By Putro Harnowo, Senior Content Manager, China Business Knowledge @ CUHK

“Location, location, location,” one of the most chanted slogans among real estate players, holds the key to unlocking the value of any property. A prime site can make all the difference, driving up asset values and drawing in a crowd of eager buyers. But what happens when the location itself undergoes a significant transformation? This is the scenario that unfolds when company headquarters relocate.

A major corporate entity’s move brings with it many potential benefits and challenges. When Amazon announced its plan in 2018 to establish a second headquarters in the heart of Arlington County, Virginia, just south of the bustling US capital, it didn’t take long for the Amazon effect to drive property values. Within a year after the announcement, local housing prices had risen by 33 per cent.

The e-commerce behemoth is not the only one. Apple’s headquarters relocation in 2017 has also caused a property boom surrounding Apple Park in California. As companies continue to seek new opportunities and expand their operations, the ripple effects of their headquarters’ relocations are inevitable. In Asia, global firms like Phillips, FedEx, and Dyson have also moved their head offices, which may impact local economies and increase in demand for property markets.

“Firms could be choosing nice locations with good attributes, such as amenities, transport, government subsidy, to relocate their headquarters, which are coincidental with housing price increases,” says Desmond Tsang, Associate Professor of Real Estate at the School of Hotel and Tourism Management at the Chinese University of Hong Kong (CUHK) Business School.

Nevertheless, property booms that follow company relocations are a fascinating phenomenon in the business world. In a new study titled Corporate relocation and housing market spillover, Professor Tsang, alongside his colleague Maggie Hu, an Assistant Professor of Real Estate in the same department, in collaboration with Wayne Xinwei Wan of Monash University, investigated further the complexities behind such occurrences.

“Our study shows that headquarters relocation has brought a real impact on housing prices through relocation of employees, a multiplier effect of nearby business and retail establishments, and agglomeration and synergy of similar firms being located close to each other, even after controlling for various factors,” says Professor Tsang.

Specifically, the study found that headquarters relocation resulted in a 10 per cent increase in local housing prices, with the effect starting one year before the relocation and continuing to increase for up to two years afterwards. The strongest effect is observed within a 15-mile radius of the new head offices.

Headquarter moves and housing grooves

Headquarters relocation is unique compared to other offices or plants relocation due to its role as a central hub for top-level executives and highly skilled employees. As a result, this event involves bringing in a significant number of skilled workers to the new location and prestige to new locations, which attracts other businesses to the area.

“We see headquarters relocation is more influential because it brings in skilled labour,” says Professor Tsang. “For instance, in one of our analyses, we show the impact of corporate relocation is greater for high-priced homes compared to low-priced homes.”

Relocation announcements are often made well in advance. After analysing 16,191 corporate headquarters relocations in the US from 1994 to 2017 and their impacts on the local housing market, the researchers found that, in a more refined sample of relocation announcements, housing prices in the district where the relocation took place increased significantly soon after the announcements were made.

“We see headquarters relocation is more influential because it brings in skilled labour. For instance, in one of our analyses, we show the impact of corporate relocation is greater for high-priced homes compared to low-priced homes.”

Professor Desmond Tsang

The overall analysis revealed that housing prices increased by 0.35 per cent in the year of headquarters relocation. This translates to a substantial impact, resulting in approximately 10 per cent higher housing price growth compared to districts without a corporate headquarters relocation, based on an average annual house price growth of 3.5 per cent.

The study also found around 0.29 per cent increase in local housing prices in the year before the relocations, indicating the expected impact of the impending move. The prices then rose by 0.34 per cent in the year following the relocations and an additional 0.23 per cent increase after two years of relocations. This cumulative effect translates to 40 per cent higher growth in housing prices in districts with corporate relocations compared to those without.

The impact on the local housing market is observed to be the strongest when the headquarters move from far locations. This effect appears less significant for relocations within the same state or city, suggesting that the effect is limited if the company only moves to a nearby area without requiring its employees to move or change vendors.

