Hong Kongs Macroeconomics - Case Study Example

Heading: Hong Kong’s Macro- Economics Your name: Course name: Professors’ name: Date Executive Summary This study explores the performance of property investment in Hong Kong and does comparison with the property business in Australia. The aim of this comparison is to investigate whether or not, the investment in Hong Kong is better than that of Australia. This will in turn enable my employer to make reasonable decision to invest in residential property investment as well as commercial property businesses. It presents a report on the present condition of the Hong Kong property business, focusing on recommendable decisions for my employer to best invest AUD 100 Million in the Hong Kong property investments business. This program involves a proper review of the macroeconomic market indicators for the business in Hong Kong. Considering the cultural difference between Australia and China, this study will proceed to identify cultural and ethical issues which the Australian investor in the Hong Long Market like my employer would be interested in. If the indicators are relevant to the investor, then this study will enter into a session of comparing multinational indicators. The main objective of this study is to present adequate information about the Hong Kong business cycle in the property business for the board. Finally, it will advise the board on whether the Hong Kong property market is a potential market or not. Introduction This study shows the interest that an investor has in the property market and the factors that need to be considered before getting into a foreign market. My employer is in the same category because being an Australian Company; it is interested in capturing the market in Hong Kong. Preliminary studies about the new market are very critical. It is vital for my employer to understand the strength of the market before venturing into it. This is where the need for comparison between the Australian Market and that of Hong Kong. If it appears that Australia performs better than Hong Kong in the property business, then it would be better to decline the prospective move into the Hong Kong market. If Hong Kong market proves to be potential, then there is still need to investigate and ascertain the areas of property that are promising reliable and sustainable growth. This is a judgment between commercial properties, industrial properties, residential buildings and retail premises. This enables my employer to make a realistic decision in the areas to be involved in either directly or indirectly. There is obviously diversity in the cultural and ethical differences as my employer intends to move into the Hong Kong property business. The macroeconomic and economic cycles in the Chinese Market is definitely different from the current state of property trade in Australia. This difference is what acts as the guideline for my employer in knowing the strategy to apply in approaching the new market. At the same time, the indicators for the macroeconomic cycle in Australia might not exactly match that of Hong Kong. Literature Review According to a recent report on the property market in China in 2010, it was found that offices in Hong Kong were the most expensive globally in terms of rent. One square foot of an office was valued at about USD161compared to Australia, whose equivalent value then was approximately USD 97 and Japan was valued at approximately USD100 per square foot. A comprehensive listing of the major countries and their office rental values are presented in the table below. Country Rental Value (US $) USA 142 United Kingdom 157 Australia 97 Japan 100 China 161 Singapore 47 Table 1: Office Rental charge per square foot in various countries in 2010. Figure 1: Comparison of Office Rental charge per square foot in various countries in 2010. After a considerable inward movement of money in the property market in China, there was a great increase in the prices of fixed asset in Hong Kong. It was speculated that the prices would go down but because Hong Kong quickly focused on the residential property market, the growth continued consistently. Later on, the commercial property business took the lead and indicated the highest growth. Chinese government and private investors had invested about 350 Billion US Dollars in the development of local properties (Krueger 2008). This was slightly less than the amount that the Federal Government of Australia had invested, an amount of US Dollars 520 Billion (Levine 2004). The gap between the two was a clear indicator that there was a lot of room for investment in Hong Kong. This gap shows a justification of movement from the Australian market to the more lucrative commercial and residential property dominated market in Hong Kong. The other vital revelation from various studies is that the property business in Hong Kong does not have restrictions on the ownership of commercial properties. The only constraint is that investors from other countries can only own real estate assets in Hong Kong after the property has been registered under the registration of company’s provision (Thomas 2004). This provision requires that the foreign company which owns properties be registered as a foreign company. The land registry of Hong Kong does the administration of real estate assets as well as the qualifications of their owners (Seal & Penrith 2008). The administration is done under two different ordinances, the Building Management and the Land Registry Ordinance. Chinese government possesses all parcels of land in Hong Kong. The owners or occupiers acquire lands under maximum lease terms of 999 years (Zhang & Alon 2010). The major law that deals with the real estate business