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Profit Allocation in Urban Renewal– A Real Option Approach
Oliver F. Shyr, Angel Lee, and C. F. Wang
12012.06.15
19th European Real Estate Society Conference Edinburgh, Scotland, 13-16 June 2012
Department of Urban Planning National Cheng Kung University, Taiwan
Department of Urban Planning , NCKU, Taiwan
Background
Urban Renewal– Results in urban gentrification– Deteriorates housing affordability– Accelerates social inequality– Is an unfair game between landowners
and developers– Is not a free lunch
2
Department of Urban Planning , NCKU, Taiwan
BackgroundHousing Affordability in Taipei
4
Department of Urban Planning , NCKU, Taiwan
Background
Social Inequality in Taiwan - Poverty Rate
5
7.2 7.3
6.6
7.7
7.36.9
8.1
5.15.5
6.26.3
6.3 6.5 6.5
4.95.2
7.0
6.3
6.0 6.0 5.96.3 6.4
7.3
5.2
5.8
7.4
6.46.5 6.7 6.7 6.7
7.3
4
5
6
7
8
9
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009年
% 總計 男性 女性
≈ 0
Department of Urban Planning , NCKU, Taiwan
0.303
0.3450.3400.3380.345
0.350
0.3260.324
0.3200.3170.318
0.308
0.312
0.28
0.29
0.30
0.31
0.32
0.33
0.34
0.35
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 年
%
-2
0
2
4
6
8
10
12吉尼係數 經濟成長率
≈
0
Social Inequality in Taipei - Gini Index
6
Background
Department of Urban Planning , NCKU, Taiwan
Background
What are the public interests related to urban renewal projects?– Prevention of multiple hazards (fire,
earthquake, flooding, etc.)• Provision of open spaces
– Reduction of traffic accidents• Provision of walkways and bike paths
– Reduction of poverty & crime rates– Aesthetic values
7
Department of Urban Planning , NCKU, Taiwan
Background
Why is urban renewal an unfair game?– Proposals are often submitted by developers– Landowners don’t have complete information
of local housing market– Tenants can’t participate in urban renewal– Shop owners usually can’t keep their shops
after renewal
8
Department of Urban Planning , NCKU, Taiwan
Background
Why urban renewal projects become free lunches for all stakeholders?– Projects are financed based on floor-area
ratio (FAR) incentives
Who pays these free lunches?– High FAR justified by Transit-Oriented
Development (TOD) may deteriorate the service quality of public facilities and infrastructure
9
Department of Urban Planning , NCKU, Taiwan
MotivationTo estimate both the option values &
intrinsic values of parcels in Taipei by taking into account urban renewal restrictions & demolition costs
To assist landowners to make the right decisions
To modify the rule of urban renewal by setting up new formula for profit allocation games
10
Department of Urban Planning , NCKU, Taiwan
FAR incentives should be a good tool to promote public interests as to prevent market failures cause by– Potential hazards– Social costs associated with poverty,
crimes, and traffic accidents
FAR incentive creates debts on future renewal practices
11
Research Hypotheses
Department of Urban Planning , NCKU, Taiwan
Literature Review Real Options: Theory & Estimation Approach
– Black & Scholes (1973)– Merton (1973)– Quigg (1993)
Real Options: Applications– Urban Planning
• Cunningham (2007)• Lee and Jou (2010)• Peng, etc. (2011)
– Real Estate Valuations• Fu and Jennen (2008)• Grovenstein, etc. (2011)
Hedonic Housing Price Studies– Rosen (1974)
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Department of Urban Planning , NCKU, Taiwan
Methodology
13
Financial Feasibility
Bargaining
Urban Renewal Process
Intrinsic Value + Real Option Value
Abort Project
No
Yes
Proposal Modification
Profit Allocation
Proposal Submission
Yes
Delay Project
No
Department of Urban Planning , NCKU, Taiwan
Methodology Real Option Functions
– Black & Scholes, 1973 – Quigg, 1993
14
tdd
ttRESd
dNeEdNSC Rt
12
21
11
)/(])2/()/[ln(
)()(
C = value of the call option S = stock price E = value of exercise or strike priceR = risk-free ratet = time to maturitys = standard deviation of the return on the stockN = CDF of normal distributiond1 & d2 = evaluated values of normal distribution
Department of Urban Planning , NCKU, Taiwan
Methodology Cooperative Games
– Profit imputations among landlords and developers
Bargaining Games– Sequential bargaining under asymmetric information
among landlords and developers
Project Assessment on Urban Renewal Policy– Values of public interests regarding urban renewal
practices
15
Department of Urban Planning , NCKU, Taiwan
MethodologyHedonic Functions
– Log-linear and semi-log functions are pre-specified functions while Box-Cox functions maximize the log-likelihood of the functions within a pre-specified family of functions
– It is often advisable to compare the results of different functional forms in order to identify non-robust estimates
The functional forms of our models– Double-log and Box-Cox transformation
16
Department of Urban Planning , NCKU, Taiwan
Methodology
Double-log
Box-Cox
17
P: housing price,Z: explanatory variables,D: dummy variables,β: coefficients,α: constant term,ε: random error.
Department of Urban Planning , NCKU, Taiwan
The Data The Data
– Transaction property prices before and after urban renewal projects in Taipei from 2003 to 2011
– Makes use of sales prices rather than rents• Accounts for most transactions• Sales prices reflects future expectations
– Other data• Construction (hard) and soft costs• Housing Price Index
– Sources• Department of Land Administration, Ministry of Interior• Urban renewal developers• Real estate agents
18
Department of Urban Planning , NCKU, Taiwan
Estimation Approaches
19
Expectations & Variations of Asset Values– Hedonic housing price functions– Zoning & renewal constraints– FAR incentives
Risks & Public Interests Related to Urban Renewal Projects– Costs of Negotiation (repeated games)– Scale of Development (cooperative games)– Reject & Resubmit (majority games)– Demand & Supply Analysis on Housing Market– Assessment of Multiple Hazards– Evaluation of Social Costs & Aesthetic Values
Department of Urban Planning , NCKU, Taiwan
Our Missions– To help developers & landlords make
decisions on urban renewal proposals– To refine urban renewal regulations
Our Challenges– The quantification of risks and public
interests associated with housing policy and urban renewal practices
20
Final Remarks