An instrumental variable approach to unveiling the determinants of flatted factory rent in Hong Kong

The early period of industrialisation in the Hong Kong SAR occurred during the 1950s-1970s. Manufacturers were engaged in labour-intensive manufacturing processes with the assistance of machines in factory buildings. Since the 1980s, manufacturers in Hong Kong have faced keen competition from neighbouring economies, amidst the rising costs of land and labour. Moreover, since the adoption of an opening-up policy by the Chinese mainland since 1978, more and more local manufacturers in Hong Kong have relocated their production processes to the mainland so as to take advantage of the lower factor costs. As a result, the contribution of the manufacturing sector to GDP declined from around 20% in 1986 to 2.7% in 2006 and further decreased to merely 1.1% in 2016. Interestingly, there has been a general upward trend of real flatted factory 1 rent in Hong Kong in the past decade. This study, via a threshold regression, demonstrates that not only demand from the retail property rental market has been a factor in the increase of factory rent, but demands from the office rental market and local households have also contributed to the recent rise in real factory rent since 2006 Q1.