Abstract
Presale, or selling before completion, is a very common phenomenon in the housing market. However, not all developers presell their units and the proportion of units presold varies over time and across projects. This study examines the factors that affect developers’ decisions to presell their units. Based on housing transaction records on over 1000 projects in Hong Kong, we found that presale has been used as a tool to hedge against future price fluctuations. Developers’ decisions to presell also depend on its effectiveness as a hedging tool, which increases with the size of the development portfolio held by a developer. When the flexibility of a presale is constrained by regulations, its effectiveness declines, thus giving a developer less incentive to presell. Contrary to industry wisdom, presale is not an important source of financing, at least for listed developers in Hong Kong.
Highlights
We investigate why developers presell and why presales and spot sales coexist in the marketplace
We only focused on developments that were completed on or after 1995 to minimize the possible mistakes that may come from overlooking the presale transactions
In Models 1 and 3, the coefficients of real market interest rate (RIR) were positively correlated with PRE, whilst the correlation became insignificant in Model 2
Summary
We investigate why developers presell and why presales and spot sales (or sales after completion) coexist in the marketplace. Presale refers to a developer selling a residential unit in a development prior to its completion or even before its construction. Li and K.W. Chau developer and homebuyer agree on the price of a presold unit at the date of a presale, but the unit can only be transferred to the buyer at its date of completion. Presale contracts offer some potential benefits to developers and homebuyers. They can mitigate the risk associated with future price uncertainties by securing a favorable transaction price at an early stage. Presale payment arrangements (usually low deposits to secure future ownership of housing units) can overcome initial payment constraints. Presale prices and trading volumes have been used to forecast future housing prices
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