Presale, also known as selling before the completion date, is a frequent occurrence in the market for housing. However, a few developers have their units presold, and the percentage of units sold differs over time and between projects. This study examines the elements that influence developers’ decisions to presell their properties. Based on the housing transaction records for more than 1,000 projects within Hong Kong, we found that presale was utilized to protect against price fluctuations in the future. The decision of developers to sell is also contingent on the effectiveness of the presale as a hedge that increases in proportion to the size of the portfolio of development that a developer has. If regulations and regulations limit the flexibilities of a presale, its effectiveness decreases, which gives a developer less motivation to sell. Contrary to what the industry says, it is not an essential source of financing at most for companies listed within Hong Kong.

Introduction

We examine why developers sell and why spot sales and presales (or sales after the completion) compete. Presale is a term used to describe selling a residence in the development before its completion or even before construction. The homebuyer and the developer can agree on the cost of an unfinished unit prior to the time of the presale. However, the unit will only be given to the purchaser on its completion date. Presales can provide advantages to homebuyers and developers. Developers can reduce the risk of future price volatility by securing a favorable purchase price early. In some states, the profits from presales could be used to finance development. For buyers of homes, presales arrangements for payment (usually low-cost deposits to guarantee the future ownership of housing units) could help override initial payment restrictions. Short-term speculators can also utilize the arrangement to make particular option contracts or futures with plans of selling properties to earn a profit before completion. These transactions also serve as a price discovery method in the spot market. The presale prices and the trade volume are used to predict future housing prices.

Due to these benefits for the sellers and buyers, they have become the most popular method of selling properties in the last few years. Hong Kong and Taiwan’s presale techniques date to the 1960s and 1950s. Then, Shenzhen adopted this system and began its first presale project in 1980. However, it was only in 1994 that it was fully implemented throughout China (Deng & Liu, 2009). It is also the predominant method of disposal of property by developers in Singapore, as Ong (1997, 1999, 1997) as well as Hwang and Quigley (2010) and Hwang and Quigley (2010) have proven. However, the system’s benefits are only sometimes embraced, at the very least, by the government. Hong Kong’s market for presale has long been accused of stimulating speculation due to the high leverage and the absence of a transactions tax (stamp duty) for transactions that were pre-approved prior to the year 1994 footnote1 attracted short-term investors to the marketplace (Chang as well as Ward 1993). It was the case that the Hong Kong Government introduced anti-speculative measures in 1994 Footnote 2 (and partially loosened the rules in 1998) to deter this kind of activity and protect the fundamental interests of homebuyers. However, if there is not a thorough knowledge of the purpose of this system, any well-intentioned government intervention usually negatively affects the real estate market. For instance, a study by Wong and Co. (2006) found that anti-speculative measures increase the risk of rising prices for housing.

Despite decades of presales in various housing markets, the issue has not yet been the subject of much attention in academia. A literature search revealed that the most commonly discussed research questions concern presale pricing and the discovery of prices (Chang & Ward, 1993; Wang et al., 2000; Chau et al., 2003; Wong et al., 2007; Fan et al., 2012). If a presale is an arrangement with a legal basis that benefits buyers and sellers, it ought to be superior to other property disposal arrangements, such as sales following the completion (spot selling). Why can’t all developers presell their units? Why do the presale and sale exist? In actuality, the developer’s decision on how to dispose of their properties is not a binary choice between presale and spot sales of the project; however, it is a decision that will determine the percentage of units sold. Another question is how the proportion of sold units varies over time and across different projects. Only a handful of studies address these and other issues theoretically, under the assumption of no institution (Lai and others. 2004; Chan et al., 2008; Edelstein et al., 2012). The problem is made more complex if there are constraints from the institution on the ability of developers to make presells.

In actuality, the reality is that regulatory and institutional constraints affect the property market as they can severely restrict the developer’s ability to presell and could deviate from the free-institution assumption that was used in the previous theoretical analysis (Yao & Pretorius, 2014). Theoretical analyses based on institution-free assumptions can diverge from the actual situation and are, therefore, not helpful in explaining real-world events. This is one reason there have been a limited number of instances of using the theories used to understand phenomena in the market for presale.

We seek to comprehend the market for resale homes and recognize the significance of constraints imposed by institutions. Therefore, there are two primary goals. The first is to study the factors that drive developers to sell their units by delving into the factors that influence their decision on presale according to the percentage of units sold in a development. The second goal is to study how institutional and regulatory restrictions affect pre-sales decisions. The empirical findings of this study will provide insight into the role that the system of presales performs as well as provide a rationale for why presales, as well as spot sales, exist in the market for housing.

The vast presales data from Hong Kong (see Table 1) and the changing regulations and institutions for the presale system will allow us to meet the stated goals. Hong Kong has a bustling resale presale market for many reasons widely believed to be. For one, those with limited capital might be enticed by pre-sales agreements that permit buyers to take ownership of homes by making small down payments, significantly when property prices rise. Greater leverage, as well as lower costs for transactions, make presales a popular alternative to investing in the short term. Developers can also use presale to raise money to finance their development and protect themselves against the risk of the volatile market.