From the prices of housing units to the share prices of their producers

Abstract

Investment in brand name is a common strategy in many businesses. Such an investment can increase the consumer’s confidence in the quality of the product and thus allow the company to charge higher prices, which means higher profitability and thus valuation of the company. Therefore, a good brand name or reputation is a valuable intangible asset which is often not reflected in the company’s financial statements. However, research on how the reputation of a real estate company affects its company value is rare. The goal of this study is to fill this research gap by (1) measuring the reputation of listed developers in Hong Kong. and (2) investigating how reputation affects their price performance. This study measures a developer’s reputation by estimating the average premium / discount in housing prices (HPP), to that of the entire market, of its housing units in the second-hand market. The comparison has been done on a like with like basis by controlling for the effects of known factors that affect housing prices such as location, date of transaction, size, age, proximity to MTR exits, sea-view, floor level, size of development etc. However, it is impossible to control for the effects of all the unique characteristics of the transacted properties. To address this issue the approach adopted in the study is to use a large number of transaction records so that the overall effect of the missing characteristics becomes insignificant. A total of more than 440,000 secondhand market transaction records of housing unit all over Hong Kong have been used to estimate the average premium / discount achieved by 19 listed developers. Not all developers can be included in the analysis due to the small number of units developed by some developers. The estimated HPP serves as a measure of the reputation of the developers, which is labelled as developer’s reputation index (DRI) in this study. A high DRI suggests that secondhand buyers are confident in the quality of the properties produced by the developer and thus are willing to pay a higher premium. The first-hand transaction records have been excluded since they are often distorted by different payment methods, developer’s pricing / marketing strategies, sales methods, and the duration between sales time to completion date. Three company performance measures are used in the study, namely return volatility (risk), Sharpe Ratio (risk adjusted return), and Tobin’s Q (market value to book value of tangible asset). The results show that a developer with high DRI can reduce its shareholders’ risk, has a higher risk adjusted return and also higher market valuation relative to the book value of the developer’s tangible asset.