The benefits of the relocation also extend beyond the immediate district, leading to increased housing demand and higher prices in neighbouring areas. The researchers discovered that the positive spillover effect reaches districts within a five-mile radius of the new headquarters, which experienced a significant growth rate that is 19.6 per cent higher than districts without corporate relocation nearby. This impact remains significant up to 15 miles away and diminishes with distance.

Although the study did not look into specific types of neighbourhoods that are more susceptible to these effects, Professor Tsang sees that the extent of influence of the spillover effect would be geographically greater for rural areas, due to the ease of transportation to larger areas.

“We do find neighbourhoods with similar firms already there would see bigger effects of corporate relocation, due to the agglomeration and synergy effect of similar firms,” says Professor Tsang.

Rising costs, dwindling options

The agglomeration effect was found to spread beyond the industry to the local economy, as firms located close to each other benefit from the available talent and knowledge that helps the local economy grow. Additionally, some businesses not only bring more spending but also help other businesses come together and grow in the same area.

For real estate industry practitioners, the study implies that the local housing market could have large fluctuations due to the intertwined relationship between corporate entry and residential real estate prices. Therefore, housing market forecasts should take corporate spatial decisions into consideration for real estate valuation.

While the housing boom resulting from corporate relocations could positively impact existing homeowners, Professor Tsang and the team note that it may also reduce housing affordability and pose greater challenges for renters and first-time buyers. City and state policymakers must carefully weigh the potential benefits against the distributional effects associated with corporate relocations.

RELATED ARTICLE

How drop in home prices benefit renters

Furthermore, Professor Tsang elaborates on finding a balance between the benefits of corporate relocation, such as increased economic activity, with the negative effects on housing affordability and economic welfare. “I think this is an open question that is subject to future research work,” he says.

“Attracting headquarters would be more essential for up-and-coming neighbourhoods where housing is still affordable,” Professor Tsang adds. “Once cities have flourished and fully developed, the concern about housing affordability could outweigh its economic benefits.”

The post Decoding property booms following corporate relocations first appeared on China Business Knowledge.

By Putro Harnowo, Senior Content Manager, China Business Knowledge @ CUHK

Access to affordable housing is a fundamental necessity, yet the scarcity of affordable homes has escalated into a worldwide crisis. Factors such as limited land availability, restricted mortgage lending, labour shortages, and rising material costs have collectively contributed to the increase in real estate prices. Consequently, the path to homeownership has become increasingly challenging, and many find themselves resigned to long-term renting.

Although 2023 has seen major cities worldwide experiencing a slump in housing prices due to inflation and economic uncertainties, the International Monetary Fund’s recent report, Housing Market Stability and Affordability in Asia-Pacific, highlights the rapid growth in property prices that outpaced income growth, leading to a significant deterioration in housing affordability.

In China, the housing market has reached unprecedented price levels in recent decades, leading to a thriving rental market as a result. According to a 2021 whitepaper published by real estate services firm Jones Lang LaSalle titled New Journey: Onwards and Upwards, the total number of rental housing units operated by leading 10 players of rental housing platforms in China’s top-tier cities nearly doubled from 356,000 in 2018 to 730,000 in 2020, with a 97.5 percent occupancy rate on average.

Despite the demand for long-term rentals, most property owners in China prefer to sign a one-year leasing contract with an option to renew for a second year. For tenants, the uncertainty of future housing availability due to short-term leasing contracts, known as “horizon risk”, can cause stress and anxiety as they need to find alternative places.

“Rental housing contracts are typically short-term, and renters face uncertainty regarding the actual ‘horizon’ for which they can occupy their homes,” says Maggie Hu, an Assistant Professor of Real Estate and Finance at The Chinese University of Hong Kong (CUHK) Business School.