transactions or ownership, is an ordinance known as the Conveyance and Property Ordinance (Suryadinata 2008). Still on ownership, there is an ordinance known as the Land Titles deed Ordinance, which was established in the year 2004. In the year 2010, there was a popular report that could have the impact of improving the availability of real estate assets for development of office premises (KLU 2005). The law that were in existence from the inherent phases permitted property developers to own buildings on a compulsory basis upon attaining an ownership of 90 per cent of the units that the buildings contain. In the present cycle and under new laws, the threshold has been reduced to 80 per cent considering the value of a building that has been in existence for more than fifty years (Jarvis 2003). In Hong Kong, there are approximately 4000 buildings with such properties. They have been converted over time from residential buildings to commercial properties in the city of Hong Kong. Property owners are mandated by the Chinese Government to pay an annual tax on ownership and occupation of real estate assets in Hong Kong. For properties that have been split, separate assessment reports may be prepared on the same parcel of land. Inland or domestic revenue ordinance does the administration of property tax throughout Hong Kong City(Levine 2004). Cultural and Ethical Issues Ethics are the generally accepted ways of doing things in a given culture. It is the perceived wrong or right things to do. Culture on the other hand deals with the way a given society generally behaves with respect to themselves and other people. It also relates to the way in which people will respond to life issues. There are significant differences in culture between the Chinese and the Western people (Seal & Penrith 2008). Western culture is based on individualism rather than collectivism as the Chinese culture is based. The western people tend to emphasise on their individual rights whereas the Chinese will focus on the society more that individuals. Western culture is more adventurous, westerners generally like exploring new things and as such, they tend to expand outwards. On the contrary Chinese are more conserved and less adventurous; they therefore tend to expand inwards. The westerns culture also tends to focus on scientific basis to solve issues related to relationships. On the contrary, the Chinese tend to focus on the people, humanism and hence resolve people’s conflict using Chinese ethics and tolerance. These fundamental differences in these two cultures also extend to the way in which business is conducted (Bert & Dam 2007, p.5). According to Bert & Dam (2007, p.5) research on various aspects relating to governance of bribery and corruption, communication of codes of ethics, implementation of codes of ethics and human right policies are analysed in order to show the performance of each country’s firms in relation to these issues. As shown, firms from Norway, U.S. performs the best; companies from Italy, Australia, Netherlands and Finland perform well. On the contrary firms from Hong Kong, Portugal, Spain and Ireland perform poorly in bribery and corruption. In quality of systems of the code of ethics, U.S, Australia, and Dutch firms perform better than firms in Hong Kong, Singapore and Luxembourg. With respect to communication and code of ethics, US, New Zealand and Australia lead while Hong Kong, Singapore and Luxembourg are lowly ranked (Bert & Dam 2007, p.5). In the implementation of code of ethics, the U.S. based firms are more rated as compared to Hong Kong, Singapore and Luxembourg. On human rights policies, Norway and Finland got an average while firms from New Zealand, Portugal, and Singapore scored the lowest. In general U.S. and Scandinavian countries scored the highest in the five attributes of business ethics while firms from Singapore, Hong Kong and Luxembourg scored the lowest (Suryadinata 2008). As evident from the above findings, there are challenges relating to culture and business ethics in Hong Kong and other countries like Singapore, the western countries such as the U.S. and Australia tend to perform much better in business related ethics. Despite this challenge, Singapore and Hong Kong are ranked the best in doing business respectively; this could be attributed to the fact that these countries offer fewer restrictions on establishing a business as a foreigner. (Bert & Dam 2007, p.5) Macro-Economic Indicators Gross Domestic Product (GDP) According to Ahuja & Myrvoda (2012) the GDP of Australia is about $1.372 trillion USD and the inflation is about 1.6% , on the contrary, the Hong Kong’s GDP is about $322.755 billion USD, while its inflation is about 2.4 %. The GDP sector in Hong Kong is dominated by the service sector, about 90 % of it while that of Australia is dominated by service sector about 74% and industry about 24 %. Another country with a good business environment is Singapore, its GDP is about $318.9 Billion USD, its inflation is about 5.2%. As indicated in the above statistics, the Australian GDP is stronger than that of Hong Kong and Singapore respectively ( Lynn 2010). This however does not imply that business conditions in Australia are better than Hong Kong; the main reason for this is basically the business environment. Hong King offers a better business environment as compared to Australia specifically in property business. Employment rate According to Ahuja & Myrvoda (2012) the unemployment rate in Australia is about 5.4%, the country’s labor force is about 12.05 million. In Hong Kong, the unemployment rate is 3.4 % while the labor force is about 3.23 million. As compared to Singapore, the unemployment rate is about 1.9% while the labor