1. Dr. L. H. Li Associate Professor Course Director – MSc (Real Estate) Dept. of Real Estate &Construction,HKU
Real Estate Economics(RECO6011)
Web site :
Tel : (Dept. of Real Estate & Construction)

2. Please Switch Off Your Mobile Phone , I Have Had Enough Brain Damage From the of My Own Cell Phone !

3. Real Estate Economics
The purpose of this course is to provide students with a basic understanding of the economics of real estate and urban land development. This module is NOT ABOUT MICRO/MACRO economics. The programme is conducted over different sections of lectures and tutorials. The following gives a general outline of the course for reference only and is not designed to be a definitive course guide. The key reading list is also by no means exhaustive and students are expected and strongly encouraged to browse through the library before lecture.

4. To save a few trees for the monkeys, students are required to download supplementary (to required readings) lectures notes (from http ://hkusury2.hku.hk/li, click on various REE notes under “Information on MSc lectures” to download. If you have problems in doing so, please let me know.

5. PROGRAM OUTLINE Section 1 : Real Estate Market and Cycles
It will start with introductory discussion on the market structure for real estate economy, followed by an examination of the formation of real estate cycles in general and in Hong Kong.

6. Section 2 : Real Estate Appraisal
This section intends to cover the basic techniques of real estate investment and development appraisal. It will therefore start with introductory discussion various types of simple traditional appraisal models, theory of land value and progress to relatively complicated financial models of appraisal (some of which may have been covered in the Real Estate and Investment module).

7. Section 4 : Risk Analysis in Real Estate Investment
Having covered the applicability of various appraisal theories, the next question is naturally - So What ? If we assess the value for a particular asset, does that mean we will go ahead with the investment ? How do we know our decision is right ? How would the variables in the appraisal change ? How can computer help ?

8. Section 5 : International Real Estate Market
As a new element in the programme, we will try to insert an “international flavour” into the module by inviting international scholars to deliver issues in their part of the world. In 2002/2003, we will have the North American Real Estate market.

9. Section 6 : The Economics of Urban Land Policy  
This will examine the impact of urban land policy in different environments. The lecture discusses the model of urban land policy adopted under different situation, as well as in a reforming economy. Moreover, socio-economic impact of urban land (political) decisions will be examined in the context of Hong Kong such as urban land use rejuvenation and the role of government in the market.

10. Real Estate Market Structure
Market Structures in Real Estate and Construction
Perfect competition or monopoly ?
Characteristics of perfect competition
Large numbers of players ?
Homogenous products ?
Free entry and exit ?
Perfect information ?
Number of Customers
Identical factor prices ?

11. Real Estate Cycle – A theoretical Framework
Property cycle can be defined as “… current but irregular fluctuations on the rate of all-property total return, which are also apparent in many other indicators of property activity, but with varying leads and lags against the all-property cycle” (Key, et al , 1994)

12. Real Estate Cycle – A theoretical Framework
Do real estate cycles really exist ?
degree of volatility of return
statistical correlation between yearly real estate returns
Wheaton (1987) applies econometric model using real rents, level of office employment, expectations about future space needs(proxied by the ratio of current and previous period’s office employment), and area of occupied office space as determinants of demand.
He finds that rents do not move quickly to clear market leading to extended length of cycles, and
Supply reacts more to vacancies and rents than does demand, thus causing instabilities.
What other causes ?

13. Factors causing fluctuations :
mis-match between the demand and supply factors, the lags between the planning and production of space – Role of market data in minimizing these gaps
Monetary and taxation deregulation led to price inflation
intensified competition in the financial sector led to excessive loans on sometimes unjustified projects
Easier capital flows and property finance offers a wide range of debt and equity finance opportunities, for good and bad projects
internationalization of the world’s financial sector leading to new specification for commercial real estate and obsolescence of traditional supply

14. Land and Real Estate Market Structure in Hong Kong - Data and Information
Construction stage :
Construction floor plans of various degree need to be submitted and approved by the Buildings Department.
Consent to Commence Work as indication of new supply
Occupation stage :
The Rating and Valuation Department (R&V) is responsible for the assessment of a kind of property tax – Rates
The R&V Department publishes annual report on such data as property price indices for all sectors and size classes
It also produces database on information such as vacancy rates, take-up ratio as well as market yields
Try the R&V Dept web site :

15. Land and Real Estate Market Structure in Hong Kong - Data and Information
Private sector :
Surveyors have been dominating the provision of property-related services in the HKSAR.
In the recently years large securities house such as Nomura and Morgan Stanley also participate in the analysis of the real estate market.

