

6.84

7.49

23.14

5.56

-2.18

0.00

2010-3

6.11

10.58

9.07

10.32

-3.40

8.84

3.64

0.00

2010-4

8.67

9.86

7.90

11.40

0.71

2.36

1.86

0.00

2011-1

6.86

9.64

7.32

11.95

-6.31

-0.01

1.82

0.00

2011-2

0.41

3.50

4.29

4.72

-24.50

-12.51

-0.94

0.00

2011-3

-0.91

-0.82

3.13

0.97

9.69

-6.14

2.95

0.00

2011-4

2.52

0.08

6.25

5.13

9.68

12.14

1.38

0.00

2012-1

9.91

7.70

11.41

11.12

-0.33

-4.66

0.73

0.00

2012-2

5.31

6.77

9.93

11.26

19.95

2.54

-1.99

0.00

2012-3

7.37

9.48

9.30

12.77

7.60

11.20

3.69

0.00

2012-4

5.92

8.44

5.61

12.45

-1.96

4.90

1.24

0.00

2013-1

2.23

2.97

2.07

3.94

-6.40

-3.67

1.15

0.00

2013-2

2.48

2.15

0.89

2.97

7.25

1.72

-0.76

0.00

18


19

Hong Kong Property Investment Analysis Report Although any type of direct property investment has an average total return higher than the property stock investment, those property returns are not significant enough (Table 5b) under the t-test. This means that without the effect of financial crisis, the stocks market should have high return over direct property investments. Therefore, with the rebounding stock market, we need to consider more now. Table 5a: Total Returns Quarterly (n=46)

Annual (n=43)

Five-Year (n=27)

Return

SD

CV

Return

SD

CV

Return

SD

CV

Private Domestic Property

3.72

4.98

1.34

16.81

13.62

0.81

99.51

22.76

0.23

Private Office Property

5.32

7.33

1.38

24.50

21.58

0.88

145.27

55.35

0.38

Private Retail Property

5.28

5.19

0.98

23.81

15.82

0.66

136.07

34.97

0.26

Private Flatted Factory Property

6.85

5.06

0.74

31.01

16.84

0.54

205.48

44.47

0.22

Property Stocks

3.34

14.69

4.40

15.64

30.47

1.95

71.86

69.58

0.97

General Stocks

3.00

10.90

3.63

13.56

24.06

1.77

67.26

61.12

0.91

Inflation (CPI)

0.46

1.29

2.78

2.03

2.43

1.20

11.64

5.34

0.46

Savings Deposits

0.17

0.26

1.51

0.97

1.12

1.15

7.45

6.45

0.87

Table 5b: Significance of Quarterly Profitability Using T-Test (t-statistics) Sector

Quarterly (n=46)

Annual (n=43)

Five-Year (n=27)

Private Domestic Property

0.076305

0.085903

1.214851

Private Office Property

0.270123

0.410565

1.409395

Private Retail Property

0.373796

0.516435

3.558193**

Private Flatted Factory Property

0.693676

0.912708

4.453114**

**significance at 0.01 level (two-tailed)

Conclusions on Risk and Return From above illustrations, the direct property investments seem to have always produced higher risk-adjusted returns no matter during the short-run or long-run. This might be a signal to invest in property market now. However, it is tricky to decide the future investment opportunity only based on the historical returns which were seriously affected by the financial crisis. It is highly possible that stock return will boom over the future years along with the recovery of economy and financial status. To see if the financial crisis did have a great impact on the risk and return of stock markets, we further generate two sub-tables describing the total returns before and after the financial crisis in 2008. In those table (Table 5c & Table 5d), the returns of stocks did decrease a lot in property stocks and general stocks from 23.47% and 22.28% to 7.44% and 4.44%. Meanwhile, the CV for property stocks and general stocks sharply increased during the financial crisis from 1.07 and 0.78 to 4.55 and 6.10. However, the result also shows that even before the financial crisis, the risk-adjusted returns of stocks still were not attractive as direct investing in real estate property, except the private domestic property, generated even higher returns. Although the retail, office, and flatted factory properties gave us favorable returns with low risk, however they suffered from many other costs such as liquidity risk, transaction cost, political risk and so forth which cannot be described through the standard deviation of the returns. Table 5c: Total Returns Before Financial Crisis in 2008 (Year 2002 Q1 to Year 2007 Q2) Quarterly (n=46) Return