“Horizon risk deters renters from making otherwise optimal long-term commitments, such as purchasing durable goods, forming a family, and raising children. Moreover, such risk can lead to increased search costs and relocation expenses while also amplifying rental uncertainty as a consequence of frequent moving.”

Against this backdrop, Prof. Hu and a team of researchers from Peking University investigated the impact of property investors’ housing market expectations on rental supply and contract duration. The researchers discovered that increasing housing prices lead to shorter rental contracts, suggesting that landlords are less likely to offer long-term contracts when they believe that property prices will keep rising.

This way, the landlords can retain flexibility and sell the house or adjust the rent more often to take advantage of the higher prices. On the other hand, when housing prices are expected to decrease, landlords may be more willing to offer longer-term contracts to secure their rental income.

When House Is Not Home

Long-term rental contracts would definitely reduce horizon risk and provide more stable housing for renters, but this practice is rarely seen in the real world. Landlords in general are reluctant to offer long-term contracts due to the uncertainty surrounding future housing market conditions. The prevailing housing affordability crisis makes the concept of horizon risk academically and practically intriguing.

In their research paper, Horizon Risk in Renting: Evidence from a PropTech Rental Platform, Prof. Hu and the team examined a unique dataset obtained from a prominent Chinese property technology platform, consisting of approximately 93,000 rental housing contracts in Beijing between 2015 and 2019. The research was focused on the national capital, where the platform has the largest market share and the longest operating period.

The analyses found that landlords are significantly less likely to renew expiring rental contracts for housing units located in neighbourhoods experiencing recent housing price growth, supporting the hypothesis that landlords offer shorter rental contracts following local housing price appreciations in preparation for a possible sale in the near future.

“Rental housing contracts are typically short-term, and renters face uncertainty regarding the actual ‘horizon’ for which they can occupy their homes.”

Prof. Maggie Hu

This effect is statistically significant and economically sizable, with a one-standard-deviation increase in housing price growth reducing contract duration by approximately one month. Conversely, when housing prices are expected to decline, landlords may be more willing to supply long-term contracts to lock in rental income.

Younger landlords and those with multiple rental units are found to be more responsive to housing price growth than older landlords, consistent with the hypothesis that older generations are less inclined to speculate and more likely to live off rental incomes, and also multi-homeowners are more likely to hold real estate assets for investment or speculative purposes.

Finding the Perfect Abode

Looking deeper into the duration of rental contracts and how various factors influence them, the researchers grouped rental contracts based on their respective durations and plotted them against the mean rental price, creating the “term structure of rental supply” to determine the overall pattern of rental rates. The team then discovered that the housing price growth also impacts the term structure of rental rates.

As housing prices increase, the decline in long-term rental contracts drives up rental prices due to higher demand, which results in a counterclockwise shift in the term structure of rent, with long-term prices rising compared to short-term rates. Conversely, when housing prices decline, landlords are more inclined to offer longer-term contracts to secure predictable rental income and minimise the risk of losing potential gains from property sales.

“The result of our study implies that a market with stable rental and housing price growth will encourage landlords to supply long-term rental contracts and reduce horizon risk for renters,” says Prof. Hu.

The long-term rental housing supply shortage is a key friction when studying the risks and tradeoffs surrounding housing decisions. Policymakers need to consider regulations encouraging landlords to supply long-term rental contracts, such as tax incentives or subsidies. Renters may also benefit from policies that increase the supply of long-term rental housing, as this could lead to more stable and affordable housing options.

RELATED ARTICLE

Do Borrowers Benefit from Using Lucky Numbers?

“We believe that future investigations to delve deeper into the implications of horizon risk would be fruitful. In particular, long-term rental housing can provide stability and peace of mind similar to that provided by homeownership,” says Prof. Hu.

“It is possible that the variations in long-term rental supply can help explain the variation in homeownership rates within and across countries. While the survey and anecdotal evidence both appear to support this conjecture, it remains crucial to systematically quantify these effects.”

