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Research Seminars & Workshops @ IRES


Professor Tsuriel Sommerville
Sauder School of Business, University of British Columbia

Measuring the Cost of Hold-out: Size and Sequencing in Land Assembly


Date:

09 December 2013 (Mon)

Time:

3:30 - 5.00pm

Venue:

RMI Executive Seminar Room, Level 4, I-Cube Building


Abstract

The US Supreme Court’s 2005 decision in the case of Kelo v. City of New London affirmed that the state has a public interest in using its powers of eminent domain to facilitate private developments. Central issue at this case is that the optimal size for a new development forces a developer to assemble multiple land parcels. This creates an opportunity for some land owners to hold-out and delay development to extract a greater share of the developer’s profits. Surprisingly, this “hold-up” premium has never been measured in the economics literature. Theory suggests that these are owners of smaller lots or those whose lots are acquired later in a sequential acquisition. We use a semi-parametric approach on a set of more than 700 transactions in Hong Kong, all of which are sites that subsequently begin the redevelopment process to estimate these hold-out premiums in land assembly. We make two principal contributions. First, we find both the size of the hold-out premium and how it varies by lot size and sequencing. Second, we identify patterns in the sequencing of acquisition among heterogeneous owners that reflect the trade-off of the opportunity cost of not assembling the preferred set of sites vs. exposure to greater hold-out risk. The premium for the last lot assembled is in excess of 10% per square foot. This premium is greatest for lots with smaller shares of the eventual development size. Developers sequence their lot systematically, assembling smaller lots, where the development potential gain from assembly is greatest, first and corner lots, where their future bargaining potential is lowest, later. An additional result of this analysis is that we are able to identify the range of lot sizes over which unit land prices are convex. The price per sq. ft. rises until lots reach 5,000 sq. ft., and decline thereafter. However, because we control for land assembly, the likely explanation for the convex region is the higher construction costs for building on small parcels in Hong Kong’s dense urban environment.

About the Speaker

Prof Tsur Somerville is an associate professor, Director of the UBC Centre for Urban Economics and Real Estate, and holder of the Real Estate Foundation Professorship in Real Estate Finance at the Sauder School of Business at UBC. His primary areas of research are housing markets, Canadian mortgage markets, and real estate development. He has published in all of the leading journals in urban economics and real estate and served on the boards of the top academic organizations and on multiple academic journal editorial boards in these fields. In addition to his academic research, Dr. Somerville is a frequent commentator in the local and national media on housing markets. Prof Somerville received his Ph.D. in Economics from Harvard University and his BA from the Hebrew University (Israel) in Economics and East Asian Studies and has been at UBC since 1993.

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