Dr. Nell Chang & Dr. Tim Havard European Real Estate Society 16 th Annual Conference 2009 U...

Dr. Nell Chang & Dr. Tim HavardDr. Nell Chang & Dr. Tim HavardEuropean Real Estate Society 16th Annual Conference 2009

UUnderstandnderstand HHow ow DDevelopers evelopers

CConstruct onstruct tthe he PPricingricing OOff tthe he

RResidential esidential PPropertyroperty

Developers’ Perceptions

Main Investigations:Main Investigations:

To investigate in a scenario resemble the real life To investigate in a scenario resemble the real life situation, what factors developers would consider in situation, what factors developers would consider in

constructing a price opinionconstructing a price opinion

Findings come from 23 participant experiments of the Beijing and Hong Kong developers using

process tracing protocol

Process Tracing Protocol

Application

• The process tracing protocol tries to follow the human decision-making processes

• The professionals, usually the appraisers, and the novices are requested to solve a problem that involves decision making

• The researcher needs to observe the sequence of requested and utilized information

• This traces the problem solving process

Process Tracing Protocol

Advantages• Traditional research paradigms have proved inadequate for the purpose of descriptive research - actual problem-solving behaviour; the measurement techniques wedded to conventional statistics cannot capture the richness of human problem solving

Diaz III (1992)

• Although the decision making context is artificially constructed for research purposes, the results are no less reliable than those obtained by other methods

Hall and Hofer (1993)

• This methodology could provide powerful data that are invisible to other methods Ransdell (1995)

The Participant Experiment

The Scenario• Firstly developers were asked what information they might need and consider in pricing an apartment in an unfamiliar market.

• Secondly they were presented with a situational question proposing that they were requested by their company to price four properties in an unfamiliar city that they will invest.

• The basic general information on the developments:• the city location plan that shows the geographical location

of the four developments, • overall perspective/drawing of the development, • the tower floor plan, • the layout plan and some descriptions of the development.

• No transactional price is provided

The Participant Experiment

The Process• Developers were requested to give a narrative of their thought process and a summary of factors they took into consideration in determining the apartment price.

• They were asked to talk as they conducted the required task and were encouraged to provide as much indication as they wished about what information they were looking at and why

• They were told that the information provided was only basic information.

• They could ask for any other information which they thought would be essential in making their decisions

Hong Kong Developers

What information / factors developers would need to acquire / consider if they are requested to price an apartment in an unfamiliar market?

Factors Considered by HK Developers in an Unfamiliar Market Total 1. Location 2. Social class 3. District 4. Affordability-Income* 5. Cost-land and construction* 6. Environment 7. Distance to transport 8. Distance to CBD 9. Developers 10. Facilities 11. Type of property nearby 12. Number of apartments completed* 13. Future market trend* 14. Distance to school

Environment Environment

Financial Financial

Environment Distance Distance

Property/environment

Environment Financial Financial Distance

7 6 5 5 5 5 4 4 3 3 3 2 2 2

Note: Bold* factors are financial factors not reflected in the second question Bold italic factors are major factors in decision-making

Table 1 Summary of all the Factors Considered by Hong Kong Developers in an Unfamiliar Market


• 14 major factors have been considered

• There are four main considerations that cannot be reflected in the pricing decision experiment:

• affordability: that includes the price of the properties, the buyers’ income and the length of mortgage in the owners’ view.

• cost: land and construction

• number of apartments completed per annum

• future market trend


Beijing Developers


Factors Considered by Beijing Developers in an Unfamiliar Market Total 1. Location 2. Environment 3. District 4. Affordability-Income* 5. Distance to transport 6. Facilities 7. Distance to CBD 8. Condition of the property 9. Rental rate* 10. Living standard* 11. Type of property around 12. Distance to school 13. Scale of the development 14. Sale situation*


Financial Distance

Property/environment Distance Property Financial Financial

Environment Distance Property Financial

7 7 6 4 4 4 3 3 3 3 2 2 2 2

Note: Bold* factors are financial factors not reflected in the second question Bold italic factors are major factors in decision-making

Table 2 Summary of all the Factors Considered by Beijing Developers in an Unfamiliar Market

Beijing Developers

• 14 major factors have been considered

• As in the Hong Kong market, there are four main considerations that cannot be reflected in the second pricing experiment:

• affordability: that includes the price of the properties and personal income

• Unlike developers in the Hong Kong market, Beijing developers emphasise the importance of the living standard

• the rental rate

• the sale situation that includes the vacancy


All of the factors that have been considered


Factors Considered by Hong Kong Developers 1 2 3 4 5 6 Others Total 1. Distance to transport 2. Location 3. Distance to CBD 4. Environment 5. Layout 6. Apartment area 7. Distance to shopping 8. District 9. Scale of the development 10. Type of property nearby 11. Social class of

people/district/properties 12. Land cost 13. Distance to work 14. Development density 15. Facilities 16. Developer side factor 17. View from the property 18. Investment potential/ Resale value 19. Number of apartments per floor

