Zhi Dong

How Do Land Auction Formats Influence the Market Structure and Aggregate Surplus of Real Estate Development

This article proposes a duopoly dynamic game theoretic model to investigate the market structure and aggregate surplus of real estate development when land is sold in a sealed-bid first price auction vis-a-vis an open English auction. It relaxes the assumption of symmetric bidders. The land values have common value and private value components. We find that the sealed-bid first price auction introduces competition in the real estate development market. The open English auction leads a monopoly market. State agencies are recommended to increase the aggregate surplus of real estate development by publishing past bidding information under the sealed-bid first price auction and reducing information asymmetry between bidders.

Investment Property Diversification Over Different Economic Phases in New Zealand

Abstract This study empirically investigates the enhancement of cross-sector diversification for investment properties in a small economy, where there are only a few regional choices. It also examines the distinct effects of optional diversification strategies over different economic phases. The study constructs investment property return indices using a unique listed investment property database in New Zealand, which compares the Sharpe ratio of optional investment portfolios under different diversification strategies. It is found that a portfolio of industrial properties in Auckland is preferable to any other property portfolios over the entire sample period in New Zealand. The findings support a prior strategy to prudently select properties in a major city in this small economy. The findings recommend direct or indirect property investors prioritize the locational choice in a small economy. The findings imply that the best diversification strategy may not be consistent over different economic phases. This study is one of the few to explicitly compare diversification strategies over different economic phases. It also provides additional new insights towards the importance of cross-sector diversification in a small economy.

Earnings Management: A Case of New Zealand Listed Property Trusts

Abstract Existing literature of earnings management focuses on a wide range of firms and large corporations. However, LPTs are usually limited in the use of accruals for earnings management because of the characteristics of real estate investment. This paper examines earnings management strategies among New Zealand LPTs by using itemized contributing elements of total cash flow incorporating fundamental direct property data, such as average lease term and vacancy rates. Using White’s heteroscedastic-correction estimate, the model specification using total cash flow rather than itemized elements revealed significant results for average lease term and accruals playing little role in future earnings. When itemized elements of total cash flow were analyzed, fundamental property variables were not significant, with contributory elements of total cash flow providing the best estimator of earnings next period. These findings suggest that New Zealand LPTs use different earnings management strategies than the literature dealing with a wide variety of firms would suggest. Additionally, this paper reveals that when contributory elements of cash flow are available to investors, that indicators of fundamental underlying direct property performance is of limited benefit for estimating earnings.

Capital structure decisions of LPTs in a small economy

Purpose – The existing literature on real estate investment trust (REIT) capital‐structure decisions implicitly excludes either interest payment tax shield benefits or a trusts growth potential. The purpose of this paper is to test the long‐term debt leverage decisions of listed property trusts (LPTs), but without excluding interest payment tax shield benefits and growth potential. A new variable, the exchange rate, is included in the tests, because financial products subject to globalization, such as SWAPs are currently used to support the funding of small economies.Design/methodology/approach – This paper uses a truncated regression and probit model to empirically test two competing hypotheses – the trade‐off theory and the pecking order theory. It also takes into account the implicit debt costs influenced by the exchange rate. The data for New Zealand LPTs are used.Findings – Unlike the existing literature, it is found that the trade‐off theory is supported, while the pecking order theory is rejected,...

THE ROLE OF PROPERTY IN THE PORTFOLIO OF SMALL AND MEDIUM ENTERPRISES

Abstract Previous published academic property research has tended to focus on the optimal allocation of real estate from the perspective of large institutions. Little attention has been given to mixed business portfolios of small to medium enterprises. This study seeks to address this imbalance by examining the perceptions of entrepreneurs who own more than one distinct business at any given time. Using in-depth interviews, this paper explores the role of property within the portfolio of small and medium enterprises (SMEs) of 15 successful entrepreneurs. The results suggest that property or property-related businesses feature prominently in these portfolios. The importance and differing roles of property during the life cycle of the portfolio is also highlighted and further indicate that property plays a strategic role in business decisions and often dictates the direction of individual businesses and the portfolio as a whole.

Developers’ heterogeneity and real estate development timing options

Purpose - The purpose of this paper is to examine developers’ optimal development timing when developers are heterogeneous and have different marginal costs in a real estate development market. Design/methodology/approach - This study uses a multiple-player game theoretic real option model and provides tractable results of asymmetric development strategies from a two-stochastic-variable model. Anecdotal evidence and market observations are presented. Findings - Stronger developers (with low marginal costs) exercise real estate development options earlier than weaker developers (with high marginal costs). However, the interval time between developments by stronger and weaker developers decreases in rental volatilities. Real estate with a high positive externality are developed earlier than real estate with a low or negative externality. Practical implications - Weaker and smaller developers are advised to undertake projects having positive externalities from vicinities. Government agencies are recommended to use tools of zoning and urban planning to prioritise developments introducing positive externalities and to facilitate the growth of weaker and smaller developers. This may subsequently help reduce incentive for land banking and oversupply in real estate space market. Originality/value - This research is probably the first to explicitly incorporate developers’ heterogeneous strength in real estate development timing options with multiple developers in a competitive market. It sheds additional insights into the understanding of potential problems of development cascades, under the interactive effects between exogenous policy changes and endogenous response from asymmetric developers.

How the 2007 global financial crisis changed the financial disclosure behavior: the case of US equity REITs

Purpose The purpose of this paper is to investigate how the 2007 global financial crisis (GFC) changed financial disclosure behavior using a sample of US equity real estate investment trusts (REITs) from 2000 to 2015. Design/methodology/approach The authors use panel data spanning from 2000 to 2015 to examine the impact of the GFC on REITs’ earnings management (EM) after controlling for other factors (including the market shock in 2007 and 2008). The measurements of EM are estimated by using the models developed from literature such as modified Jones models. The static panel data regression models are used to estimate the impact of GFC on the REITs’ EM. Findings The authors find that REITs are more likely to engage in income-increasing EM to embellish their financial reports during the GFC. However, the magnitude of the use of EM to manipulate disclosed financial information decreased following the GFC, indicating an improvement in the quality of financial disclosure as a consequence of the enhancement of the regulatory environment. REITs also changed the manner in which their EM behavior responded to the main factors in the market following the outbreak of GFC. Research limitations/implications This study contributes to the finance and accounting literature by providing the first empirical test results concerning how the financial disclosure behavior and quality of listed portfolios and companies such as REITs have changed corresponding to the enhancement of the regulatory environment and adverse market conditions brought by GFC. Practical implications This study provides references for investors, auditors, and regulators to help them make adjustments for and improve the interpretation of the disclosed financial information. Originality/value This is one of the first empirical study testing the impact of the GFC on EM. It is also the first empirical study investigating the impact of GFC on the financial disclosure behavior of REITs.

Unintended consequences: the use of property tax valuations as guide prices in Wellington, New Zealand

Abstract Property markets are characterised by a lack of information, particularly in relation to price. Where guide prices are not provided for properties and sale prices for comparable properties are not widely available, buyers and sellers may depend upon valuations of the property that are not intended to act as market valuations. The resulting anchoring heuristics may lead to a reliance on that information in decision-making. Using mass valuation data and house sale transactions for Wellington, New Zealand, between 2007 and 2010, issues relating to transaction volume, transaction prices and the release of government valuation data are evaluated through a two-stage hedonic estimation. The timing of transactions was related to the release of government valuation data as well as significant relationships found between the government value of the land and final transaction price. These findings suggest that transaction price influences are an unintended consequence of making mass valuation information the only freely available information to the public.