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Developers’ heterogeneity and real estate development timing options

Author

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  • Zhi Dong
  • Tien Foo Sing

Abstract

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.

Suggested Citation

  • Zhi Dong & Tien Foo Sing, 2017. "Developers’ heterogeneity and real estate development timing options," Journal of Property Investment & Finance, Emerald Group Publishing Limited, vol. 35(5), pages 472-488, August.
    • Handle: RePEc:eme:jpifpp:jpif-07-2016-0058
    DOI: 10.1108/JPIF-07-2016-0058
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Value of Dirt: Introducing the Astor Index
      by Jason Barr in Skynomics Blog on 2019-09-03 12:08:02

    Citations

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    Cited by:

    1. Agung Wahyudi & Yan Liu & Jonathan Corcoran, 2021. "Simulating the impact of developers’ capital possession on urban development across a megacity: An agent-based approach," Environment and Planning B, , vol. 48(2), pages 376-391, February.
    2. Anna Olkiewicz & Radosław Wolniak & Marcin Olkiewicz & Martyna Szymczewska, 2020. "The Impact of Professional and Economic Activity on the Development of Apartments Market," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 404-418.
    3. Lu, Chien-Lin & Liao, Wen-Chi & Peng, Chien-Wen, 2020. "Developers’ perspectives on timing to build: Evidence from microdata of land acquisition and development," Journal of Housing Economics, Elsevier, vol. 49(C).
    4. Radoslaw Wolniak & Marcin Olkiewicz & Marta Szymczewska & Anna Olkiewicz, 2020. "The Functioning of the Real Estate Market: Dynamics of Price Formation and the Sale of Apartments," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 281-307.
    5. Korthals Altes, Willem K., 2019. "Planning initiative: Promoting development by the use of options in Amsterdam," Land Use Policy, Elsevier, vol. 83(C), pages 13-21.

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