SD

CV

Annual (n=43) Return

SD

CV

Five-Year (n=27) Return

SD

CV


Hong Kong Property Investment Analysis Report Private Domestic Property

2.79

4.99

1.79

15.23

15.07

0.99

91.20

23.69

0.26

Private Office Property

5.66

8.08

1.43

28.68

24.37

0.85

155.05

65.97

0.43

Private Retail Property

5.01

5.07

1.01

22.73

15.79

0.69

121.79

33.39

0.27

Private Flatted Factory Property

7.41

4.13

0.56

33.73

14.32

0.42

216.80

50.16

0.23

Property Stocks

5.37

13.55

2.52

23.47

25.19

1.07

99.22

69.13

0.70

General Stocks

4.95

7.56

1.53

22.28

17.28

0.78

94.65

57.04

0.60

Inflation (CPI)

0.06

0.67

12.07

0.83

2.31

2.77

9.00

4.51

0.50

Savings Deposits

0.28

0.30

1.09

1.37

1.27

0.93

5.34

6.01

1.13

Table 5d: Total Returns After Financial Crisis in 2008 (Year 2007 Q3 to Year 2013 Q1) Quarterly (n=46)

Annual (n=43)

Five-Year (n=27)

Return

SD

CV

Return

SD

CV

Return

SD

CV

Private Domestic Property

4.57

4.93

1.08

18.47

12.07

0.65

116.13

4.99

0.04

Private Office Property

5.00

6.73

1.35

20.13

17.74

0.88

125.69

7.80

0.06

Private Retail Property

5.53

5.40

0.98

24.93

16.17

0.65

164.63

15.13

0.09

Private Flatted Factory Property

6.34

5.83

0.92

28.16

19.08

0.68

182.84

14.74

0.08

Property Stocks

1.47

15.71

10.66

7.44

33.84

4.55

17.14

22.90

1.34

General Stocks

1.22

13.16

10.82

4.44

27.04

6.10

12.47

12.87

1.03

Inflation (CPI)

0.84

1.59

1.90

3.28

1.90

0.58

16.92

1.52

0.09

Savings Deposits

0.08

0.17

2.20

0.56

0.78

1.39

11.67

5.30

0.45

Compared with the results mentioned in the Property Investment in Hong Kong article, our results seem not following the rule of “high-risk, high return”. Housing bubble is used to describe the difference. Between 1984 and 1996, the housing market in Hong Kong had not been developed well, and the mortgage products had not been largely introduced to the investment. As a result, investors and speculators did not pay attention to the property investment. After more and more mortgage products and financial derivatives products entering into investors’ sights, the housing prices are increasing even out of its true value. So that’s why in our results, the returns of direct property investment are so high. Based on the results, if the “high-risk, high return” still hold, direct property investments should possess much more risks than before and these risks cannot be shown from the CV. Therefore, investors should be aware of those non-specified risks when making their decisions.

Correlation Table 6 below summarizes the correlations between total returns of the property and stock investments, inflation and savings deposits on a quarterly, annual and five-year basis. Table 6: Correlation of Property and Stock Returns, Inflation and Savings (2002-2013) Private Domestic Property

Private Domestic Property Private Office Property

Private Office Property

Quarterly

1.0000

Annual

1.0000

5-year

1.0000

Quarterly

0.8688**

1.0000

Annual

0.9016**

1.0000

5-year

0.4290*

1.0000

Private Retail Property

Private Flatted Factory Property

Property Stocks

General Stocks

Inflation (CPI)

Savings Deposits

20


21

Hong Kong Property Investment Analysis Report

Private Retail Property Private Flatted Factory Property Property Stocks

General Stocks

Inflation(CPI)

