1. Profit Allocation in Urban Renewal – A Real Option Approach
19th European Real Estate Society Conference
Edinburgh, Scotland, 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

2. 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

3. Background
Urban Gentrification in Taipei

4. Background
Housing Affordability in Taipei

5. Background
Social Inequality in Taiwan - Poverty Rate

6. Background
Social Inequality in Taipei - Gini Index

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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)

13. Methodology Urban Renewal Process Intrinsic Value + Real Option Value
Profit Allocation
Bargaining
Yes
Yes
Proposal Submission
Financial Feasibility
Proposal Modification No No
Abort Project
Delay Project

14. Methodology Real Option Functions Black & Scholes, 1973 Quigg, 1993
C = value of the call option
S = stock price
E = value of exercise or strike price
R = risk-free rate
t = time to maturity
s = standard deviation of the return on the stock
N = CDF of normal distribution
d1 & d2 = evaluated values of normal distribution

15. Methodology Cooperative Games Bargaining 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

16. Methodology Hedonic Functions The functional forms of our models
Log-linear and semi-log functions are pre-specified functions while Box-Cox functions maximize the log-likelihood 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

17. Methodology Double-log Box-Cox P: housing price,
Z: explanatory variables,
D: dummy variables,
β: coefficients,
α: constant term,
ε: random error.

18. 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

19. 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

20. Final Remarks Our Missions Our Challenges
To help developers & landlords make decisions on urban renewal proposals
To refine urban renewal regulations
Our Challenges
The quantification of risks and public interests associated with housing policy and urban renewal practices

21. Thank you for your attention