Presales, Financing Constraints, and Developers' Production Decisions

Abstract

This study explores the impacts a presale contract has on a developer's pricing and production decisions in a game theoretical framework. In an environment where developers have full capital market access, the findings reveal that both developers and buyers are indifferent between a presale and a spot sale method. However, in an environment with financing constraints, both developers and buyers are better off when a presale method is used. This is because the presale method solves the financing constraint by injecting equity into the development and, hence, reducing financing costs. This model prediction seems to describe well the real world situations seen in some of the property markets in Asia that have nascent financial systems.

Keywords: property markets, Asia, presales contract, developer