Savings Deposits

Quarterly

0.8591**

0.8485**

1.0000

Annual

0.9026**

0.8857**

1.0000

5-year

0.7730**

0.5350**

1.0000

Quarterly

0.7256**

0.7566**

0.7279**

1.0000

Annual

0.7277**

0.7362**

0.6992**

1.0000

5-year

0.2357

0.9302**

0.3995*

1.0000

Quarterly

0.2194

0.2157

0.2910*

0.1988

1.0000

Annual

0.3936**

0.3648*

0.4542**

0.2515

1.0000

5-year

-0.1402

0.5936**

0.0938

0.6184**

1.0000

Quarterly

0.4531**

0.4540**

0.5310**

0.4499**

0.7832**

1.0000

Annual

0.5116**

0.5209**

0.5217**

0.4539**

0.8848**

1.0000

5-year

-0.0999

0.7187**

0.0878

0.7219**

0.9500**

1.0000

Quarterly

0.2386

0.1736

0.1494

0.2346

-0.1567

0.0791

1.0000

Annual

0.4244**

0.1851

0.1983

0.4060**

-0.2689

-0.1015

1.0000

5-year

0.6000**

-0.3972*

0.2508

-0.4841*

-0.6905**

-0.7406**

1.0000

Quarterly

-0.0755

-0.0787

-0.2409

0.0297

0.0849

0.1424

0.0739

1.0000

Annual

-0.2140

-0.2367

-0.4806**

-0.1756

-0.0157

0.0937

0.0980

1.0000

5-year

0.3622

-0.3983*

0.1202

-0.6796

-0.4948**

-0.5086**

0.5525**

1.0000

*significance at 0.05 level (two-tailed); **significance at 0.01 level (two-tailed) For total returns in all four property types, they have strong relationship with each other and with general and property stocks on a quarterly and annual basis. In long run, some of those significant relationships become insignificant like the private domestic property and retail, while office and factory are still positively related to the stock market. Thus, to lower the risk of investment portfolio, we need to trade-off between investing in the property directly and investing in stock market instead. Besides, as there are significant high negative correlation of -0.40, 0.48, -0.69 and -0.74 between the inflation and office, factory, property stocks and general stocks respectively, those property types and stocks might not be a good hedge against inflation for holding periods of five years. On the contrary, private domestic property bears a correlation of 0.23, 0.42, and 0.60 with inflation on a quarterly, annual and, five-year basis, suggesting that investors should have turned to domestic property for inflation hedging.


Hong Kong Property Investment Analysis Report

Comparisons with benchmarks and security market line Comparisons with benchmarks In our previous topic we discussed about the long-term historical performance among different assets, interest rates and macro-economy factors. Here, we continue our discussion but change a little bit because we want to apply some other benchmarks such as Centa City Index, Hang Seng Properties and factors such as Broad Money and “CPI plus 500 basis points”. Since it may seem obvious to use a benchmark related to asset class being measured, and many institutional investors today use benchmark like real rates of return (e.g., CPI plus 500 basis points) for real estate. This has evolved over time, adopted from the role of real estate as an inflation hedge. Moreover, Centa City Index is a monthly index based on all transactions records as registered with the Land Registry to reflect property price movements in the previous 1-2 months. Performance of the Centa City Index over the period of 2002 to 2012 is shown in Figure 7. Also shown in Figure 7 is the rolling three year performance of alternative benchmarks and factors changes discussed below. The Centa City Index is used as the real estate benchmark because it has predicting advantages: as land registration takes time, any index based on the Land Registry's sale and purchase price data inevitably cannot provide the most up-to-date information. Index based on preliminary contract price data is a good indicator of the most recent price movements in property. Centaline Property Agency Limited has more than 20% of the property agent market share, thus the Centaline transaction data are able to reflect the market situation. While the Centa City Index provides the broadest measure of institutional investment in the asset class, there are still some other measure ways. As Figure 7 shown, like Hang Seng Properties Index (HSPI, comprised of nine listed real estate companies with a total value of 1,436.76 billion HK$), Broad Money of Hong Kong and “CPI plus 500 basis points’, they have their pros and cons. Correlations of these various indices are shown in Table 8.

Figure 7: Rolling 3 Year Returns and Changes as of December 31, 2012 25.00% 20.00% 15.00%

Private Property

10.00%

centa city index

5.00%

Broad Money

0.00%

Hang Seng Properties

-5.00%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

CPI Plus 5%

-10.00% -15.00%

As can be seen in Figure 7, over this period the comparisons between Private Property and these four measures have produced very different results in the same time periods. In some instances the differences are due to performance of the overvalued market equity of these listed real estate firms, but some differences relate to interest rates, inflation expectations and other broad economic factors. It’s obvious that Private Property is strongly

22


23

Hong Kong Property Investment Analysis Report negatively correlated to the Centa City Index, Broad Money and “CPI plus 500 basis points” over this period, and is weakly negatively correlated to the Hang Seng Properties Index as shown in Table 7aa. Furthermore, from Figure 7 we could find that between 2002 and 2012, Private Property increased in a decreasing increasing rate. It’s so contrasting to the CPI change rate and Broad Money change rate because in these ten years both of these two change rates increased at the rates which are higher than price change rate of Private Property. It’s out of traditional expectations because we take the real estate as the inflation hedge. However, the Private Property performs weaker than inflation.

