1. The dynamics of retail real estate market in Hong Kong Sun Zhuo Xiao · Chau Kwong Wing

2. Content Background Development of Hypothesis The methodology Data characteristics and sources Empirical results

3. The importance of retail sector in Hong Kong By the end of 2013, retail trade industry offers 9.8% job positions and makes 5.0% contribution to the GDP.

4. The importance of the retail property sector  In the aspect of factor of production, in year 2012, the real estate sector contributes 5.8% to the total GDP.  In the stock market, the market share of the real estate sector is even larger, they occupy 14% of the total market value in September of 2013.(Hong Kong Exchange – HKEx).

5. What might be the driven force behind it?

6. Individual Visit Scheme  First introduced in four Guangdong cities on 28 July 2003  Under the Scheme, around 270 million Mainland residents in the 49 cities who have permanent residence identity are eligible to apply for it.  According to the statistics released by the Immigration Department, the ratio of mainland travelers under the scheme accounts for 35% of the total mainland travelers in year 2004,and the ratio continues rising up to 67.1% in the first seven months of 2013.  Till July of 2013, the number of travellers under the scheme reached 116.8 million since the scheme was launched.

7. The performance of the tourism sector Yearly tourist capacities for mainland visitors and non-mainland visitors Tourist spending from mainland China and other areas of the world 33% 40% 51% 65% 58% 56% 56% 58% 62% 69% 69% 71% 75%31% 40% 54% 57% 54% 55% 55% 57% 61% 63% 67% 71%

8. Development of Hypotheses With the increasing travellers from mainland China, the demand for retail business increases, therefore, the demand for the retail space increases correspondingly. At the same time, the supply of retail property space is sticky because the construction work takes time. In the framework of the demand and supply mechanism, the retail property price will increase subsequently.  Hypothesis1 IVS has a positive impact on the retail property price in Hong Kong.

9. Development of Hypotheses The expensive locations for retail property not only exhibit good locations, but also represent convenient transportation, centralized luxury items and brand name shops, abundant subsidiary facilities and well-known reputation. The expensive locations can simply attract more travellers than the cheap locations. It is reasonable to propose that the impact of the IVS policy will be distinct in expensive locations compared with the cheap locations. Hong Kong Island and Kowloon districts are classified into the expensive locations and New Territories is classified into cheap location. Hypothesis 2 IVS has a differential impact on the retail property in the expensive locations and the cheap locations.

10. Development of Hypotheses Hypothesis 2a IVS has a stronger impact on prices of street level shops in expensive locations compared with those in cheaper locations. It is reasonable that the purchasing power of the travelers coming at the initial stage of the IVS is higher than the subsequent visitors. In addition, the first beneficiaries of IVS from mainland China are wealthier residents compared with the second and third-tier cities. Their affordability and the probability of buying luxury items are much higher. The luxury items and brand name shops are basically located in the expensive locations of the retail property area.

11. Development of Hypotheses TimeCity Jul 28th, 2003Dongguan, Foshan, Zhongshan, Jiangmen Aug 20th, 2003Guangzhou, Shenzhen, Zhuhai, Huizhou Sep 1st, 2003Shanghai, Beijing Jan 1st, 2004Shantou, Chaozhou, Meizhou, Zhaoqing, Qingyuan, Yunfu May 1st, 2004Shanwei, Maoming, Zhanjiang, Shaoguan, Jieyang, Heyuan, Yangjiang Jul 1st, 2004Nanjing, Suzhou, Wuxi, Hangzhou, Ningbo, Taizhou, Fuzhou Mar 1st, 2005Tianjin, Chongqing Nov 1st, 2005Chengdu, Jinan, Dalian, Shenyang May 1st, 2006Nanchang, Changsha, Nanning, Haikou, Guiyang, Kunming Jan 1st, 2007Shijiazhuang, Zhengzhou, Changchun, Hefei, Wuhan The time table of IVS implementation

12. With the spread of the IVS policy, less travellers from first-tier cities come and more travellers from second and third tier cities come who are generally less wealthier. The attraction of expensive locations becomes weak and the impact of the policy declines faster in expensive locations. Hypothesis 2b The effect of IVS declines more slowly in cheaper locations than expensive locations. Development of Hypotheses

