Presale Discounts and Risk Sharing: Evidence from the Hong Kong Real Estate Market

Abstract

Real estate developers face significant risks in managing new developments, and presale contracts are commonly used to shift these risks to buyers. We develop a theoretical model to show that presale prices are an increasing function of time and that earlier presales are associated with greater discounts, reflecting the tradeoff between risk sharing benefits and presale prices. Using comprehensive presale transaction data in Hong Kong, we find an upward-sloping presale price-time relationship. This relationship is stronger for developers with weaker financial conditions and concentrated businesses in Hong Kong, as well as for listed developers. We also find that the Hong Kong government's cooling intervention decreases the presale price-time sensitivity. Our study contributes to the literature on risk sharing in real estate development by providing new insights into the dynamics of presale prices and their implications for developers and policymakers.

Keywords: Presale contracts, Presale prices, Risk sharing, Price-time sensitivity

JEL Classification: G32, R30, R31, R32, R38