| The real estate industry has tremendously supported China's rapid urbanization in the past two decades. However, during this process, short-term profit-driven behavior has emerged, such as insufficient land supply from government, developers' idling valued land and delaying property sale by taking multi-phased sales form, which in essence could be characterized as delaying of market supply. Under those circumstances, land supply cannot be immediately transformed into house supply, making suppliers possess larger market power, and therefore leading to the rapid rise of housing price. In essence, the above phenomenon is the result of the timing decision by investors, which can be explained by the Real Options theory. However, intensive macro control policies from government are very common in China's real estate market, which is quite different from the United States and Europe. In addition, under the unique urban land reserve and multi-phased pre-sale system, the continuing conflicts between market and government have made the timing decision unique. The existing literatures cannot directly solve problems under those systems.Therefore, it requires the in-depth analysis of the timing decision of property supply in China, in the sense of both practice and theoretical development. The Real Option theory has experienced three phases:the standard Real Option theory, Option Game theory, and Real Option theory with incomplete information. This paper's clue is the above three connected phases of the theory development. Based on those three theoretical frameworks, the timing decisions of government's land supply, developer's land development and project's multi-phased sale are discussed, which follow a second clue where the occurrence of events is in time sequence. During that process, the institutional factors, such as municipal government's land supplying, the intensive regulatory policies and the multi-phased sale system, will be integrated with the standard analytical framework, and theoretical hypothesis will be deduced. Based on Survival Analysis, I use the micro-data of Hangzhou to testify those hypotheses. In this way, the timing decision mechanism of land supply, land development and project's phased sale in China can be understood.My primary work and conclusion can be divided into three parts as follows:First of all, I explore municipal government's timing decision of commercial land supply. In China, urban land reserve system enables municipal government to influence land market through the timing decision of land supply. Assuming its pursuit of maximizing the revenue, the paper considers municipal government as a monopolized supplier and its decision-making of commercial land supply is studied under the framework of Real Options. The theoretical model we develop predicts that greater market uncertainty would delay the optimal timing of land supply. Based on survival analysis, the empirical research examines the determinants of the timing of land supply, using a sample of243parcels in Hangzhou. Empirically, one-standard deviation increase in the uncertainty reduces the probability of land supply by42%. The results suggest that municipal government's behaviors are consistent with Real Option theory,and can provide suggestions in central government solving the problem of municipal government idling land reserve.Secondly, developer's timing decision of land development is discussed. In China, it has become one of the most serious problems of the real estate market that, developers tend to keep valuable land vacant. This paper introduces the policy uncertainty into the standard Real Options framework, and provides a theoretical explanation for the land development decision in China. Based on the survival analysis, I examine the determinants of developing timing empirically, using a sample of784phased residential projects in Hangzhou from CRIC2009dataset. I find that when people expect the policy become supportive, a one-standard-deviation increase in the volatility of year on year M2growth rate and interest rate lowers the likelihood of development by13.91%and16.58%respectively, meaning the policy uncertainty would delay land development; on the contrary, when people expect the policy become unsupportive, a one-standard-deviation increase in the interest rate volatility raises the likelihood of development by9.76%, that is to say, under this circumstance the policy uncertainty would accelerate land development. However, in the same empirical test, the price uncertainty fails to show the predicted function, which suggests that the Chinese developers are far more sensitive to policy than market. The empirical result also shows that market competition can accelerate the investment cycle, but operate only by increasing the impact of volatility. The result can provide suggestions in government solving the problem of developers idling valuabe land.Thirdly, the timing decision of project's phased sale is analyzed. Based on the theoretical framework of Option Games, I provide an explanation for the multi-phased sales phenomenon in China from the perspective of information economics. The duopoly option games model I develop predicts that when information is incomplete, the larger the information noise is, the later the sales timing will be. I further predict that the developers prefer the phased sales form to take the initiative of discovering the price information by themselves, and also that the larger the information noise is, the later the timing of first sale will be, but the other phases of sale will be uninfluenced. The empirical analysis is basically consistent with these theoretical predictions. I measure information completeness in a particular region by the number of the existing residential projects neighboring the target project, with fewer existing neighboring projects associated with larger information noise. I find that compared to the region with large information noise, the likelihood of sale is33.11%higher in the region with small noise. The findings further suggest that when the noise turns larger, the developers tend to choose multi-phased sale form. In those samples which are sold in phases, the information noise only influences the timing of first sale. The result can provide suggestions in government understanding and dealing with the multi-phased sales phenomenon.Compared with the existing literatures, this paper's major contributions are as follows.Firstly, I provide a theoretical and empirical explanation for government's timing decision of land supply, based on the standard Real Options theory and micro data of parcels in Hangzhou. A number of existing studies indicate that municipal government will maximize land revenue through land supply; however, no empirical test is conducted to verify this judgment. This paper developed a Real Options framework which is verified empirically using Hangzhou's micro data, beneficial in better understanding land supply behaviors of Chinese municipal governments.Secondly, I provide a theoretical and empirical explanation for developer's timing decision of property development under policy uncertainty, based on the Option Game theory and micro data of real estate projects in Hangzhou. The existing literatures emphasize the impact of market uncertainty on investment decision, which cannot be directly used to explain the investment behavior in China under great policy uncertainty. Due to the difficulty to obtain solid data, the empirical study falls behind the theory development; particularly, there is almost no empirical study using China's micro data at project-level. This paper extended the existing theory to include policy uncertainty and assembles data sets about parcels and projects in Hangzhou's property market from a variety of sources to conduct the empirical study. The findings can help people understand the property developing behaviors in China.Thirdly, I provide a theoretical and empirical explanation for the multi-phased sale of property projects in China, based on the Option Game theory under incomplete information and micro data of real estate projects in Hangzhou. Selling in multi-phases is a special phenomenon in China, which little foreign literatures have studied. Many Chinese studies consider selling in multi-phases is a covert form of idling land. From the perspective of information economics, I develop a theoretical explanation for this problem—due to the incompleteness of information in China's property market, develops cannot observe the true property value or demand curve, and will turn to discover the information about price and demand by selling projects in multi-phases. The Option Game theory under incomplete information is recent, and due to the difficulty of finding a proxy for incomplete information, little empirical study is conducted to verify the theoretical predicts. This paper put forward a measurement for incomplete information— information completeness in a particular region is measured by the number of the existing residential projects neighboring the target project. Theoretical predictions were verified by empirical test. The findings can help people understand the multi-phases sale behaviors in China.This paper's main results have application value in helping the central government taming the real estate market. The policy implications can be drawed as follows. First of all, the problem of "land finance" should be changed. Secondly, the policy uncertainty should be reduced to solve the problem of land idling and accelerate the property supply. Thirdly, the positive side of multi-phased sale should not be neglected.However, this paper has several limitations which future study can work on. Firstly, my analysis is based on the assumption of rational economic person. Investors' irrational intention of timing decision remains to be a future study. Secondly, the paper developed a framework for government's timing decision of land supply, based on the assumption of its pursuit of maximizing the revenue. Future study can integrate government's target of maximizing both the revenue and the public welfare into one objective function. Thirdly, I regard the land option as an independent one, which can be revised to consider the whole developing process as a compound option in future. Fourthly, in my measuring information noise, I only consider the regional difference of noise. Future study can find a better way to measure the timing-varying part of noise. |