The post How Drop in Home Prices Benefits Renters first appeared on China Business Knowledge.

By Jaymee Ng, Principal Writer, China Business Knowledge@CUHK

In China, property (as an asset class) is king. Its dominance is fuelled by a long and unprecedented boom in the housing market in recent decades which has been instrumental in driving the country’s spectacular rise in wealth. For many Chinese, owning a home is not so much a status symbol as it is a basic requirement, with ownership rates among the world’s highest at around 90 percent. The combination of these historical and demographic factors provided the perfect backdrop for a group of researchers to look at how a rise in housing wealth could lead to changes in consumer behaviour.

The working paper Housing Wealth and Online Consumer Behaviour; which was jointly written by Yang Yang, Assistant Professor of Real Estate at The Chinese University of Hong Kong (CUHK) Business School, Prof. Fang Hanming at the University of Pennsylvania and Prof. Wang Long at ShanghaiTech University; confirms what many people may already suspect: when housing prices go up, people become more impulsive in their spending and less motivated at work.

“Chinese people have a love affair with purchasing property.”

Prof. Yang Yang

To come to their conclusion, the researchers looked at the surge in property prices in 2017 that followed the surprise announcement of the establishment of the Xiong’an New Area in China’s Hebei province and its impact on the online buying habits of the residents of this area. Located about 100 kilometres from Beijing, Xiong’an is one of the many “new areas” in China. These are former farmlands turned into urban districts where local governments are granted special economic privileges to help it attract development and speed up growth. The Central government has envisioned Xiong’an to be the next Shanghai Pudong New Area or the Shenzhen Special Economic Zone, two of the major drivers of China’s GDP growth.

According to the study, the average property listing and rental prices in Xiong’an went up by over 60 percent and 78 percent, respectively, following the government announcement on April 1, 2017. The average housing price also increased significantly in neighbouring counties, although on a smaller scale. Savvy property speculators flooded the streets of Xiong’an within hours after the announcement, The New York Times reported.

“Chinese people have a love affair with purchasing property,” says Prof. Yang, noting that about 70 percent of the country’s household wealth is tied to property whereas this figure was only around 30 percent in the U.S. “When the news of Xiong’an first broke, local residents were overjoyed to find themselves sitting on gold mines as their property value skyrocketed overnight,” she adds. “We wanted to find out how these people reacted to this sudden infusion of wealth.”

Changing Online Shopping Behaviour

Using the data from a leading e-commerce company in China, Prof. Yang and her collaborators reviewed the online buying habits of over 10,000 residents of Xiong’an and over 60,000 residents of nine nearby counties. They found that, following the announcement of the establishment of the new area, residents of Xiong’an spent 10.3 percent more on any given purchase item and 11.85 percent more on an any given order, on average. Residents of nearby counties also showed an increase in consumption, by spending 4.8 percent more on items and 4.5 percent more an orders.

In addition, residents of Xiong’an were also 13.50 percent more decisive when making payments, and eight percent less likely to return goods. For residents of nearby counties, they were 5.8 percent more determined in making payments and three percent less likely to make returns. Perhaps because this sudden increase in wealth has made them less concerned about making ends meet, both groups spent more time on online shopping during work hours, up by 7.6 percent for residents of Xiong’an and 3.4 percent for residents of nearby counties.

In order to better understand the underlying mechanism that drove the change in online shopping behaviour, Prof. Yang and her collaborators exploited a difference in policy that placed a temporary ban on the sale of properties in Xiong’an immediately after the government announcement. This allowed the researchers to separate the influence of the “wealth” effects of housing price increase (because people in the nearby counties are able to sell their now-appreciated property holdings and convert an illiquid asset into cash), from the “collateral” effect of increased accesses to bank-lending by refinancing their now-more expensive homes.

