Abstract
This study investigates how information asymmetry affects the rent and vacancy rate adjust in response to external shocks using empirical data from the Hong Kong office market. We show that information asymmetry about the quality of real estate asset will lead to slower rent adjustments in response to external shocks. Information asymmetry makes it more difficult for the landlord and prospective tenant to agree on a new equilibrium rent, which also leads to temporary deviation of the vacancy rate form the natural vacancy rate. Compared to a low-end office unit, information asymmetry is less serious for a high-end office unit since a larger proportion of its rental value is derived from its location attributes which are easily observable by both the landlord and prospective tenant. One empirical implication is that high-end office rents adjust faster when there is a short-term disequilibrium. The other side of the coin is that the vacancy rates of high-end offices are less responsive to external shocks assuming that the natural vacancy rates are relatively stable over time. Empirical data from the Hong Kong office sub-markets are consistent with these implications.
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Notes
Due to high information cost, some land lords may not be able to adjust their asking rent immediately
Table 10 in the Appendix shows that on average, close to 70 % of the Grade A offices are located in CBD areas while 70 % of the Grade C offices are in non-CBD areas of the traditional commercial areas in Hong Kong. This Patten has been rather stable over the observation period although there is tendency for more Grade A offices located in non-CBD areas.
The average duration of the office lease in London was 10.8 years for year 2007/08 on a rent weighted basis, according to British Property Federation and Investment Property Databank (2008)
Disequilibrium rent and vacancy rates are two sides of the same coin, including both disequilibrium rent and vacancy variables in the rent or vacancy rate the short run adjustment model may lead to double counting since the effect of the same external shock appeared twice (but in different form) in both the rent and vacancy rate adjustment equations. Another possible specification is to represent external shock by disequilibrium rent only so that (7) and (8) do not include lagged vacancy rate as an additional disequilibrium factor. We have also estimated empirical models with this specification in our robustness tests (see Alternative Model Specification).
Unlike Englund at el and some of the similar studies, we have not included the lagged dependent variable in our empirical estimation since our rental indices are constructed based on actual rental transactions rather than appraised values. The inclusion of a lagged dependent variable in (10) is also not consistent with the long term equilibrium model (9) which does not included a lagged dependent variable as a regressor.
The data may not be as long as one would wish to get in order to have more robust and reliable results. However, we can only work with what is available and that our data series is longer than those in most pervious similar studies.
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This project is financially supported by General Research Fund (RGC Reference Number: 710810) of the Research Grants Council of the Hong Kong SAR.
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Chau, K.W., Wong, S.K. Information Asymmetry and the Rent and Vacancy Rate Dynamics in the Office Market. J Real Estate Finan Econ 53, 162–183 (2016). https://doi.org/10.1007/s11146-015-9510-7
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DOI: https://doi.org/10.1007/s11146-015-9510-7