Past and Future Sources of Real Estate Returns in Hong Kong

Abstract

Historical commercial real estate returns are attributed to three fundamental factors: initial current yield, growth in net operating income, and changes in going-in versus going-out capitalization rates (i.e., pricing movements). Separating returns into these three factors appears to provide more insightful information than the traditionally reported income and appreciation returns. Using this three-factor model, historical real returns and inflation pass-through rates are estimated for each major type of real estate (residential A/B/C, residential D/E, office, retail, industrial).