They found that for every doubling in the value of housing collateral would lead people to spend 23.5 percent more per order and 20.5 percent more per single item. These online shoppers would also be 31.7 percent less hesitant when making payments and 16.3 percent less likely to make returns. Also, they were 16.3 percent more likely to do online shopping during work hours.

In comparison, a 100 percent increase in housing wealth would lead to an 8.9 percent and a 14.1 percent increase in payment per order and item, respectively. It would also make people 13.8 percent more decisive when making payments, 5.3 percent less likely to return goods and 9.1 percent more likely to use work hours for online shopping.

“People believe that homeownership is a cornerstone for wealth, and that’s why our findings show that the collateral effect to be stronger because homeowners would prefer keeping their homes and use them as collateral than selling them first thing when the housing market goes up,” says Prof. Yang.

Who Buys What?

The researchers also looked at what kind of products the sampled consumers were interested to buy. They separated the products into six categories: daily goods, home appliances, clothing, entertainment, health-related products and others. According to the study, Xiong’an residents only spent more on home appliances and clothing. In comparison, residents in nearby counties spent their money in almost all categories, except health-related products.

The study also found that female residents of Xiong’an showed a preference for expensive goods after the Xiong’an New Area announcement was made, and they were slightly less likely to make returns compared to male residents. In addition, older residents in Xiong’an bought more expensive products and were less likely to make returns compared to younger residents. This finding is in line with previous research studies that find older homeowners are more sensitive to changes in housing prices in comparison to their younger counterparts.

RELATED ARTICLE

Fighting (and Failing) to Cool Chinese Property Prices

However, Prof. Yang highlighted that the overall findings of their study show that homeowners tend to become more impulsive when shopping online and more likely to shirk work responsibilities when housing prices increase.

“The risk inherent in any investment is that they can go up as well as down, and this is true for property as it is it for any other asset class. Homeowners should take these findings as a warning, and keep in mind that while it’s probably human nature to get caught up and want to splurge when faced suddenly with new-found wealth when housing prices hit stratospheric levels, it’s an impulse they would be well advised to tamper if they want to avoid the regret from overspending when values come back down to earth,” Prof. Yang says.

The post Sitting on a Gold Mine: Do People Spend More When Home Prices Rise? first appeared on China Business Knowledge.

By Nicole Chabot

Crowdfunding, which has seen its popularity skyrocket with the rise of high profile platforms the likes of Kickstarter, GoFundMe and IndieGoGo, has often been hailed as a “democratising force” in finance, allowing enterprising individuals to launch new and innovative ventures while bypassing traditional sources of funding they would otherwise be unable to access. In a recent report, the global crowdfunding market was valued at US$10.2 billion in 2018 and was forecast to almost triple by 2025. Clearly, crowdfunding has hit mainstream, but has it lived up to its promise to give entrepreneurs of all stripes and sorts easier access to capital?

According to a new research study conducted at The Chinese University of Hong Kong (CUHK), entitled Crowdfunding and the Democratization of Access to Capital – An Illusion? Evidence from Housing Prices, the answer is a qualified yes.

Conducted by Keongtae Kim, Assistant Professor in the Department of Decision Sciences and Managerial Economics at CUHK Business School; and Prof. Il-Horn Hann at the University of Maryland, the study analysed the track record of crowdfunding and found evidence that pointed to its potential to level the fundraising playing field for entrepreneurs. However, this result came crouched in an important caveat – it found that people who lived in areas with lower levels of income and education were less able to take advantage of it to launch projects.

“Online crowdfunding has the potential to democratize access to finance in the sense that it can be an option for entrepreneurs who have difficulty accessing traditional funding”

Prof. Keongtae Kim

The study arrived at this conclusion by focusing on one of the most important types of credit for entrepreneurs – bank financing through housing collateral, looking at how accessibility to these loans related to crowdfunding by entrepreneurs. Prior studies had already shown that housing wealth can ease credit constraints for entrepreneurs, making it a primary factor in financing new ventures.

