19 th European Real Estate Society Conference
Edinburgh, Scotland, 13-16 June 2012
Profit Allocation in Urban Renewal
– A Real Option Approach
Oliver F. Shyr, Angel Lee, and C. F. Wang
Department of Urban Planning
National Cheng Kung University, Taiwan
2012.06.15
1

Background
 Urban Renewal
– Results in urban gentrification
– Deteriorates housing affordability
– Accelerates social inequality
– Is an unfair game between landowners and developers
– Is not a free lunch
Department of Urban Planning , NCKU, Taiwan
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Background
 Urban Gentrification in Taipei
Department of Urban Planning , NCKU, Taiwan
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Background
 Housing Affordability in Taipei
Department of Urban Planning , NCKU, Taiwan
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Background
 Social Inequality in Taiwan - Poverty Rate
總計
％
男性 女性
9
8
7
6
5.2
5
≈
5.1
4.9
5.8
5.5
5.2
7.4
7.2
7.0
7.3
7.3
7.3
6.9
6.6
6.3
6.4
6.2
6.0
6.5
6.3
6.0
6.7
6.3
5.9
6.7
6.7
6.5
6.3
6.4
6.5
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
8.1
7.7
7.3
年
Department of Urban Planning , NCKU, Taiwan
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Background
 Social Inequality in Taipei - Gini Index
吉尼係數 經濟成長率
0.35
0.350
0.345
％
12
0.340
0.34
0.345
0.338
10
0.33
0.32
0.312
0.31
0.308
0.30
0.29
0
≈
0.303
0.28
1989 1991 1993
0.318
1995
0.317
0.320
0.324
1997 1999
0.326
2001 2003 2005 2007
0
2009 年
-2
8
6
4
2
Department of Urban Planning , NCKU, Taiwan
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Background
 What are the public interests related to urban renewal projects?
– Prevention of multiple hazards (fire, earthquake, flooding, etc.)
• Provision of open spaces
– Reduction of traffic accidents
• Provision of walkways and bike paths
– Reduction of poverty & crime rates
– Aesthetic values
Department of Urban Planning , NCKU, Taiwan
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Background
 Why is urban renewal an unfair game?
– Proposals are often submitted by developers
– Landowners don’t have complete information of local housing market
– Tenants can’t participate in urban renewal
– Shop owners usually can’t keep their shops after renewal
Department of Urban Planning , NCKU, Taiwan
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Background
 Why urban renewal projects become free lunches for all stakeholders?
– Projects are financed based on floor-area ratio (FAR) incentives
 Who pays these free lunches?
– High FAR justified by Transit-Oriented
Development (TOD) may deteriorate the service quality of public facilities and infrastructure
Department of Urban Planning , NCKU, Taiwan
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Motivation
 To estimate both the option values & intrinsic values of parcels in Taipei by taking into account urban renewal restrictions & demolition costs
 To assist landowners to make the right decisions
 To modify the rule of urban renewal by setting up new formula for profit allocation games
Department of Urban Planning , NCKU, Taiwan
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Research Hypotheses
 FAR incentives should be a good tool to promote public interests as to prevent market failures cause by
– Potential hazards
– Social costs associated with poverty, crimes, and traffic accidents
 FAR incentive creates debts on future renewal practices
Department of Urban Planning , NCKU, Taiwan
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Literature Review
 Real Options: Theory & Estimation Approach
– Black & Scholes (1973)
– Merton (1973)
– Quigg (1993)
 Real Options: Applications
– Urban Planning
• Cunningham (2007)
• Lee and Jou (2010)
• Peng, etc. (2011)
– Real Estate Valuations
• Fu and Jennen (2008)
• Grovenstein, etc. (2011)
 Hedonic Housing Price Studies
– Rosen (1974)
Department of Urban Planning , NCKU, Taiwan
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Intrinsic Value +
Real Option Value
Methodology
Urban Renewal Process
Bargaining
Profit
Allocation
Financial Feasibility
Yes
No
Abort Project
Proposal
Modification
No
Delay Project
Yes
Proposal
Submission
Department of Urban Planning , NCKU, Taiwan
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Methodology
 Real Option Functions
– Black & Scholes, 1973
– Quigg, 1993
C d
1

S

N ( d
1
)

E
 e

Rt 
N ( d
1
)

[ln( S / E )

( R
 
2
/ 2 )
 t ] /(
 d
2
 d
1
   t

C = value of the call option
S = stock price
E = value of exercise or strike price
R = risk-free rate t = time to maturity

= standard deviation of the return on the stock
N = CDF of normal distribution d
1
& d
2
= evaluated values of normal distribution t )
Department of Urban Planning , NCKU, Taiwan
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Methodology
 Cooperative Games
– Profit imputations among landlords and developers
 Bargaining Games
– Sequential bargaining under asymmetric information among landlords and developers
 Project Assessment on Urban Renewal Policy
– Values of public interests regarding urban renewal practices
Department of Urban Planning , NCKU, Taiwan
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Methodology
 Hedonic Functions
– Log-linear and semi-log functions are pre-specified functions while Box-Cox functions maximize the loglikelihood of the functions within a pre-specified family of functions
– It is often advisable to compare the results of different functional forms in order to identify non-robust estimates
 The functional forms of our models
– Double-log and Box-Cox transformation
Department of Urban Planning , NCKU, Taiwan
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 Double-log
Methodology
 Box-Cox
P : housing price,
Z : explanatory variables,
D : dummy variables,
β : coefficients,
α : constant term,
ε : random error.
Department of Urban Planning , NCKU, Taiwan
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The Data
 The Data
– Transaction property prices before and after urban renewal projects in Taipei from 2003 to 2011
– Makes use of sales prices rather than rents
• Accounts for most transactions
• Sales prices reflects future expectations
– Other data
• Construction (hard) and soft costs
• Housing Price Index
– Sources
• Department of Land Administration, Ministry of Interior
• Urban renewal developers
• Real estate agents
Department of Urban Planning , NCKU, Taiwan
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Estimation Approaches
 Expectations & Variations of Asset Values
– Hedonic housing price functions
– Zoning & renewal constraints
– FAR incentives
 Risks & Public Interests Related to Urban
Renewal Projects
– Costs of Negotiation (repeated games)
– Scale of Development (cooperative games)
– Reject & Resubmit (majority games)
– Demand & Supply Analysis on Housing Market
– Assessment of Multiple Hazards
– Evaluation of Social Costs & Aesthetic Values
Department of Urban Planning , NCKU, Taiwan
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Final Remarks

– To help developers & landlords make decisions on urban renewal proposals
– To refine urban renewal regulations

– The quantification of risks and public interests associated with housing policy and urban renewal practices
Department of Urban Planning , NCKU, Taiwan
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Thank you for your attention
Department of Urban Planning , NCKU, Taiwan
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