Comparing the impacts of public-sector-led redevelopments on nearby residential and retail property values : an empirical analysis in Hong Kong

Abstract

The Urban Renewal Authority (URA) is a self-funded intuition set up by the government to solve the urban blight problem in Hong Kong. This study examines the external effect of urban renewal projects initiated by URA on the prices of nearby housing and street-level shops not included in the URA project. On the whole, URA projects do not only improve the environment of the redeveloped area but also have a positive external effect, as shown by an increase in nearby value of housing prices and street-level shops holding all factors constant. However, the external effects are different for housing units and street-level shops, and they vary with the attributes of the URA pro-jects. Based on the analysis of more than 60,000 transaction records in the vicinity of 36 urban renewal projects initiated by the Urban Redevelopment Authority (URA), there was strong evidence that the URA projects has a negative impact (or less overall positive impact) on nearby older housing units. The results were most significant for units more than 30 years old at the date of transaction. The market value of property comprises of the embedded redevelopment real option value (RROV) and existing use value (EUV). The proportion of RROV increases with building age since the EUV de-clines over time due to physical deterioration and economic obsolesce of the building. The RROV cannot be easily realized in multiple ownership buildings. However, the URA, backed by the legislation, can help to realize it if they are included in a URA project. For nearby housing units not included in the URA project, the chance of realizing their RROV by another URA project in the same is lowered. This will lower the market value of the nearby housing units. Since the proportion of RROV in the market value is higher as the building ages, the negative impact is stronger for older housing units. This result is consistent with those in Chau and Wong (2014) and Chau et al. (2019) based on a smaller sample and fewer URA projects. However, unlike Chau and Wong (2014) and Chau et al. (2019), this study shows the negative impact of the scale of the of URA project on nearby housing prices. The result suggests that the chance of another URA project in the vicinity is perceived to be lower had there already been a large scale URA project. This is con-firmed by the sub-sample results, which show that the negative impact of the scale effect is more substantial on older nearby housing units. Similar to in Chau and Wong (2014) and Chau et al. (2019), the size of the commercial components in URA projects has a positive impact on nearby housing prices due to an increase in convenience to nearby residents. The impact of the URA project on nearby street-level shop prices is very different from those of nearby housing prices. First, the impact of the size of the commercial components in the URA project on nearby street-level shop prices is negative, which suggests that there is no significant synergy or conglomerate effect between retail spaces in the URA projects and nearby street-level shops. The results suggest that they are more likely to compete for the same pool of customers. Second, the scale of redevelopment has a positive impact on the nearby street-level shop prices due to an in-crease in the number of nearby customers with higher purchasing power for larger URA projects. The proportion of RROV in the market value of housing units and street-level shops changes differently as the building ages. For older street-level shops, the proportion of the RROV in the market value may not increase with age since their EUVs do not necessarily decline with age. This implies that the overall effect of age on street-level shops is non-negative. The results of this study show that building age has no negative impact on the prices of street-level shops that are more than 10 years old, which is consistent with the conjecture that the proportion of EVU in market value does not decline over time. There are three reasons for the non-negative impact of age on street-level shops: (1) prime locations are developed first and therefore occupied by older buildings, therefore building age may capture some unobserved locational quality, (2) older shops are more likely to have illegal structure that enhances its EUV, which will disappear after redevelopment and, (3) the structure of shops are better maintained due to high value of the property relative to the cost of its structure. Since the proportion of RROV of street-level shops does not increase with age in the same way as the housing units, being excluded from a URA project will not have a significant impact on their market values. Empirical results from this study show no evidence that URA projects depress nearby street-level shop prices irrespective of whether they are new or old, which was in marked contrast with the result from nearby old housing units but consistent with the non-negative impact of age on street-level shops. The contributions of this study are threefold. First, the results confirmed the positive externality of URA projects with a much larger dataset than in previous studies. Second, this is one of the very few empirical studies on the impact of urban renewal projects on nearby shops. Since street-level shops are usually more expensive than the housing units in the same building, it is essential to understand how their prices are affected by nearby URA projects. Third, previous results on the impact of age on shop prices are mixed, but very little effort has been paid to understanding these results. This study shown that the age effect is non-negative for street-level shops more than 10 years old in Hong Kong. The last contribution has practical implications for the valuation of street-level shops, i.e. no adjustment for deprecation due to ageing is needed when valuing street-level shops that are more than 10 years old.