13. The methodology to conduct the study

14. Data characteristics and sources VariableDescriptionDefinitionData Source PPrice Price for retail property in HK and three districts of Hong Kong Rating and valuation department RRSReal Retail SalesRetail sales value in Hong Kong divided by CPI Hong Kong Monthly digest of Statistics by Census and Statistics Department SPANewly Completely Space Completions based on the issue of an occupation permit Hong Kong Property Review by Rating and Valuation Department IVSIndividual Visit SchemeLaunched in July of 2003Government Policy IVS*@trendDummy variableEqual to 0 before 2003, and equal to 1 thereafterThe time trend of IVS EXCEffective Exchange rate Index The effective exchange rate index (EERI) for the HKD is an index which measures movements in the weighted average of the exchange rate of the HKD against the currencies of major trading partners of Hong Kong. Hong Kong Monthly digest of Statistics HIBOR3M Hong Kong Interbank Offered Rate 3 month As a proxy for interest rateHong Kong Monetary Authority ISIncome to space ratio Income to space ratio is calculated as GDP divided by the retail stock at the year end. Hong Kong GDP : Hong Kong yearly digest of Statistics Stock completed at the yearend: Hong Kong Property Review VVacancy rateVacancy rate at year end Hong Kong Property Review by Rating and Valuation Department STStockStock at year endRating and Valuation deparetment

15. Empirical model H1 H2

16. Empirical model

17. Empirical result for Hypothesis 1 VariableCoefficientProb. Intercept0.9453860.0000 ∆lnRRS(-1)0.7837150.0308 ∆lnSPA(3)-0.0986930.0491 IVS2.6645600.0000 Exchange-0.0114340.0147 IVS*@TREND-0.1086210.0000 IS0.0453530.0456 V-2.4331890.0708 ∆lnHibor3M-0.0111860.0672 MA(1)-0.9997910.0126 Adjusted R-squared0.8468

18. Empirical result for Hypothesis 2 Hong Kong Island Kowloon New Territories Intercept 0.313590*** (0.0000) Intercept 0.304739*** (0.0049) Intercept 0.148141*** (0.0372) ∆lnRRS 0.662637** (0.0463) ∆lnRRS 0.800022*** (0.0310) ∆lnRRS 0.962337*** (0.0195) ∆lnHKISPA -0.087118*** (0.0047) ∆lnKLSPA -0.048317 (0.1138) ∆lnNTSPA -0.007407 (0.8414) IVS 0.352727*** (0.0008) IVS 0.530759*** (0.0000) IVS 0.002263 (0.9858) IVS*@trend -0.004780*** (0.0010) IVS*@trend -0.007462*** (0.0000) IVS*@trend -0.000174 (0.9196) Exchange -0.002845*** (0.0000) Exchange -0.002757*** (0.0051) Exchange -0.001259* (0.0529) ∆lnHibor3M -0.106405*** (0.0006) ∆lnHibor3M -0.129705*** (0.0009) ∆lnHibor3M -0.002496 (0.9488) AR(1) 0.308840*** (0.0063) AR(1) 0.475426*** (0.0000) AR(1) 0.401008*** (0.0001) MA(1)-0.978014*** (0.0000) MA(1)-0.999946*** (0.0000) MA(1)-0.999925*** (0.0000)

19. Empirical results for Hypotheses 2a and 2b VariableCoefficientProb. C0.0594290.1715 DLOG(RRS)0.2747110.3756 DLOG(HKISPA(10 ))- DLOG(NTSPA(10) ) -0.0154880.3599 IVS0.148877*0.0789 IVS*@TREND-0.001996*0.0832 EXCHANGE-0.0005600.1645 DLOG(HIBOR3M ) -0.0494700.0482 AR(1)0.0287110.8121 MA(1)-0.9704220.0000 VariableCoefficientProb. C0.1177610.0429 DLOG(RRS)-0.0026030.9944 DLOG(KLSPA(10 ))- DLOG(NTSPA(10 )) 0.0026060.8890 IVS0.354036***0.0005 IVS*@TREND-0.004981***0.0002 EXCHANGE-0.0010900.0421 DLOG(HIBOR3 M) -0.0807650.0128 AR(1)0.1181230.3467 MA(1)-0.9998400.0000

20. Conclusions IVS has a positive impact on the retail property price in Hong Kong IVS has a differential impact on retail property price in the expensive locations and cheap locations The impact is stronger in expensive locations The impact declines slowly in cheap locations Conclusions

21. Thank you & Questions?