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Paper eres2013_69:
What Causes the Differential Movements of Cap Rates in the High and Low End Housing Markets?

id eres2013_69
authors Liang, Jiancong; Siu Kei Wong, Kwong Wing Chau
year 2013
title What Causes the Differential Movements of Cap Rates in the High and Low End Housing Markets?
source 20th Annual European Real Estate Society Conference in Vienna, Austria
summary The capitalization rate used in real estate literature is the ratio of net operating income to property value. This paper has investigated the capitalization rate movements in Hong Kong from 1987 to 2012. In Hong Kong, capitalization rates for residential and commercial properties were closely intertwined during 1984-1997. However, after 1997, diverging patterns were observed: commercial properties' cap rates became higher than residential properties'; cap rates for lower-end properties increased relative to higher-end properties. What are the factors that determine the cap rates in Hong Kong?What are the causes that generate such gap between different properties types' cap rates in Hong Kong? Based on the basic Gordon model, WACC and CAPM, the study seeks to explain the cap rate movements in Hong Kong by modelling it as a function of the risk-free rate, risk premium, and expected long-run rental growth. Our preliminary results show that the cost of debt, stock market performance, unemployment, CPI inflation, and price growth are significant determinants of cap rates. At the same time, the LIBOR/HIBOR ratio and price growth are significant determinants of cap rate gaps. Additionally, the cap rates would also adjust to its lagged term due to autocorrelation.
keywords CAP rate, Hong Kong, Risk premium, Differential movements
series ERES:conference
type paper session
email ljc99022@hku.hk
more http://library.eres.org/cgi-bin/rsa98.pl?conf=ERES2013&type=session&theme=D&slot=5704
discussion No discussions. Post discussion ...
ratings
session D-5: Housing Markets & Economics
last changed 2014/10/21 21:51
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