Table 7: Rates of Private Property and Related Benchmarks Year

Private Property

Centa city index

Broad Money

Hang Seng Properties

CPI Plus 5%

2002

4.99%

-11.83%

5.78%

12.03%

1.88%

2003

5.23%

-11.48%

3.20%

-5.12%

2.20%

2004

5.27%

-11.85%

2.18%

-9.14%

2.60%

2005

4.83%

4.81%

4.72%

2.58%

3.00%

2006

4.36%

13.72%

5.72%

11.38%

4.32%

2007

4.00%

17.22%

9.04%

18.95%

5.85%

2008

3.94%

7.75%

12.86%

21.93%

6.65%

2009

3.94%

8.39%

13.09%

14.84%

7.78%

2010

3.70%

8.17%

9.42%

7.30%

7.28%

2011

3.44%

13.29%

5.61%

-0.72%

7.41%

2012

3.14%

13.08%

7.48%

2.45%

7.74%

Table 7aa: Correlation of Property and Related Benchmarks Correlation

PRIVATE_PROPERTY

CENTA_CITY_INDEX

Private Property

1

Centa City Index

-0.83325**

1

BROAD_MONEY

HANG_SENG_PROPERTIES

Broad Money

-0.60747*

0.542594

1

Hang Seng Properties

-0.35456

0.492645

0.818626**

1

Cpi Plus 500

-0.94806**

0.784807**

0.73236*

0.377144

CPI_PLUS_5_

1

*significance at 0.05 level (two-tailed); **significance at 0.01 level (two-tailed)

Pricing of Each Asset-Security Market Line (SML Model) Market portfolio. Here we defined that the market only consists of private real property, corporate stocks and bonds only. Asset values are derives mainly from property data published in Hong Kong Rating and Valuation Department. As the property stocks of private domestic property is quoted in unit not square meters, we adjust the stock using square meters by multiplying 70 m2/unit (average area per unit). The data of equities and debt capitalizations are retrieved from the CEIC database. Table 7a shows the stocks or adjusted stocks for each investment sector. The total market values over recent ten years from 2002 to 2012 are stated in Table 7b. Figure 7 provide us a clear look at the component of this market portfolio in which securities take up most market. Table 7a: Property Stock at Year-End (2002-2013) (in thousands HK$) Subsectors

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012


Hong Kong Property Investment Analysis Report Private Domestic Property Private Office Property Private Retail Property Private Flatted Factory Property

76541

70558

72448

73727

74823

75547

76015

76343

77204

77739

78255

9287

9539

9795

9770

9813

10107

10392

10529

10689

10782

10891

9231

9306

9408

9522

10396

10484

10588

10664

10744

10792

10862

17560

17463

17480

17468

17397

17347

17374

17284

17231

17183

17137

Table 7b: Values of Individual Assets Comprising the Market Portfolio (2002-2013) Subsectors Private Domestic Property Private Office Property Private Retail Property Private Flatted Factory Property Equity Securities Debt Securities Total

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2729233

2378984

3434000

4226044

4373631

5431669

6111777

6105657

7505943

8870185

9483168

266688

252585

410710

586947

621744

771781

978118

925907

1174526

1486718

1723407

547724

538634

775327

874558

799665

1041272

1094085

1245692

1416134

1839418

227934

63071

58944

69696

93747

116936

149103

184167

178751

228905

300362

394170

3559099

5477670

6629177

8113333

13248821

20536463

10253589

17769271

20942284

17452667

21871730

531018

557425

607904

663728

748141

764220

716608

1108047

1245654

1260929

1308790

7696833

9264242

11926814

14558357

19908938

28694508

19338344

27333325

32513446

31210279

35009199

Debt Securities 4%

Figure 7: Market Portfolio

Private Domestic Property 27% Equity Securities 62%

Private Office Property 5%

Private Retail Property Private Flatted 1% Factory Property 1%

Risk segregation. In Table 8, we calculate the average return, standard deviation, correlation based on the annual time series data processed above. Na誰ve comes from the ratio of standard deviation of the asset to the standard deviation of the market portfolio. The Beta is the multiplication of Na誰ve and respective correlation. Among those investment assets, stocks possess higher betas which are 1.489 for property stocks and 1.33 for general stocks. For the four property types, office gives the highest beta of 0.40 followed by retail. Domestic property and factory have roughly low risks. Considering the differences between systematic risks and unsystematic risks, we realize that the portions of both risks are nearly the same for the four property types. The large amount of unsystematic risk

