Factors influencing the performance of Hong Kong real estate companies

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.