Tien Foo Sing

Price Discovery between Private and Public Housing Markets

Public and private housing markets are usually differentiated in terms of price, regulations and policies, but they are not necessarily segmented. Any integration, as opposed to segmentation, between private and public markets implies that the prices of private housing are interrelated with the prices of public housing determined in the open market. If so, information revealed in one market will be pertinent for making inferences on prices in the other market. This paper addresses the price discovery or relation between public and private housing in view of Singapores substantial public housing programme that has an actively traded secondary market. Implications for the direction of price causality and upward mobility for households between housing price strata are examined.

Evidence of irreversibility in the UK property market

Abstract The real options approach to valuation of property investment suggests that various sources of uncertainty about future returns on investment have important effects on irreversible property investment decisions. Our aim in this study has been to examine how investment decisions at three main stages of the property development/investment processes respond to different sources of uncertainty. Based on the methodology developed by Episcopos (1995) , the neo-classical proposition of Hartman-Abel that predicts a positive investment-uncertainty relationship is tested against that proposed by the real option theory. It is interesting to note that our empirical findings are generally consistent with the prediction of the real option theory that uncertainty increases the option value to wait for the arrival of new information thus decreasing the current investment activities. In periods of high volatility, we would expect investors in the property market to be more prudent and scale down their investment exposure to market volatility compared with periods of a relatively stable market environment.

Optimal timing of a real estate development under uncertainty

This paper recasts the land development problems of Williams (1991) and Quigg (1993) by explicitly dealing with the effects of scale elasticity of unit rental and unit construction cost in a real estate project. Two different diseconomies of scale constraints are imposed on the rental and cost variables. We assume a concave function for the rental variable with respect to the scale of development. Whereas, on the cost side, the diseconomies of scale effect of the variable component of the construction cost is incorporated via a elasticity of scale factor that is larger than unity. The comparative statics simulated positive relationships between the premium that keeps the option of waiting to develop alive and the volatilities of the unit rental and unit construction cost. It was also found that the cost elasticity of scale and the financing cost are factors that increase the premium of the waiting option, whereas, the rental yield factor reduces the incentive of waiting. A high rental yield tends to expedite a development project because the opportunity cost of not developing the land is high. In the case analysis involving a vacant land of 8,000 square meters at Spitafield, East London, a unit rental of £267.2 per square meter (psm) is obtained, which would breakeven a cash flows of the project when the traditional “invest now or never” assumption is made. Compared with the optimal unit rental of £677.0 psm estimated by the real option model, the traditional DCF results tend to accept the feasibility of the real estate project too early and at too low a cut‐off rental.

Network connectivity and office occupiers' space decision: the case of Suntec City

Purpose – This paper sets out to empirically test the office space choice decision of firms currently occupying offices in Suntec City, Singapore.Design/methodology/approach – Empirical data on office space determinants of occupiers in Suntec City office towers were collected via a mailed questionnaire from March to June 2004. Based on a consolidated sample list of 342 firms, 61 responses from the occupiers, which represent a response rate of 17.8 percent, were received.Findings – Based on the survey results on office space preference of occupiers in Suntec City, the mean score statistics show that image and prestige of an office location and accessibility by public transport are the two most highly ranked factors by the firms.Research limitations/implications – The selection of Suntec City as a sample case study may help to control the heterogeneity of building factor, but it will also limit the generalization of the findings. However, the results provide support to the deliberate strategies by the manag...

Common risk factors and risk premia in direct and securitized real estate markets

This study empirically examined the effects of systematic market and common risk factors in explaining the variations in excess returns of securitized and direct real estate using multifactor asset pricing models (MAP). Two estimation methodologies were used to test the market integration hypothesis. The constant risk premia model that imposes time‐invariant restrictions on the coefficients of the macroeconomic risk factors across different real estate portfolios in each market was estimated using the seemingly unrelated regression (SUR) technique. Credit risk, unexpected inflation and spread between government and commercial bonds were significantly priced in the securitized real estate market, whereas real T‐bill yields and unexpected inflation were the two risk factors affecting the excess returns of direct real estate. It was found that risk factors were priced differently in the two real estate markets. The second model that relaxes the time‐invariant constraints was estimated using the standard Fama–MacBeth two‐pass regression technique. In the model, credit risk factor remained significant in the pricing of excess securitized real estate returns, whereas term structure risk and unexpected inflation were the two factors significantly priced in direct real estate returns. The significance of the homogeneity of various risk premia across the two markets was also tested. The tests rejected the null hypothesis of integration of the two real estate markets in both fixed and time‐varying MAP frameworks.