24


25

Hong Kong Property Investment Analysis Report suggests that property returns are substantially affected by unique factors affecting those property types only. The stocks, however, have much more systematic risks of 90%. Table 8: Segregation of Risks of Property and Stock Investment (2003-2013) Yr

Private Domestic Property

Private Office Property

Private Retail Property

Private Flatted Factory Property

Property Stocks

General Stocks

Inflation (CPI)

Savings Deposits

Market

2003

4.16

11.96

22.72

15.52

36.81

32.00

-2.30

0.25

20.36

2004

34.18

72.23

47.32

47.88

25.53

14.51

0.45

0.04

28.74

2005

11.97

25.29

17.62

47.01

1.09

9.82

1.34

0.41

22.06

2006

7.59

9.94

7.05

32.86

31.44

32.82

2.09

3.06

36.75

2007

25.41

37.82

25.64

35.82

66.84

56.07

3.45

2.84

44.13

2008

-0.79

-3.65

-2.16

4.99

-54.04

-49.81

2.29

2.55

-32.61

2009

27.12

21.00

31.70

16.69

69.24

59.85

1.63

0.65

41.34

2010

25.30

28.72

32.62

36.38

8.57

8.63

2.70

0.15

18.95

2011

15.34

23.29

24.23

31.42

-21.81

-15.94

5.76

0.15

-4.01

2012

27.00

25.46

41.60

45.63

40.66

21.37

3.79

0.16

12.17

Avg. Return

17.73

25.21

24.83

31.42

20.43

16.93

2.12

1.03

18.79

Std Dev.

11.69

20.12

14.90

14.64

38.30

32.55

2.14

1.25

23.07

Correlation

0.53

0.46

0.43

0.41

0.90

0.94

-0.24

0.03

1.00

NaĂŻve

0.51

0.87

0.65

0.63

1.66

1.41

0.09

0.05

1.00

Beta

0.27

0.40

0.28

0.26

1.49

1.33

-0.02

0.00

1.00

6.23

9.26

6.47

6.07

34.40

30.68

0.51

0.04

23.07

5.46

10.86

8.42

8.58

3.91

1.87

2.66

1.21

0.00

53.31

46.03

43.46

41.44

89.80

94.26

16.20

3.16

100.00

46.69

53.97

56.54

58.56

10.20

5.74

83.80

96.84

0.00

Systematic Risk Unsystematic Risk Systematic Risk Portion Unsystematic Risk Portion

;

√

;

.

Security market line (SML Model). Based on the beta and average return of each asset, an empirical security market line (SML) is derived as shown in Figure 8. As we already known, market has a beta of 1.0. Due to savings deposit contains little risk, it earns a zero beta. By stretching a line through the savings deposit point and market point, we get the security market line as follows.


Hong Kong Property Investment Analysis Report

Figure 8: Empirical Security Market Line (SML) of Property and Stock Investments in Hong Kong (2002-2013) Private Flatted Factory Property

35.00

Average Annual Return (%)

30.00 25.00

Private Office Property

Private Retail Property

Property Stocks Private Domestic Property

20.00

Market

15.00

General Stocks

10.00 5.00

Inflation (CPI)

Savings Deposits 0.00 -0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Beta

Same as the result of Property Investment in Hong Kong article, the SML implies that the returns of general stocks and property stocks are less than the market return. On the other hand, all four types of property investment are above the SML indicating profitable opportunities to invest. However, investment decision cannot only base on the SML because direct property investments are prevented by:   

Higher transaction costs and management costs, Higher liquidity risk, Higher costs to collect property market information than the stock investments.

Therefore, even though SML shows that investing in property market directly would have been better, investors need to consider other risks and costs which cannot be reflected from the SML graph.

