The dynamics of retail real estate market in Hong Kong

1. The dynamics of retail real estate market in Hong Kong Sun Zhuo Xiao · Chau Kwong Wing

2. Content • Background • Development of Hypothesis • The methodology • Data characteristics and sources • Empirical results

3. 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.

4. 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).

5. What might be the driven force behind it?

6. 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.

7. The performance of the tourism sector 31%40%54%57%54%55%55%57%61%63%67%71% 33% 40%51%65%58%56%56%58%62%69% 69%71% 75% Yearly tourist capacities for mainland visitors and non-mainland visitors Tourist spending from mainland China and other areas of the world

8. 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.

9. Development of Hypotheses • 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.

10. Development of Hypotheses 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. • Hypothesis 2a IVS has a stronger impact on prices of street level shops in expensive locations compared with those in cheaper locations.

11. Development of Hypotheses The time table of IVS implementation

12. Development of Hypotheses • 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.

13. 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+

14. Data characteristics and sources

15. Empirical model • (1) H1 H2 • (2) • (3) • (4)

16. 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)

17. Empirical result for Hypothesis 1

18. Empirical result for Hypothesis 2

19. Empirical results for Hypotheses 2a and 2b

20. Conclusions 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

21. Thank you & Questions?