Implied Volatility in the U.K. Commercial Property Market: Empirical Evidence Based on Transaction Data

The primary aim of this research is to compute implied volatility based on a stochastic contingent claim valuation model proposed by Dixit and Pindyck (1994). Over the sample period of 1984 to 1997, and with approximately 20,000 commercial property transactions in the United Kingdom, we find that implied volatility of rental returns is in the region of 24.83 percent. Over the same sample period, the historical and conditional standard deviations of the log returns of transaction-based rental series is estimated to be 15.60 percent and 35.64 percent, respectively. The tests of information content of these risk measures show that there is strong orthogonality in the information impounded in implied volatility estimates compared to that contained in historical standard deviations.

Collective Action Dilemmas in Condominium Management

Condominium residents are reluctant to join the management committees (MCs) and contribute to the management of local public goods because of free-riding problems. In studying a sample of condominiums in Taipei, it is found that some degree of outsourcing to third party managers (TPMs) is necessary when the scale of local public goods increases. However, higher management fees paid to TPMs are not directly related to higher utilities derived by the residents in the use of local public goods. When self-selectivity in the outsourcing decision is controlled, the results show that the efficiency in the provision of local public goods increases with the effort levels of the MC members. The MC members who adopt a hands-off approach by fully delegating the management responsibilities to TPMs deliver lower pay-offs in the provision of public goods.

Oligopolistic bidding and pricing in real estate development

Real estate developers often operate in oligopolistic environments. Pricing strategies must be made in an interactive framework that makes empirical evaluation difficult. This study appeals to economic experiments to examine how developers price their properties, especially when there is an option to market pre‐completed units. In addition, the interaction between bidding for land and pricing the end product is examined. The results indicate that competitor actions are important considerations in pricing decisions. In particular, the profit maximizing pricing strategy depends critically on being competitive, not necessarily being the most aggressive. Interestingly, pre‐completed units sell only at prices that incorporate future price expectations, and successful bids tend to precipitate more aggressive pricing. Finally, competitive bidding and pricing strategies appear to the best profit maximizing strategy.

Empirical evaluation of the value of waiting to invest

The lack of transaction data has been identified as one of the major obstacles for the empirical evaluation of real option. Quigg’s study in 1993 was one of the first to empirically estimate the premium for the option of waiting to develop using data from 2,700 land sales in Seattle. This study modified Quigg’s methodology and applied it to estimate the premium for the option of waiting to develop based on a sample of data from 2,286 property transactions in the UK collected over a 14‐year sample period from 1984 to 1997. Based on a one‐factor contingent claim valuation model, we found that the average premiums for the timing options were 28.78 percent for office sector, 25.75 percent for industrial sector and 16.06 percent for retail sector. We also tested the robustness of the theoretical‐based land value estimates in explaining the market‐based land values. The regression results showed a statistically significant relationship in logarithm form between the market‐based residual land value and the model‐based land values (with embedded timing option), with R2 of 0.75, 0.79 and 0.82 for office, industrial and the retail sectors respectively.

Asset allocation: International real estate investment strategy under a workable analytic hierarchy process (AHP)

Purpose – The purpose of this paper is to conceptualise a workable strategic asset allocation (SAA) model, given the data paucity problem, and involve an ex ante framework that is distributional free. Design/methodology/approach – The SAA model is developed within a semi‐quantitative and expert‐based framework – the analytic hierarchy process (AHP) – and not a purely time‐series one. It is developed on the basis of consensus by a group of real estate investment experts, who agree on a fixed investment time horizon so that the time factor is disregarded as a variant. The SAA becomes the interface around which a set of tactical bands is imposed, subject to the Markowitz mean‐variance optimisation, and utilizing the total‐return data set of the Jones Lang LaSalle Real Estate Intelligence Service‐Asia. The lower and upper limits of the tactical bands represent the cyclical attractiveness of the various Asian office markets as growth and value‐added markets Findings – The SAA‐AHP model robustly reflects expert judgement among a cohesive group of real estate investment experts, with regard to a Pan‐Asia office market portfolio of eight major Asian cities. Through pair‐wise comparisons and subject to consistency checks in terms of the consistency ratio of <0.10, then the comparative expert assessment of the macro‐economic and the real estate specific factors driving individual Asian real estate markets, would be consistent (i.e. non conflicting). Then the total weighted evaluations of individual markets are derived and deployed as the SAA portfolio mix. This portfolio mix thus becomes the appropriate interface, around which the tactical asset allocation (TAA) is developed within defined tactical bands. These bands must be in line with the underlying Asian real estate market analysis and their cyclical positions. The TAA is obtained through the Markowitz mean‐variance portfolio optimisation, with the objective of locating the optimally efficient TAA on the Markowitz efficient frontier, under a maximising risk‐adjusted‐return Sharpe ratio. Originality/value – The SAA‐AHP model is reliant on an ex ante assessment of alternative asset allocation strategies on the basis of expert judgement of the macroeconomic environment and the Asian office markets. It is an appropriate SAA alternative to one based on the typical economic‐sized indicators, for example, the urban GDP.