26


27

Hong Kong Property Investment Analysis Report

Comparisons between performance of real estate and performance of alternative investment vehicles

Banking Deposits and loans are the two major functions of the banking system. And deposits are depositors under the conditions of retention of title, the funds or currency which give the use rights to bank. Deposits with financial institutions is the most important asset economy for families, it is an integral part of any family current assets. The biggest advantage is that it can change to cash quickly at any time, to achieve the real purchasing power trading and commodities. Commonly, the financial institutions like banks are too big to fall, so the money of household families deposit in the bank comes to be safer than invest in other financial products. The weakness of family savings in bank is rate of return or interest rate is too low.

Securities In this part I will talk about bonds and stock. There are four major types of investment bonds--Treasury bonds, Corporate bonds, Agency bonds and Municipal bonds.[2] It’s centralized in three areas that families invest in bonds and take financial advantages. Revenue got from the bonds is higher than bank interest income over the same period of the same time. Moreover, the investment risk is lower. As part of "cash flow", it can be converted to cash through other ways. But the weakness of the bonds is dominated in two ways, lower rate of return and greater risk in suffering long-term opportunity cost. Comparing with bonds, stock has a higher return rate. If you select a stock with potential development or it is a blue-chip, you can get a long-term, stable and high investment return. Operations of stocks are also easy, and stocks can be changed to cash easily. But stock investment is risky, including the policy risks and information risk.

Insurance


Hong Kong Property Investment Analysis Report The most special one in insurance is Participating Insurance, the main advantages include insurance expiration, debt service, and it has the function of savings. Participating insurance products in insurance contracts has already been set to a predetermined interest rate. The participating insurers also has characteristics of investing venture capital, it is possible to obtain a higher return on investment. Reasonable tax avoidance is also an advantage. The pre-profit is not high becomes a big problem and investors will lose some benefits if they early surrender.

Real Estate Because of the particularity of their goods, there is a characteristic different from other types of investments, understand and master these characteristics are keys to our work in real estate investment. The real estate investment consists of a large amount of funds, a long period, and suffering impacts from the political and social influences. It also subjects to scarcity of resources, ages of the building and inelasticity from the suppliers. Real estate is a costly investment and it is a highly capital-intensive industry. The capital of real estate investment, ranging from a million to more than ten millions , or even billions of capital. This is mainly due to the fixed position of the land, irreplaceable resources and high fundamental building cost. The high fundamental building cost is due to housing construction, installation materials and large amount of money need to spend. Apart from the huge demand of engineering and technical personnel and construction management personnel in construction, there is a demand of many large construction machinery and equipment, resulting the housing construction costs are high. In addition, due to the long period of real estate construction, the cost also increases. Real estate has a long payback cycle. Once the funds invested in the real estate market, it takes real estate developers a long time to get back the initial investment and finally get profit from sales. Large investment is risky. Since the occupation of the capital available in real estate investment is big, real estate developers need to take more risk with the increasing risk factors. These risk factors include five parts-Purchasing power risk, Liquidity risk, Operational risk, Social risk and Nature risk. Finally, the investment return is good because the investment return and risk is proportional. We can summarize that the risk of real estate investment is higher than saving, insurance and bonds, but it is lower than that of stock. The return of the real estate is the biggest, but it needs substantial capital investment and professional knowledge. It also has the longest return cycle comparing with other ways of investment. About the tax and liquidity, real estate investment is heavily taxable and of poor liquidity. So if you have sufficient money, real estate is the best way to make money. Compare real estate with others

Yield tax Safety Liquidity

Deposit

Bonds(10Y)

Stock

Participating Insurance

Real Estate

0.5%-1.0% Yes Safe Strong

2.7 %-5.1% No Safe Strong

8.5%-10.3% No Risky Strong

6%-6.5% No Safe Mid-Strong

20%-25% Yes Risky Poor

28


Hong Kong Property Investment Analysis Report

Mean-Variance efficient frontier with and without the inclusion of the real estate When we are constructing the efficient portfolios with and without the private property, we define two risky assets, one is stock (e.g., Hang Seng Index) and another one is bond (US 10 year T-bond). As we are investigating the Hong Kong real estate market, it’s logical that we take Hong Kong stock market into our risky portfolio. However, for the bond selection, we use US 10 year T-bond as our proxy because Hong Kong market is strongly correlated with US market. In Figure 9, we exclude the private domestic property and just use risky portfolio comprised of stock and bond only (Table 9a, Table 9b, Table9c Table9d and Table9e show the data of efficient frontier construction process). And in Figure 10 we include the private domestic property into risky portfolio (Table 10a, Table 10b, Table10c and Table10d show the data of efficient frontier construction process). Finally, we combine these two efficient frontiers (Figure 11) so that it’s easier to figure out which portfolio is better. Definitely, the portfolio with the private property performs much better than the one without private property because given a return the portfolio with private property is less risky. Also, in our risky portfolio making, we assume that short selling is allowed. The points A and B are defined as the global minimum portfolio; since no other portfolio exists that has a lower standard deviation.

