What Motivates a Developer to Sell Before Completion?
Posted: 30 May 2018 Last revised: 18 Jun 2019
Date Written: May 17, 2018
Presale, or selling before completion, is a very common phenomenon in the housing market. However, not all developers presell their units and the proportion of units presold varies over time and across projects. This study examines the factors that affect developers’ decisions to presell their units. Based on housing transaction records on over 1,000 projects in Hong Kong, we found that presale has been used as a tool to hedge against future price fluctuations. Developers’ decisions to presell also depend on its effectiveness as a hedging tool, which increases with the size of the development portfolio held by a developer. When the flexibility of a presale is constrained by regulations, its effectiveness declines, thus giving a developer less incentive to presell. Contrary to industry wisdom, presale is not an important source of financing, at least for listed developers in Hong Kong.
Keywords: Developers, Presale, Hedging, Institutions, Risk
JEL Classification: D02, D22, D81, R31
Suggested Citation: Suggested Citation