The impact of clustering and image effect on office prices : empirical evidence from Hong Kong

Abstract

This study examines two locational attributes of offices on their prices, namely office clustering and image effect. Office clustering refers to clustering of office buildings in a locality. The intensity of clustering is operationalized as the density of office buildings in an area (Jennen & Brounen 2009; Huynh, 2014). The positive impact of clustering on office prices is due to the synergy effects among offices in the locality that facilitates the flow of information and people amongst the companies in the same area. Without institutional constraints, such as land use zoning, development controls, property ownership pattern, economic, social, and political constraints, profit maximization implies that office density will be highly correlated with distance to CBD. Empirical data from Hong Kong show that institutional constraints are sufficiently high to make the reality deviates from this hypothetical relationship, which allows empirical estimation of the clustering effect. The empirical result confirms the positive impact of clustering on office prices. which is consistent with the findings in Jennen & Brounen (2009) and Huynh (2014). In addition, this study also found that the impact of clustering is not linear but diminishing with office density. The result suggests that there are diseconomies of scale due to congestion in the utilization of supporting facilities in high density office areas. The empirical result shows that the CBD (Central and Tsim Sha Tsui) are operating beyond the optimal office density. One implication is that polices that facilitate decentralization of offices can optimize land use in Hong Kong. The image effect refers to the perceived image value of an office address which commands a premium. An office located in the "right address" can enhance its image (Archer. & Smith, 2003; Koppels, et. al., 2009) which can be capitalized as higher profit and company value. The idea that an address can enhance company value is based on the conjecture that a company located in a prestigious or high-quality area signals the quality of the company. This study follows Archer. & Smith (2003) to measure location quality by the proportion of Grade- A to non-Grade-A offices. The empirical results show that the image effect is stronger in areas closer to the CBD. In Hong Kong’s context, the Central has strongest image effect that is well above the effect implied by its distance to CBD due probably to the iconic nature of Central. Since the lower quality offices in Central are also older office buildings. As these offices enjoy a premium due to the image effect, it may impose an additional hurtle for the redevelopment of these older lower quality offices. The contributions of this study are three-fold. First, this is one of the few empirical studies and also the first study in Hong Kong on the impact of clustering on office prices. The results have implication on land use and urban planning policies. Second, the nonlinearity of clustering effect on office prices suggests that office density in Hong Kong tend to be too high in CBD and too low in off-CBD areas. Third, the image effect is a behaviour conjecture that is verified by empirical data from Hong Kong. The strong image effect in Central may hinder redevelopment of older lower quality office buildings in this area.