Cap Rate Movements in Hong Kong

Abstract

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 generating the gaps between the cap rates of different property types in Hong Kong? Based on the basic Gordon model, WACC and CAPM, the study seeks to explain the cap rate movements in Hong Kong. Our preliminary results show that the influx potential overseas investment money, which is measured by the LIBOR and HIBOR, and the expected future long term growth, which is measured by the historical price trend, are the two major factors that inducing the cap rate spread.