Distance

Distance Environment

Property Property Distance

Environment Property


Financial Distance Property Property/

Environment

Property Financial Property

2 1 2 1 1 1 1

1 2 1 1 1

3 1 1 1 1 1 1

2 2 1 1 1 1

1 3 1 2 1 3 1 1 1

1 1 1 2 1 1 2 1 1 1

3 5 4 3 4 3 2 3 4 3 4 2 1 2 4 1 2 3 3

12 10 9 8 8 7 7 7 7 6 5 4 4 4 4 3 3 3 3

Note: Italic factors are factors that would be considered first in unfamiliar market Bold factors are major factors in decision-making Table 3 Summary of the Major Factors Considered by Hong Kong Developers in their Pricing Decisions



• In total Hong Kong owners have considered 19 major factors in their decision making process.

• The most frequently considered factor is a distance factor-distance to transport

• The second factor is as expected, the location factor

• The other three factors that are considered most are one distance factor: CBD, one environmental factor and one property factor: the apartment / development layout

• Interestingly some developers would consider who the developers are in order to determine the price


Beijing Developers

Factors Considered by Beijing Developers 1 2 3 4 5 6 Others Total

1. Location 2. Distance to transport 3. Environment 4. Distance to CBD 5. Social class of people/district/properties around 6. Facilities 7. District 8. View from the property 9. Developer 10. Scale of the development 11. Material used 12. Apartment area 13. Layout 14. Distance to shopping 15. Orientation 16. Number of apartments at a floor

Distance

Environment Distance



Property Property Property Property Distance Property Property

6 1 2 4 2 1 1 1 1 1 1

2 1 1 1 2 2 2 1

2 1 2 1 1 1

1 1 1 1 1 2 2 1 1 1

1 2 1 2 1 1

2 1 1 1

1 2 3 2 1 4 2 3 1

1 2

12 9 9 8 7 7 6 6 5 5 4 3 2 2 2 2

Note: Italic factors are factors that would be considered first in an unfamiliar market Bold factors are major factors in decision-making

Table 5 Summary of all the Factors Considered by Beijing Developers in their Price Decisions


Beijing Developers

• In total Beijing developers have considered 16 major factors in their decision making process.

• The two most frequently considered factors in Beijing developers’ consideration process are location factor and the distance to transport. Distance to the CBD is also important

• Three environmental factors have been considered including the environment, social class and district

• One property factor: facilities available.

• Beijing developers also seem to consider who the developers are in order to determine the price.

The major determinants in developers’ final pricing decision


Major Factors Considered by Hong Kong Developers 1st 2nd 3rd Others Total 1. Distance to transport 2. Location 3. Distance to CBD 4. Tower and apartment layout 5. Social class-people/district/properties around 6. Apartment area 7. Environment 8. Development density 9. Distance to shopping 10. Scale of the development 11. Facilities

Distance

Distance Property


Environment Property Distance Property

Environ/Property

1 6 1 1 1

5 1 1 1 1 1

2 3 1 1 2

1 1 3 4 2 3 4 2

2 3

9 8 8 5 4 4 4 3 3 3 3

Table 5 Summary of Major Factors Contributing most to Hong Kong Developers’ Pricing Decisions


• Among all the 19 factors that have been considered during the pricing process, 16 factors are suggested as determinants

• The most important factor seems to be the distance to transport, but the location factor is mostly the first factor developers considered

• Layout: show target buyers’ social class & construction cost

• Scale: Big enough to create a whole community itself

New large development is possible to make a better environment

Small development in old setting might not match with neighbourhood and cannot sustain a high price

The major determinants in developers’ final purchase decision


Beijing Developers

Major Factors Considered by Beijing Developers 1st 2nd 3rd Others Total 1. Location 2. Distance to CBD 3. Environment 4. Distance to transport 5. Facilities 6. Social class of people/district/properties around 7. District 8. View from the property 9. Developer 10. Scale of the development 11. Apartment area

Distance

Environment Distance Property


Property

Property Property

6

1

1 1

1 4 1

1

2

1 1 2 1 1 1 1

3 2 3

1 1 1 1

7 5 5 4 4 3 2 2 2 2 2

Table 6 Summary of Major Factors Considered by Beijing Developers


Beijing Developers

• Among all the 16 factors that have been considered during developers’ pricing process, 11 factors are suggested as determinants

• The most important factor in Beijing developers’ opinion is the location

• Interestingly location is comparatively more important factor in Beijing developers’ view while distance to CBD and environment is more important than distance to transport