Figure 9: Efficient Frontier without Private Domestic Property 7.00%

6.00%

Average Return

29

5.00%

4.00%

3.00% 0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

Standard Deviation Table 9a: Returns of Each Sector (%) Year

Private Property

Hang Seng Index

10 year T-bond Rate

1 year T-Bill Rate

2002

5.27

-17.08

4.61

1.66

2003

5.08

0.24

4.01

1.03


Hong Kong Property Investment Analysis Report 2004

4.13

25.54

4.27

1.23

2005

3.86

10.89

4.29

3.01

2006

4.00

18.86

4.80

4.68

2007

3.96

38.45

4.63

4.64

2008

3.88

-13.05

3.66

1.59

2009

3.28

-11.66

3.26

0.14

2010

3.16

17.21

3.22

0.13

2011

3.00

0.37

2.78

0.03

2012

2.86

-3.40

1.80

0.05

Average

3.86

6.03

3.76

1.65

Std.

0.75

16.82

0.88

0.00

Table 9b Summary Table (%) Average Annually Return

Standard Deviation

Hang Seng Index

6.03

16.82

10 year T-bond Rate

3.76

0.88

Table 9c: Covariance Table Weights

-2%

102%

Asset

Hang Seng Index

10 year T-bond Rate

-2%

Hang Seng Index

0.028278077

0.000561182

102%

10 year T-bond Rate

100%

0.000561182

7.74365E-05

-0.00012229%

0.00700666%

Table 9d: Portfolio Statistics Risk Free Rate (%)

1.65

Portfolio Average Return (%)

3.72

Standard Deviation (%)

0.83

Slope

4.48

Target Average (%)

3.30

Table 9e: Portfolio Average Return (%)

3.30

3.50

3.72

3.76

3.90

4.10

4.30

4.50

4.70

4.90

5.10

5.30

5.50

5.70

5.90

6.03

Standard Deviation (%)

3.16

1.80

0.83

0.88

1.55

2.89

4.30

5.73

7.17

8.62

10.07

11.52

12.97

14.42

15.87

16.82

Slope

1.04

1.94

4.48

4.27

2.51

1.42

1.00

0.78

0.66

0.57

0.51

0.46

0.42

0.40

0.37

0.36

Hang Seng Index (%)

-20

-11

-2

0

6

15

24

33

41

50

59

68

77

85

94

100

10 year T-bond Rate (%)

120

111

102

1.00

94

85

76

67

59

50

41

32

23

15

6

0

30


Hong Kong Property Investment Analysis Report

Figure 10: Efficient Frontier with Private Domestic Property

Average Return

5.00%

4.00%

3.00% 0.60%

0.70%

0.80%

0.90%

1.00%

1.10%

1.20%

1.30%

1.40%

Standard Deviation

Figure 11: Efficient Frontier with and without Private Domestic Property 4.50%

4.00%

Average Return

31

Without Private With Private 3.50%

3.00% 0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Standard Deviation

3.5%

4.0%

4.5%

5.0%


Hong Kong Property Investment Analysis Report Table 10a: Summary Table (%) Average Annually Return

Standard Deviation

Private Property

3.86

0.75

Hang Seng Index

6.03

16.82

10 year T-bond Rate

3.76

0.88

Table 10b: Covariance Table Weight

279%

7%

-186%

Asset

Private Property

Hang Seng Index

10 year T-bond Rate

279%

Private Property

5.60672E-05

-0.000117631

4.86494E-05

7%

Hang Seng Index

-0.000117631

0.028278077

0.000561182

-186%

10 year T-bond Rate

4.86494E-05

0.000561182

7.74365E-05

0.00016083

4.4478E-05

-5.83232E-05

100%

Table 10c: Portfolio Statistics Portfolio Average Return (%)

4.20

Standard Deviation (%)

1.21

Slope

3.46428449

Target average (%)

4.20

Table 10d: Portfolio Average return Standard Deviation Slope Private Property Hang Seng Index 10 year Tbond Rate

