Cap (Yield) Rates of Real Estate in Hong Kong

Due to the link exchange rate, US Treasury Yield rate is commonly considered the risk free rate for investments in Hong Kong, as the risk in exchange rate from HK dollars to US dollars is hedged by the government’s guaranteeing the 1:7.8 exchange rate. Thus, the interest rate in Hong Kong generally follows that in the US, and the investment returns of various investment vehicles in the city are also positively and strongly correlated with the US rate.

Figure 1 shows the general downward trend of the US Treasury Yield Rate in the past 40 years, especially the abrupt reduction after the Global Financial Crisis in 2008. The link exchange rate in Hong Kong has been adopting since 1984, and the yield rate of the US Treasury Yield has been reducing from about 8.5% in 1984 to 3.0% in 2018. In this 3-decade, the yield rates of various real estate investment in Hong Kong are also found to follow the reduction trend to the unprecedented low level.

Figure 1 30-year US Treasury Yield Rate, 1977–2018. Source: Macrotrends (2019) [1]

Peyton and Pierzak (2016) also found a strong positive correlation (0.7) between the US Treasury Yield and the US Housing Price Index, as shown in Figure 2.

Figure 2 Strong Positive Correlation between NPI Cap Rate and US Treasury Yield, source: Peyton and Pierzak (2016) [2]

Figure 3 shows the yield rates of various types of real estate in Hong Kong in the past 3 decades. The general decreasing trend (except flatted factory) looks similar to the US Treasury Yield Rate, drops from about 9% in 1987 to 3% in 2018.

Figure 3 Yield Rates of Various Real Estate Investment in Hong Kong, 1987–2018. Source: RVD (2019) [3]

With the transformation from an industrial based economy to a service-based economy since the 1980s, rental income of manufacturing property had been decreased from the 1980s to the 2000s, which had resulted in a relatively high yield rate of the peak at about 14% in 2002. The recent sharp reduction in yield rate of flatted factory is probably due to the acceptance or tolerance of business uses in factories by the government, thus the curve is swiftly converging to the yield rate of office.

The common increase of yield rate of all sectors of real estate from 1997 to 2004 is well known to be due to the Asian Financial Crisis in 1997 and the SARS in 2003, which were both regional or local issues.

Figure 4 further shows the yield rates of various sizes of housing property in Hong Kong (Classes A to E from small sized to large sized units). Large sized units (Class E) almost always enjoy the lowest yield rate, and the current yield rate is just 2.0%. As yield rate can be regarded as the reciprocal of price-earning ratio (PE), a yield rate of 2.0% is equivalent to a PE ratio 50!

Figure 4 Yield Rates of Housing Property in HK, 1987–2018. Source: RVD (2019) [3]

Small sized housing units (Class A) had a relatively higher yield rate during the Asian Financial Crisis and the SARS periods. It was probably because owners were forced to sell at a lower market price but still have to rent smaller sized units to survive. The concentration of rental demand for small-sized units in recessionary periods resulted in a higher rent but lower price scenario. Thus, the yield rates for Class A housing units in the recessionary periods were much higher than others.

Interestingly, even after the US has started to increase the Treasury Yield Rate since 2016, the yield rates of real estate investment in Hong Kong have not seen to be rebounding. Of course, it may simply be a lagging phenomenon, and bearing in mind that price plummet does not necessarily implies a yield rate reduction. If rental drops together with price, then yield rate can still be retained. Yet a more reasonable explanation is the hot money inflow hypothesis. Let’s discuss it next time.


[1] Macrotrends (2019) 30 Year Treasury Rate — 39 Year Historical Chart.

[2] Peyton, M. and Pierzak, E.F. (2016) Real Estate: The Impact of Rising Interest Rates, TIAA Global Asset Management,

[3] RVD (2019) Property Market Statistics, Rating and Valuation Department.



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