• Facility is found to be more important in Beijing developers’ view

• Facility: government cannot catch up – properties with no water & electricity

park, club house, swimming pool – scale factor

Developers’ Decision of Pricing

What developers consider in their pricing decision-making process

Hong Kong Developers 1 2 3 Total Beijing Developers 1 2 3 Total

1. Distance to transport 2. Location 3. Distance to CBD 4. Environment 5. Layout 6. Apartment area 7. Distance to shopping 8. District 9. Scale of the development 10. Type of property around 11. Social class-people/district/property 12. Land cost

D D E P P D E P E E F

2 1 2 1 1 1 1

1 2 1 1 1

3 1 1 1 1 1 1

12 10 9 8 8 7 7 7 7 6 5 4

1. Location 2. Distance to transport 3. Environment 4. Distance to CBD 5. Social class-people/district/property 6. District 7. View from the property 8. Developer 9. Scale of the development 10. Material used 11. Apartment area 12. Layout 13. Distance to shopping

D E DE

EE

P PPPD

6 1 2 4 2 1 1 1 1 1 1

2 1 1 1 2 2 2 1

2 1 2 1 1 1

12 9 9 8 7 6 6 5 5 4 3 2 2

Table 7 Comparisons of the Factors Considered First by Hong Kong and Beijing Developers

• There are seven factors being considered first by Hong Kong owners but eleven by Beijing owners.

• Only one factor, land cost, is considered first by Hong Kong developers but not by Beijing developers.

• Ten of them are the same between the two groups. This might imply developers in the two markets have very similar ways of thinking-in terms of the factors coming first to their minds.

Developers’ Decision of Pricing

What developers consider in their pricing decision-making process

The property attributes .Hauting Garden Citichamp Palace Peacock Town The Great Mall Owners choose to purchase Age (year) Area Closest to CBD Closest to train

Distance to work Located floor s Nature No of bedrooms Orientation facing Scale of development View

3 4 176 sq m 4th 4th

4th 30 Residential/office/shop 3 North 6 Towers Garden

5 6 132 sq m 3rd 2nd

2nd 15 Residential 3 South Large estate Plaza/garden

3 New 160 sq m 2nd 3rd 2nd

7 Residential/shop 3 South 2 Towers Highway

4 New 150 sq m 1st 1st

1st 2 Residential/office/shop/hotel 2 North 6 Towers Garden

Table 8 The 4 Properties for the Hong Kong Owners

Properties for Hong Kong Developers

Apartments 1st Highest 2nd 3rd 4th Lowest Hauting Garden Citichamp Palace Peacock Town The Great Mall

2 2 0 8

1 7 2 2

4 3 5 2

5 0 5 0

Table 11 The Relative Prices of the Four Apartment Developments suggested by Hong Kong Professionals

The property attributes

Properties for Beijing Developers

Royal Court Island Place New Heaven Laguna Cove Owners choose to purchase Age (year) Area Closest to CBD Closest to train

Distance to work Located floor s Nature No of bedrooms Orientation facing Scale of development View

2 7 641 sq ft 1st 4th

1st 6 Residential 2-3 West 1 Tower Road view

3 6 781 sq ft 2nd 1st 2nd 12 Residential 2-3 East 3 Towers Road/plantation

2 New 962 sq ft 4th 3rd

4th 20 Residential 2-3 Northwest 3 Towers Fountain

6 20 939 sq ft 3rdt 2nd

3rd 26 Residential 2-3 South 38 Towers Far Sea view

Table 9 The 4 Properties for the Beijing Owners

Apartments 1st Highest 2nd 3rd 4th Lowest Royal Court Island Place New Heaven Laguna Cove

8 1 0 2

0 8 2 1

2 2 1 6

1 0 8 2

Table 10 The Relative Prices of the Four Apartment Developments suggested by Beijing Professionals

• They are both closest to the CBD and in the median distance to the supposed work place (location)

• The closest to the underground railway station in Hong Kong developers’ choice but furthest in Beijing’ developers’ choice

• At a low located floor

• Have undesirable north and west orientation

• Smallest or second smallest

The apartments that are viewed as having the higher price in the two markets are quite similar

Hong Kong vs. Beijing

Summary• Developers would consider financial factors such as affordability at an earlier stage before the examination of individual properties

• They consider all the four groups of factors (distance, environment, finance and property) with no particular weight given to any group.

• ‘Location’ that are mainly defined as distance to CBD in these two market is a very important factor in developers’ pricing decision

• Developers’ perceptions of the major price determinants include the developers’ reputation

• There is no universal applicable agreement on the major price determinants

• The generally agreed major price determinants are location, distance to transport, environment and distance to CBD

The End

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Dr. Nell Chang & Dr. Tim Havard European Real Estate Society 16 th Annual Conference 2009 U...

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