What Motivates a Developer to Sell before Completion?

Journal of Real Estate Finance and Economics, Forthcoming

Posted: 11 Nov 2019

See all articles by Ling Li

Ling Li

University of Cambridge - Department of Land Economy

K.W. Chau

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

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Date Written: October 30, 2019

Abstract

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: Presale; Hedge real estate risk; Regulation; Housing

JEL Classification: D02, D22, D81, R31

Suggested Citation

Li, Ling and Chau, Kwong Wing, What Motivates a Developer to Sell before Completion? (October 30, 2019). Journal of Real Estate Finance and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3478124

Ling Li (Contact Author)

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

Kwong Wing Chau

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)

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