What Motivates a Developer to Sell before Completion?

L. Li () and K. W. Chau ()
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L. Li: The University of Cambridge
K. W. Chau: The University of Hong Kong

The Journal of Real Estate Finance and Economics, 2019, vol. 59, issue 2, No 4, 209-232

Abstract: 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.

Keywords: Presale; Hedge real estate risk; Regulation; Housing (search for similar items in EconPapers)
JEL-codes: D02 D22 D81 R31 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11146-018-9662-3

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