UBC Faculty Research and Publications

Land assembly : measuring holdup Fu, Yuming; McMillen, Daniel P.; Somerville, Tsur


One justification for the use of eminent domain for urban redevelopment is to mitigate the holdup costs associated with assembling parcels of urban land. Theoretical work by Eckhart (1985) and Strange (1995) shows that the holdup power held by the owner of the last lot to be assembled raises the price of that lot. In equilibrium, optimal development size will fall with the number of parcels that must be assembled. We use data on site transactions for lots that are subsequently redeveloped in Hong Kong to estimate the holdup premium for a lot. Using a semiparametric approach, we study how land prices vary with the occurrence and degree of land assembly in a sample of more than 700 transactions in Hong Kong. We find that the last lot in an assembled group of parcels receives a premium as does the sale of a group of assembled units. However, lots that will be later assembled sell at a discount, in order to offset the expected holdup costs, the eventual premium paid for the last lot. The discounts for land assembly suggested by the theoretical literature support the hypothesis that land prices will be convex over the range of lot sizes where assembly is an issue. We find that unit land prices (price per square foot of lot area) rise with site size up to 4,300 square feet, after which they fall. This finding is the first evidence of the long speculated region where land values are convex in lot size. However, because we control for land assembly, the likely explanation for the convex region is the higher construction costs for building on small parcels in Hong Kong’s dense urban environment.

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