Dynamics between Direct Industrial Real Estate and the Macroeconomy: An Empirical Study of Hong Kong

Pricing of direct industrial real estate (DIRE) has long been under-researched due to the paucity of analysable data. Compared to other types of real estate, DIRE has often been regarded as more inefficient because of information asymmetry amongst market players stemming from a lack of market transparency. Therefore, pricing of DIRE usually does not follow a random walk and should be more predictable than other types of real estate. Along this line of reasoning, this study empirically investigates the causal relationships between the price-to-rent ratio of DIRE and macroeconomic attributes using cointegration and causality techniques. More specifically, we employ data on the market of Hong Kong to investigate the lead-lag relationships between the price-to-rent ratio of DIRE and a wide spectrum of macroeconomic and financial indicators, including inflation, money supply, national income, exchange rates, performance of housing market and other economic indicators specific to the industrial sector. The results of our statistical tests reveal significant evidence that DIRE is generally moving in syncs with other segments of the economy over time in terms of long-term cointegration. Further, DIRE tends to lag behind the overall macroeconomy in terms of Granger causation with the price-to-rent ratio exhibiting varying lengths of time lag with the macroeconomic determinants. The findings of the study carry important implications for informing property valuation practices and industrial land policy, particularly in designing urban revitalization programmes aimed at optimising industrial land use.