16. Real Estate Cycles in Hong Kong
Long upward trend since 1984 with only minor adjustments in 1989 and in 1992, until 1997.
Since 1992, relative cyclical movements were becoming more obvious, but new peaks normally climbed to higher levels as compared to the last peak.
This pattern continued until after the Asian financial crisis in 1997 when prices bottomed down to the 1992 level

18. Real Estate Cycles in different sectors in Hong Kong
Demand for residential units had remained fairly steady before 1997 due to various reasons.
On the other hand, different sectors performed differently

20. Real Estate Cycles in Hong Kong – political influences
the smaller residential flats out-performed the luxurious class from 1984 to 1992, then the reverse happened.
Due to some political reasons, supply in various domestic sub-sectors has been distorted.

22. Real Estate Cycles in Hong Kong
The fact that more sites available for small unit projects were put to the market was not a strategy, but incidental to some political developments after the Sino-British Joint Declaration in 1984
Hence, supply of properties from the government land market had been highly unstable

23. Table 2 - Major Land Disposal Pattern (Urban Area) 1985-1997
Year
Urban Area C
C/R R1 R2 R3 R4 I CP 3 2 1 11 4 6
Total 22 29 12 26 7 14
Source : Data compiled from Government Land Sales Record, Lands Department, Hong Kong Government.
Note :
R1 to R4 residential land for different degrees of development intensity. R1 is the most intensive type and so on.
C -commercial land
C/R - residential land with commercial elements allowed
I - industrial land
CP - land for car-parking use

24. Real Estate Cycles in Hong Kong – correlation with stock market
Real estate market had been highly correlated to that of the stock market only before the burst in 1997.
limited and inactive bond market and there is a lack of other investment vehicles.
Most of the blue-chip companies listed in the Hong Kong Stock Exchange are either property developers or property-related conglomerates.
Implications on REITs ?

26. Real Estate Cycles in Hong Kong – interest rate
Interest rate in Hong Kong has been set to follow the tend of the US pattern, leading to the role of interest rate in the monetary policy in Hong Kong being relatively inactive.
The HK interest rate, on which the mortgage rate bases, cannot always reflect the actual macro economic situation.
As a good inflation-hedge tool, demand for real estate will soar under an artificially-low interest rate period leading to rising prices

28. Real Estate Cycles in Hong Kong – government policy
New Government New Policy:
In October 1997, the Chief Executive mentioned nothing except a promise to achieve a supply of 85,000 units of housing flats and a target of home ownership increased to 70% in the long run.
This promise represents a substantial increase in housing supply in Hong Kong given the previous total supply of housing flats from

29. Housing Supply Pattern 1985-2000 in Hong Kong (
Housing Supply Pattern in Hong Kong (*Note : Figure for year 2000 accounts for statistics up to the third quarter of the year )
Public Rental
Public Sale
Private
TOTAL
1985
29598
20206
34613
84417
1986
28432
6480
33013
67925
1987
24976
8974
33629
67579
1988
31701
8802
30122
70625
1989
46393
18776
30621
95790
1990
32885
17518
31483
81886
1991
25486
16726
40728
82940
1992
11039
5740
25683
42462
1993
34295
33109
26854
94258
1994
17098
4594
34350
56042
1995
17349
16672
20753
54774
1996
18358
10725
17183
46266
1997
16046
21535
15886
53467
1998
14123
21093
19489
54705
1999
29382
22493
31504
83379
2000*
18784
16064
16597
51445

30. Can the Gov’t dictate supply ?
The new “socialist” style of land management system in Hong Kong after 1997 with production indication might not be effectiveness as the government cannot control all supply channels of housing

31. Table 5 : Contribution of Housing Supply Via Government Land Auction Channel
Year
Annual new completion of housing floor space (1,000 sq.m.)
Floor area available for housing development via government land auctions (1,000 sq.m.)
% of supply from auctioned land on total supply
1991
1831
365.64
20%
1992
947
316.64
33.4%
1993
1514
400.47
26.5%
1994
1255
222.18
17.7%
1995
1089
370.16
34%
1996
769
219
28.5%
Average :
26.68%
Source : L.H. Li, (1996) , Development Appraisal of Land in Hong Kong, Hong Kong : Chinese University Press

32. Real Estate Cycles in Hong Kong
This market expectation, when faced with a market failure, started to search for explanations in the government policies for the burst of the bubble.
One of these being the over-production of government-subsidized housing, or the HOS, for sale in the market.
Is it true ?

34. Real Estate Cycles in Hong Kong
The Bank Sector – Eager to lend you an umbrella on a sunny day and ask for it back when it rains.
Bank sector in Hong Kong has been under rather strict scrutiny by the quasi-central bank, the Hong Kong Monetary Authority(HKMA).
There has never been a major deregulation as such.

35. Real Estate Cycles in Hong Kong
Proportion of loans to property investment outweighed that to individual for purchasing private housing flats in the mid-80’s, but the situation got reversed since late 80’s until after the burst of bubble in 1997.
Banks have been keen on trying channel their funds into mortgage loans, eg. Pushing down mortgage rates.

37. Real Estate Cycles in Hong Kong
Banks are pushing too much finance opportunities in good market, and
Setting too many barriers for bridging loans in bad times