Spring2019

Kwok-Sang (Maurice) Tse

The University of Hong Kong

ktse@hku.hk

Class Hours: 9:30 am – 12:20 pm (Mon)

Venue: CYP-P4

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Demonstrator

gtsangwk@hku.hk

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Why Real Estate is an important subject?

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 Real
U.S. European
Estate
Subprime Sovereign
Market
Crisis Debt Crisis
Bubble

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 Global
Recession

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What this course will cover?

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 1. Property and Capital Market
• Property Market Analysis

• Relationship between Property and Capital Market

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2. Real Estate Related Financial Products
• Design of Mortgage Products
• Securitization of Mortgages

• REITs in Hong Kong

• Investment Analysis
• Financial Engineering for REITs
• Financial Modeling

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Major Cause of the Financial Tsunami
Key mistakes

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 3. Real Estate Investment
• Pre-Sale Transactions

• Speculative Real Estate Transactions

• Real Estate Investments and Portfolio Consideration*

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 4. Valuation of Real Estate
• Income Producing Properties

• Land

• Old Properties

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 Text and Reading Materials

paperless

• References:

• Strongly Recommended Tool:

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Date Topic Readings
Jan 14 Introduction Lecture notes
Jan 21 Property Market Analysis Lecture notes
Jan 28 Capital and Property Market Lecture notes
Feb 04 University Holiday
Feb 11 Lunar New Year Break
Feb 18 Mortgage Market Lecture notes
Feb 25 Securitization of Mortgages Lecture notes
Mar 04 Reading Week
Mar 11 Securitization of Mortgages and In-Class midterm Lecture notes
Mar 18 Real Estate Investment Trusts (REITs): Lecture notes
Mar 25 Pre-sale Transactions Lecture notes
Apr 01 Real Estate Investment Performance and Portfolio Considerations Lecture notes
Apr 08 Valuation of Income Producing Properties Lecture notes
Apr 15 Valuation of Land and Redevelopment RM1, RM2
Apr 22 Easter Monday
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Grading Policy

• Tutorial Participation and Discussion 10%

• Two Assignments 20%
• Mid-term 10%
• Semester-End Final Exam 60%

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Academic Honesty and Integrity

http://www.hku.hk/plagiarism/

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End
of Syllabus

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Real Estate Market Analysis

Kwok-Sang (Maurice) Tse 謝國生

The University of Hong Kong
ktse@hku.hk

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Contents

•Stock Market, Property Market, GDP,

Consumption.

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Introduction

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Hong Kong Stock Market

Industry Classification
• Energy • Utilities
• Materials • Financials
• Industrials • Properties & Construction
• Consumer Goods • Information Technology
• Consumer Services • Conglomerates
• Telecommunications
HKEX Fact Book

• What about the portfolio weights?

 Market Capitalization Trend by
Hang Seng Industry Classification 2006-2015
Industry Class 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Energy 6.1% 7.4% 6.9% 7.3% 8.1% 7.8% 7.6% 6.2% 4.7% 3.5%
Materials 2.2% 2.9% 1.8% 3.0% 3.3% 2.6% 2.5% 2.0% 2.1% 1.8%
Industrials 1.0% 1.6% 1.3% 1.5% 2.2% 1.6% 1.8% 3.6% 4.2% 4.7%
Cons Goods 5.9% 6.8% 6.5% 9.3% 10.6% 11.5% 10.9% 11.7% 11.1% 11.4%
Cons Services 6.9% 7.2% 5.8% 6.7% 8.1% 9.2% 9.1% 10.6% 7.9% 6.3%
Telecom 13.8% 16.4% 18.3% 10.2% 9.3% 11.9% 10.5% 8.7% 9.4% 9.2%
Utilities 3.5% 3.0% 4.2% 3.6% 3.4% 4.3% 4.9% 5.4% 6.0% 6.0%
Financials 39.6% 31.2% 34.8% 34.5% 32.9% 30.5% 30.7% 29.0% 30.0% 29.4%
Properties 11.5% 14.2% 12.4% 13.9% 12.6% 11.6% 15.2% 13.5% 13.9% 14.4%
Info Tech 3.0% 3.2% 2.4% 4.7% 4.0% 3.7% 3.8% 6.0% 6.5% 8.6%
Conglomerates 6.4% 6.0% 5.5% 5.4% 5.6% 5.3% 3.1% 3.3% 4.2% 4.7%
Equity Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
 Market Capitalization Trend by Hang Seng
Industry Classification 2010-2013
Market Capitalization by Industry
1 Jan 2010 -- 31 Dec 2013
35% 30%
30%
25%
20%
15% 13%
11%
8% 9%
10% 6% 7%
4% 5%
5% 3% 3%
0%
 Market Capitalization Trend by
Hang Seng Industry Classification 2006-2015
45.0%
39.6%
40.0% 34.8% 34.5% 32.9%
35.0% 31.2% 30.5% 30.7% 30.0% 29.4%
29.0%
30.0%
25.0%
20.0% 15.2%
14.2% 12.4% 13.9% 12.6% 13.5% 13.9% 14.4%
15.0% 11.5% 11.6%
10.0%
5.0%
0.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Energy Materials Industrials

Consumer Goods Consumer Services Telecommunications
Utilities Financials Properties & Construction
Infomration Technology Conglomerates

Major Sectors in Hong Kong 2015:

1. Financials (29.4%)
2. Telecommunications (9.2%)
3. Properties & Construction (14.4%)
4. Consumer Goods (11.4%)
Hang Seng Index and Hang Seng Sub-Indices

HS Index Finance Properties Com&Ind Utilities

HS Index 1 0.937 0.846 0.952 0.623
Finance 1 0.778 0.849 0.529
Properties 1 0.783 0.552
Com&Ind 1 0.593
Utilities 1
Beta 1.0000 1.0248 1.0024 1.0029 0.4305
Year HS Index Finance Properties Com&Ind Utilities
2016 1 0.971 0.845 0.961 0.769
2015 1 0.965 0.832 0.962 0.668
2014 1 0.933 0.796 0.935 0.688
2013 1 0.969 0.829 0.932 0.624
2012 1 0.919 0.758 0.921 0.511
2011 1 0.894 0.940 0.977 0.527
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 Stock Market, Property Price and Rental
R(HSI) R(Price) R(Rental)
R(HSI) 1 0.47 0.38
R(Price) 1 0.84
R(Rental) 1
80.0% Anti-speculative measures
1995 Buyer’s
60.0% Stamp Duty
Handover 1997 Recovery 2004 (BSD) 15%
40.0% 27Oct2012

20.0%

0.0%

-20.0%
SARS 2003 Special
-40.0% Ad valorem
Stamp Duty
Stamp Duty
(SSD)
-60.0% Recession 1997-2002 20Nov2010
(AVD)
5Nov2016
-80.0% Asia Financial Crisis 1997-1999 Global Financial Crisis 2008
-100.0%
Nov-04

Nov-09
Jan-94

Jan-99
May-97

Sep-10
Sep-95

Jul-01

Mar-08

Jul-11

Sep-15
Jul-06

May-12

Nov-14

Jul-16
Sep-05
Mar-98

Jan-14
Mar-03

Mar-13
Sep-00

Jan-04

Jan-09
May-07
Nov-94

Jul-96

Nov-99

May-02

R(HSI)-YoY R(Price)-YoY k s tse 25

 Stock and Property Market Performance

0.2 R(HS Index) R(Price) R(Rental)

R(HS Index)
0.15 2008 -65.9% -11.8% -11.3%
R(Price)
2009 41.9% 25.0% 11.6%
0.1 R(Rental)
0.05
0
-0.05
-0.1
-0.15
-0.2 Hong Kong Monetary Base (HKD billion)
-0.25 2005 2006 2007 2008 2009
284 296 321 507 1011
-0.3
Sep-05 Mar-06 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08 Jul-09 Jan-10 Aug-10
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 Real GDP and Property Price Indices
GDP Small & M Large
GDP 1 0.63 0.74
Small & M 1 0.94

50.0%
Property Price Change and GDP Growth (YoY%) 15.00%

40.0%
Quarterly Property Price Change yoy％

10.00%

Quarterly Real GDP Growth YoY％

30.0%

20.0%
5.00%

10.0%

0.00%
0.0%
01Q1

03Q3

02Q1

02Q3

03Q1

03Q3

04Q1

04Q3

05Q1

05Q3

06Q1

06Q3

07Q1

07Q3

08Q1

08Q3

09Q1

09Q3

10Q1

10Q3

11Q1

11Q3
-10.0%
-5.00%

-20.0%
Quarterly GDP Change YoY% Small and Medium Sized Properties

-30.0% Large Properties (> 100 sqm) -10.00%

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Consumer Price Index

In 2008-2009, inflationary pressure was building up

because of the weak US dollar and the booming
property market leading to higher rental rates.

Question: Is Real Estate Real ? Does real estate

provide a good hedge against inflation ?

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Consumer Price Index
Consumer Price Index (yoy %Change): 2000-2015
+15.0
All Food Housing Clothing and Footwear Transport

+10.0

+5.0

0.0

-5.0

-10.0

-15.0
2000 2002 2004 2006 2008 2010 2012 2014 2016

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Consumer Price Index

Question: Is Real Estate Real ? Does real estate

investment provide a good hedge against inflation ?

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Is Residential Real Estate Real
Examine the Return on Price and Rent versus Inflation Rate
15.00%
monthly return on Return on Price Return on Rent CPI (%)
residential property 10.00%
price and rent
5.00%
versus inflation rate.
0.00%

-5.00%

-10.00%
Does real estate
investment provide a -15.00%
good hedge against Feb-93 Jul-98 Jan-04 Jul-09 Dec-14
inflation ?
Return on Price Return on Rent CPI (%)
Monthly Average 0.50% 0.24% 0.19%
Monthly Stdev 2.59% 1.51% 0.37%

Correlation Return on Price Return on Rent CPI (%)

Return on Price 1.00 0.46 0.09
Return on Rent 1.00 0.27
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Is Residential Real Estate Real
Examine the Total Return of Residential and Inflation Rate
monthly return on Total Return CPI (%)
residential property 15.00%
price and rent 10.00%
versus inflation rate.
5.00%

0.00%

-5.00%

-10.00%
Does real estate
-15.00%
investment provide a
good hedge against -20.00%
Feb-93 Jul-98 Jan-04 Jul-09 Dec-14
inflation ?
Return on Price Return on Rent CPI (%)
Monthly Average 0.50% 0.24% 0.19%
Monthly Stdev 2.59% 1.51% 0.37%

Correlation Return on Price Return on Rent CPI (%)

Return on Price 1.00 0.46 0.09
Return on Rent 1.00 0.27
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Q&As

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