The researchers obtained data on housing prices and matched this with a data set from crowdfunding platform Kickstarter. They focused on local housing prices as a proxy for collateral-based credit availability for entrepreneurs in a local market. If entrepreneurs living in areas with declining housing prices have an increasing degree of difficulty in raising sufficient capital, they may be inclined to use crowdfunding as an additional funding source.

The professors focused on technology-based projects in the technology and games categories, obtaining data covering April 2009 through December 2013 and accounting for 9,120 projects that attracted more than US$257 million in pledges from approximately 3.4 million contributors.

Impact of Housing Prices

“We found that tightened credit constraints imposed because of declines in local housing prices led to increased use of crowdfunding. This finding supported the idea that crowdfunding serves as a supplement to traditional sources of financing,” says Prof. Kim.

“We also observed that a decline in housing prices led to even more people turning to crowdfunding in areas with a large share of homeowners and in states with unlimited homestead exemptions,” he adds. Homestead exemptions are legal provisions that shield homeowners from partial or full seizure of their properties in the event of a default, and previous studies have shown that banks are less willing to lend to individuals in states with high or even unlimited homestead exemptions.

“Our research indicated that crowdfunding can serve as an addition to traditional financial sources, implying that online crowdfunding has the potential to democratize access to finance in the sense that it can be an option for entrepreneurs who have difficulty accessing traditional funding,” Prof. Kim says.

The researchers did not find a link between a fall in housing prices and whether a crowdfunding project was successful or not.

However, they also found a stark contrast in the ability to access capital using crowdfunding between the wealthier and the poor. Specifically, they observed that a decrease in housing prices led to an increase in successful crowdfunding projects primarily for areas in high socio-economic status and an increase in unsuccessful projects primarily for areas of low socio-economic status.

“Although entrepreneurs from areas of low socio-economic conditions have at least equal access to online crowdfunding, they may still suffer from lower demand for their projects. This may be partly because of less support of their social networks,” Prof. Kim says.

“The role of access to financing is essential as difficult access discourages entrepreneurship, as measured by self-employment surveys and census data, and entrepreneurship is very important,” he adds.

In the U.S. alone, small businesses employ more than 50 percent of the private sector workforce and account for 66 percent of all net job creation. Most jobs are created by young, typically small businesses. High-growth start-ups contribute significantly to job creation in the U.S. economy.

Leveling the Crowdfunding Playing Field

Crowdfunding has the potential to offset a decrease in entrepreneurship. “However, entrepreneurs need to be strategic in seeking funding from sources that may be favourable to them,” cautions Prof. Kim

The study showed that while decreasing housing prices made banks reduce credit supply to entrepreneurs in need, crowdfunders were still willing to back them. “Entrepreneurs living in disadvantaged areas should exploit crowdfunding aggressively and attempt to build upon their social networks or improve their projects for successful funding,” he says.

“To help entrepreneurs from disadvantaged areas in achieving real economic benefits from crowdfunding, we must understand its underlying mechanisms,” says Prof. Kim.
He advises that policymakers should seek to implement policies to help entrepreneurs from areas of low socio-economic status to obtain sufficient resources to raise money from online crowdfunding successfully.
lay a considerable role in the socio-economic divide, they could not explore this in a meaningful way due to data limitation.

According to the professor, another limitation was that their study focused only on technology-intensive projects, meaning that they have a limited ability to discuss crowdfunding in other types of projects.

“Although we recognize that bank financing and crowdfunding offer different funding conditions in terms of funding duration, success rates of funding, interest charges, and so on, the two channels considerably overlap,” concludes Prof. Kim, adding that a significant number of creators are potentially able to use both channels and choose the optimal combination that offers the best terms and conditions.

The post Is Crowdfunding the Democratising Force It’s Cracked Up To Be? first appeared on China Business Knowledge.