Gang-Zhi Fan

The Relationships between Real Estate Price and Expected Financial Asset Risk and Return: Theory and Empirical Evidence

In pricing real estate with indifference pricing approach, market incompleteness is shown to significantly alter the conventional pricing relationships between real estate and financial asset. Specifically, we focus on the pricing implication of market comovement because comovement tends to be stronger in financial crisis when investors are especially sensitive to price declines. We find that real estate price increases with expected financial asset return but only in weak market comovement (i.e., a normal market environment) when investors enjoy diversification benefit. When market comovement is strong, real estate price strictly declines with expected financial asset return. More importantly, contrary to the conventional positive relationship from real option studies, real estate price generally declines with expected financial asset risk. With realistic market parameters, we show that there is a nonlinear relationship between real estate price and financial risk. When the market comovement is strong, real estate price only increases with financial asset risk when the risk is low but eventually declines with the risk when it becomes high. Our cross-country empirical results also show that the relationship between financial market risk and real estate price is non-monotonic, conditional on the degree of market comovement.

Heterogeneous Agents and the Indifference Pricing of Property Index Linked Swaps

Swap spreads predicted by the traditional risk-neutral valuation models are much lower than the quoted market spreads for property index linked swaps (Patel and Pereira, Journal of Real Estate Finance and Economics, 36:5–21, 2008). This paper attempts to develop a utility indifference-based model for evaluating the reservation spreads of swap receivers and payers based on the principle of expected wealth utility equivalence rather than the traditional risk-neutral argument. Under the proposed model framework, this paper addresses the determination of the swap spreads. When the incompleteness of real estate markets and heterogeneity of representative agents are taken into consideration, it is shown that the agents’ risk preferences and heterogeneous beliefs about expected future property returns are the remarkable determinants for the swap spreads. Our model also identifies market power and the settlement rules in the event of counterparty default as important factors in determining the swap spreads. Our model provides a possible interpretation for the difference between the spreads predicted by the traditional models and the actual market spreads.

Pricing Credit Risk of Asset-Backed Securitization Bonds in Singapore

Asset-backed securitization (ABS) is a creative arrangement to raise funds through the issuance of marketable securities backed by predictable future cash flows from revenue-producing assets. This paper proposes two pricing models: structural model and intensity model, to value credit spreads on Singapore ABS bonds. Sensitivity analyses were conducted on the ABS credit spreads by varying the values of the key input variables within a plausible range. The property price volatility and its correlations with risk-less interest rates have been shown to have positive effects on the ABS credit spreads. However, when the market volatility is extremely high, the credit spreads decrease with an increase in the time to maturity. The positive effects of the property price volatility were significantly reduced when credit enhancements were added to the ABS bonds, and the credit risks associated with the correlation variable were fully eliminated in the credit enhanced ABS bonds. The rate of loss recovery in the event of default also has significant impact on the credit risks of the ABS bonds. ABS bonds backed by physical property will likely to have high recovery rates thus reducing the credit risks vis-a-vis non-collateralized bonds.

The Helping Hand of the State in Chinese Real Estate Firms: Anti-corruption and Liberalization

We show that traditional western style corporate governance tools are ineffective in Chinese real estate firms by using data from 2000 to 2012. Instead, we find evidence of effective state governance, such as corruption cleanups and financial market liberalization. Specifically, firms with fewer state connections experience better performance in provinces with greater corruption prosecutions and after 2006 with accelerated stock market liberalization. Overall, our results suggest that the Chinese real estate industry is becoming more market-oriented with assistance from the state.

Risk-aversion and urban land development options

This study examines the possible implications for real options models if developers are risk averse when exercising development options. In our empirical tests using data on first-price auctions of state lands in Singapore, we found evidence of risk aversion among developers, which supports the results of the auction experiments. We derive risk-aversion indices that are discernible from the winner’s curse effects with respect to the auction data and test the predictability of the indices on the developers’ time to development decisions. Our empirical results show that the developers mitigate risks by exercising their development options earlier in the process; thus, the risk neutrality assumption is rejected. According to our results, the developers’ early exercise of development options is not induced by a preemptive motive but is driven by a risk-averse attitude.