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Presales, Financing Constraints and Developers?Production Decisions

Author

Listed:
  • Su Han Chan

    () (California State University-Fullerton 800 N State College Blvd, Fullerton, CA 92834)

  • Fang Fang

    () (Shanghai University of Finance and Economics 777 Guoding Road, Shanghai, P.R. China, 200433)

  • Jing Yang

    () (California State University-Fullerton 800 N State College Blvd, Fullerton, CA 92834)

Abstract

This study explores the impacts a presale contract has on a developer’s pricing and production decisions in a game-theoretical framework. In an environment where developers have full capital market access, we find that both developers and buyers are indifferent between a presale and a spot sale method. This is true because a developer will adjust the presale price to compensate for the option value he gives to the buyer. However, in an environment with financing constraints, both developers and buyers are better off when a presale method is used. This is the case because the presale method solves the financing constraint by injecting equity into the development and, hence, reducing financing costs. The latter benefit can then be shared by both developers and buyers. Also, the additional equity the developers receive makes it more feasible for them to increase the size of their developments. This model prediction seems to describe well the real world situations seen in some of the property markets in Asia with nascent financial systems.

Suggested Citation

  • Su Han Chan & Fang Fang & Jing Yang, 2008. "Presales, Financing Constraints and Developers?Production Decisions," Journal of Real Estate Research, American Real Estate Society, vol. 30(3), pages 345-376.
  • Handle: RePEc:jre:issued:v:30:n:3:2008:p:345-376
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    References listed on IDEAS

    as
    1. Rose Neng Lai & Ko Wang & Yuqing Zhou, 2004. "Sale before Completion of Development: Pricing and Strategy," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(2), pages 329-357, June.
    2. Rose Lai & Ko Wang & Jing Yang, 2007. "Stickiness of Rental Rates and Developers’ Option Exercise Strategies," The Journal of Real Estate Finance and Economics, Springer, vol. 34(1), pages 159-188, January.
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    4. Kam C. Chan & William G. Hardin III & Kartono Liano & Zheng Yu, 2008. "The Internationalization of Real Estate Research," Journal of Real Estate Research, American Real Estate Society, vol. 30(1), pages 91-124.
    5. Charles K. Y. Leung & Garion C. K. Lau & Youngman C. F. Leong, 2002. "Testing Alternative Theories of the Property Price-Trading Volume Correlation," Journal of Real Estate Research, American Real Estate Society, vol. 23(3), pages 253-264.
    6. Ko Wang & Yuqing Zhou, 2000. "Overbuilding: A Game-Theoretic Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(3), pages 493-522.
    7. Grenadier, Steven R., 1995. "Valuing lease contracts A real-options approach," Journal of Financial Economics, Elsevier, vol. 38(3), pages 297-331, July.
    8. Ko Wang & Yuqing Zhou & Su Han Chan & K. W. Chau, 2000. "Over-Confidence and Cycles in Real Estate Markets: Cases in Hong Kong and Asia," International Real Estate Review, Asian Real Estate Society, vol. 3(1), pages 93-108.
    9. Jeremy C. Stein, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 379-406.
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    Citations

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    Cited by:

    1. Jin Choi & Henning Rasmussen & Matt Davison, 2012. "Fair Value and Risk Profile for Presale Contracts of Condominiums," The Journal of Real Estate Finance and Economics, Springer, vol. 44(4), pages 472-504, May.
    2. Roberto Dieci & Frank Westerhoff, 2012. "A simple model of a speculative housing market," Journal of Evolutionary Economics, Springer, vol. 22(2), pages 303-329, April.
    3. Su Chan & Ko Wang & Jing Yang, 2012. "Presale Contract and its Embedded Default and Abandonment Options," The Journal of Real Estate Finance and Economics, Springer, vol. 44(1), pages 116-152, January.
    4. Robert Edelstein & Peng Liu & Fang Wu, 2012. "The Market for Real Estate Presales: A Theoretical Approach," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 30-48, June.
    5. Su Han Chan & Ko Wang & Jing Yang, 2016. "The Pricing of Construction Loans," International Real Estate Review, Asian Real Estate Society, vol. 19(4), pages 411-434.
    6. Su Han Chan & Ko Wang & Jing Yang, 2011. "A Rational Explanation for Boom-and-Bust Price Patterns in Real Estate Markets," International Real Estate Review, Asian Real Estate Society, vol. 14(3), pages 257-282.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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