force is 3.23 million (Krueger 2008). Vacancy rate and property prices in Hong Kong Despite the economic slowdown in Hong Kong, the property prices are accelerating. By the end of 2012, the house prices had increased by about 24 %, this is after 19% inflation adjustment. This was the highest annual increase, small size residential properties also increased in prices by the end of 2012 (Baum 2009). On average, the property rise was about 27% for a small 70-100 s.q. apartment. Over the past three years, the property prices have surged to a record 73 %. In 2009, the property price rose by about 28 %, in 2010, the house prices rose by 21 % and 11.1 % in 2011. Despite the drop in the number of residential sales in 2012 by 2.6 %, the revenue of property increased by about 4 %, this is about US$56.1 billion in that period( Bert & Dam 2007). Interest rate Hong Kong is definitely one of the lowest in interest rates; this is the major reason for the growth of foreign demand on the country’s property. In 2012, the government introduced a 15 % tax on property purchase by foreigners. This was meant to regulate the rate of foreign investment on property as it had been witnessed on recent years. This step however does not indicate any issues related to purchasing houses in Hong Kong, the country still tops the world in terms of property price growth (Earnshaw 2006). Recommendation Following the study and comparison of the macroeconomic factors affecting the real estate market in Australia and Hong Kong, the real estate market is better in Hong Kong than in Australia. Here are the recommendations to my employers based on the same findings: Invest in Hong Kong property market such as residential, retail and commercial sector (Jacobus 2009). Conduct an assessment of the market by introducing a small scale real estate property business Prepare a structured plan for the investment of the AUD 100 million capital. Prepare a business continuity plan for the investment Justification for Recommendation Why invest in Hong Kong property market Firstly, as noted the country’s GDP is $322.755 billion USD which is notably stronger as compared to Singapore with $318.9 Billion USD. This is one of the fundamental indicators of stronger economic cycle. The rate of inflation is also relatively low. Over the past few years, there has been a tremendous increase in house price in the region; this was escalated by the lower interest rates in the country. Hong Kong is now the fastest growing real estate in the world (KLU, 2005). As compared to the 55 countries listed, Hong Kong is the fastest followed by Dubai with 19 % and Brazil at 10 % among others. Hong Kong is ranked as the second most preferred place to do business because of fewer restrictions. This is a major advantage for the country as it is a magnet of foreign investment (Jarvis 2003). Notably, Singapore and Hong Kong are ranked as the best places in ease of doing business according to World Bank’s “Doing Business 2012 report”. It takes fewer steps to incorporate a business, basically 1-3 procedures. Hong Kong also performs better in property registration, across border trading and resolving insolvency. Hong Kong is also strategically located, it is even better for people who want to conduct business with mainland China (JonesWhite& Dunse 2012). It is therefore advisable to invest AUD 100 million because the returns on investment are assured given the prediction that the house prices will continue to escalate in the 2013. Conclusion The current conditions and the past conditions of the real estate business in Hong Kong and Australia are enough for a critical decision making such as moving into Hong Kong Market without the fear of collapsing. Even though Australia has its own strength including favourable foreign policies, it is logical to invest in the Chinese Market. The growing prices of rent show a sustainable business growth and return on investment. References Ahuja, A & Myrvoda, A 2012, The Spillover Effects of a Downturn in China’s Real Estate Investment, International Monetary Fund, New York, p14. Baum, A 2009, Commercial Real Estate Investment: A Strategic Approach, Taylor & Francis, Florence, UK, p43. Bert S & Dam, L 2007, Culture Values and International Differences in Business Ethics, Journal of Business Ethics, p.1-12. Earnshaw, G 2006, China Business Guide 2006, China Economic Review Publishing, Birmingham, p62. Jacobus, CJ 2009, Real Estate: An Introduction to the Profession, Cengage Learning, Boston. p.23. Jarvis, DSL 2003, International Business Risk: A Handbook for the Asia-Pacific Region, Cambridge University Press, Cambridge, P.234. Jones, C, White, M & Dunse, N 2012, Challenges of the Housing Economy: An International Perspective, John Wiley & Sons, Taman, Malaysia, p54. KLU, 2005, China Intellectual Property Law Guide, Kluwer Law International, p36. Krueger, T 2008, Potential and Opportunities for China's Real Estate Industry, GRIN Verlag, Berlin, p45. Levine, ML 2004, International Real Estate: A Comparative Approach, Dearborn Real Estate, Dearborn, pp33. Lynn, DJ 2010, Emerging Market Real Estate Investment: Investing in China, India, and Brazil, John Wiley & Sons, Taman, Malaysia, p67 Seal, JM & Penrith, D 2008, Live & Work Australia, Crimson Publishing, London. Suryadinata, L 2008, Ethnic Chinese in Contemporary Indonesia, Institute of Southeast Asian Studies, Heng Mui Kenf, p34. Thomas, N 2004, Re-Orienting Australia-China Relations: 1972 To the Present, Ashgate Publishing, Ltd, Farham, p203. Wei, Y 2000, Investing in China: The Law and Practice of Joint Ventures, Federation Press, New Delhi, p114. Zhang, W & Alon, I 2010, Guide to the Top 100 Companies in China, a, World Scientific, New York, p42. Read More