Property Investment in Hong Kong

Abstract

Executive Summary. In this article, Hong Kong transaction-based data collected during the 1980s and 1990s seems to confirm European and American findings that, in terms of risk and return, direct property investment is superior to that of property stocks. Returns from property investment also have a low correlation with that of stocks. Analyses based on the security market line show that property investment in the office, retail, industrial, and residential sectors all yield returns higher than what the market, comprising both property and stocks, required during the decade between 1984 and 1995. Such characteristics suggest that institutional investors in Hong Kong should have included direct property in their portfolios in order to capitalise on its diversification potential and its return/risk superiority. However, direct property is seldom included in their portfolios.

This exclusion of direct property from portfolios by fund managers is attributed to the segmentation of the property and stock markets, and the large proportion of unsystematic risk of direct property investment. In contrast to stock investments, direct property investment has the problems of lumpiness and illiquidity, as well as higher information, transaction and management costs. In addition, investment managers of investment funds may perceive property investment as highly risky and out of their specialization.

However, in view of the growing importance of institutional investors in Hong Kong, alternative opportunities promoting better rewards should be explored. Despite its peculiarities, direct property investment, or its securitisation, remains a likely candidate for inclusion in portfolios to achieve this goal. After all, only the institutional funds have enough muscle to diversify the unsystematic risk of direct property investment and capitalise on its diversification potential and return/risk superiority.