Option effect of land transfer by city governments: a case study of Hangzhou
| DOI | https://doi.org/10.1108/JPIF-09-2020-0108 |
| Published date | 11 December 2020 |
| Date | 11 December 2020 |
| Pages | 510-524 |
| Author | Ling Zhang,Minghui Zheng,Zheyan Zhang |
Option effect of land transfer by
city governments: a case study
of Hangzhou
Ling Zhang, Minghui Zheng and Zheyan Zhang
Department of Civil Engineering, Zhejiang University, Hanghzhou, China
Abstract
Purpose –This paper aims to study the impact of land options on the land transfer behaviourof Chinese city
governments.
Design/methodology/approach –Based on the institutional environment of Hangzhou, China, the option
pricing model is used to measure the option value of the trading plots. The effect of the option value on the land
transfer price and the timing of transfers are estimated respectively, using the hedonic price model and the
survival analysis models.
Findings –The results show that the option value has a significant explanation on land price and timing of
land transfers. Under the effect of option value, the positive impact of fiscal pressure on the possibility of land
transfer weakens. From the perspective of the annual option premium rate, the option premium is closely
related to the real estate cycle. Option premiums are higher during booms but lower during recessions and in
new urban areas.
Practical implications –By revealing the distinction of land option premiums in different places and times,
this paper provides a reference for city governments seeking a balance between real estate regulation and
obtaining more land revenue.
Originality/value –By introducing policy variables that reflect the degree of tightness of real estate
regulation and indicators of local government financial pressure, the paper discusses the impact of options on
the transfer behaviour of local governments in different situations.
Keywords Option pricing model, Hedonic model, Survival analysis model, Land transfer price,
Land transfer timing
Paper type Technical paper
1. Introduction
In recent years, China’s real estate market has developed rapidly; with the transaction and
price of land sales both increasing, the “land king”phenomenon now occurs frequently. The
so-called land king refers to the highest price of a plot or the highest floor price in the city. In
some cases, the price per square metre of floor space can even exceed the price of the
surrounding houses. In 2016, there were about 340 “land king”plots nationwide, with the
highest floor price or highest plot price in the local area. The CRIC (China Real Estate
Information Corporation) statistics show that both the area and amount of land transferred
nationwide increased continuously from 2016 to 2018. The average annual growth rate of
transferred land area was nearly 20%. In China, the tax sharing reform of 1994 diverted more
fiscal revenue from the local to central government. Since then, land transfer fees have
become one of the few sources of revenue available to local governments. As a result, local
officials have a strong incentive to promote the real estate sector, in order to maximize land
revenue (Han and Kung, 2015;Wang and Hui, 2017). This phenomenon is widely called
“land finance”by the media and academia (Wu et al., 2015). Pan et al. (2015) pointed out that
land finance refers to the practice of local governments who sustain their fiscal expenditure
by selling the land-use right. Since 2002, when the Ministry of Land and Resources issued
new regulations, all development land for commercial, tourism or residential use must be
JPIF
39,6
510
The authors would like to thank the editor and the anonymous reviewers for the positive and
constructive comments and suggestions.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 23 September 2020
Revised 21 November 2020
Accepted 26 November 2020
Journal of Property Investment &
Finance
Vol. 39 No. 6, 2021
pp. 510-524
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-09-2020-0108
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