Information Asymmetry and the Rent and Vacancy Rate Dynamics in the Office Market

31 Pages Posted: 13 Jun 2015 Last revised: 30 Oct 2015

See all articles by K.W. Chau

K.W. Chau

The University of Hong Kong - Ronald Coase Centre for Property Rights Research - Economics

Siu Kei Wong

University of Hong Kong

Multiple version iconThere are 2 versions of this paper

Date Written: May 11, 2015

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 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 same 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. Empirical data from the Hong Kong office sub-markets are consistent with these implications.

Keywords: Information asymmetry, Office, Rent, Transaction costs, Vacancy rate

JEL Classification: C32, D82, R00

Suggested Citation

Chau, Kwong Wing and Wong, Siu Kei, Information Asymmetry and the Rent and Vacancy Rate Dynamics in the Office Market (May 11, 2015). Journal of Real Estate Finance and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2617477

Kwong Wing Chau (Contact Author)

The University of Hong Kong - Ronald Coase Centre for Property Rights Research - Economics ( email )

Ronald Coase Centre for Property Rights Research
Pokfulam Road
Hong Kong
Hong Kong
(852)28592128 (Phone)
(852)25599457 (Fax)

Siu Kei Wong

University of Hong Kong ( email )

Pokfulam Road
Hong Kong, HK
China

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