0.03 45 0.01 32 2.62 34 1.38 40 0.07 56

0.03 50 0.01 20 2.90 60 1.10 55 0.06 58

0.03 55 0.01 10 3.22 85 0.82 71 0.05 61

0.03 60 0.01 00 3.59 11 0.54 86 0.04 63

0.03 65 0.00 92 3.98 68 0.27 02 0.03 66

0.03 70 0.00 84 4.39 48

0.03 75 0.00 79 4.77 50

0.03 80 0.00 75 5.06 85

0.03 85 0.00 74 5.21 37

0.03 90 0.00 75 5.18 91

0.03 95 0.00 79 5.00 73

0.04 00 0.00 85 4.72 37

0.04 05 0.00 92 4.39 49

0.04 10 0.01 01 4.06 22

0.04 15 0.01 11 3.74 86

0.04 20 0.01 21 3.46 43

0.04 25 0.01 32 3.21 14

0.00 82

0.28 67

0.56 51

0.83 33

1.12 20

1.40 04

1.67 89

1.95 73

2.23 58

2.51 42

2.79 27

3.07 11

0.02 68

0.01 70

0.00 73

0.00 21

0.01 22

0.02 20

0.03 18

0.04 15

0.05 13

0.06 10

0.07 08

0.08 06

2.45 95

2.17 13

1.88 31

1.59 50

1.30 68

1.01 86

0.73 03

0.44 21

0.16 46

0.13 43

0.42 24

0.71 06

0.99 88

1.28 70

1.57 53

1.86 35

2.15 16

32


33

Hong Kong Property Investment Analysis Report

Limitations During the evaluation of private domestic value, we only use the estimated square meter per unit as the multiplier to calculate the total area. This number may not be accurate enough. When calculating the SML and Mean-Variance frontier, we assume the total assets only consists of four property types, property stocks, equity securities and debt securities. However, the true market portfolio also possesses many other assets that are excluded out of this report. To construct a better market portfolio, we need to include the value of financial derivatives, the value of ETF, pension fund, insurance and so forth. Thus, without a well-organized market portfolio, the SML and Mean-Variance frontier curve cannot give us a complete view of current markets.

Conclusion and Decision The results of this study have demonstrated that property investment has been superior to stock investment and bond investment in Hong Kong. Though the limitations limit the viewpoint of the total market, there is clear indication that the return of private property is decent. And it’s worthy for investors to do the investment. While our analysis is based only on historical data, and the Hong Kong stock market is inefficient in strong form, the property market could only be more inefficient than the stock market. In the absence of a central market, information on property transactions is not as readily available as stock transactions. Even though the real estate market became more efficient after 1997, and the speed of information update was faster than ever before. It’s still not efficient enough and causes a higher cost of information for investment decision. But the evidence from this study is transparent. Private property investment performed stable and profitable between 2002 and 2012. It significantly reduces the risk and increases the return in the risky portfolio. We suggest that the Hong Kong private property could be added in institutional investment portfolios but portfolio managers should consider carefully.


Hong Kong Property Investment Analysis Report

Appendix Basic data

34


35

Hong Kong Property Investment Analysis Report


Hong Kong Property Investment Analysis Report

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37

Hong Kong Property Investment Analysis Report


Hong Kong Property Investment Analysis Report

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39

Hong Kong Property Investment Analysis Report


Hong Kong Property Investment Analysis Report

Efficient frontier related formula

Two Assets

40


41

Hong Kong Property Investment Analysis Report

Three Assets


Hong Kong Property Investment Analysis Report

42


43

Hong Kong Property Investment Analysis Report

Reference Article:  

Property Investment in Hong Kong Benchmarking Real Estate Performance: Considerations and Implications

Report:      

HONG KONG BUSINESS FORECAST REPORT HONG KONG INFRASTRUCTURE REPORT CHINA REAL ESTATE REPORT Cheung Kong (Holdings) Limited Company profile Country Intelligence: Report --- Hong Kong 2012 年香港債券市場的概況

Source:     

http://data.worldbank.org/country/hong-kong-sar-china http://www.censtatd.gov.hk/home/index_tc.jsp http://www.tradingeconomics.com/hong-kong/indicators http://www.rvd.gov.hk/en/property_market_statistics/ http://www.docin.com/p-617043598.html

Database: 

CEIC database


MA Jiacheng-Writing Sample