Valuation of Long-Term Property Rights Under Political Uncertainty

75 Pages Posted: 10 Aug 2020 Last revised: 17 May 2021

See all articles by Zhiguo He

Zhiguo He

University of Chicago - Finance

Maggie Hu

The Chinese University of Hong Kong

Zhenping Wang

State of Wisconsin Investment Board

Vincent Yao

Georgia State University - J. Mack Robinson College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 2020

Abstract

We empirically analyze the pricing of political uncertainty in long-term property rights, guided by a theoretical model of housing assets subject to contract extension in the remote future. To identify exposure to political uncertainty, we exploit a unique variation around land lease extension protection beyond 2047 in Hong Kong's housing market due to the historical arrangements under the “One Country, Two Systems” design. A reduced-form approach reveals that relative to properties that have been promised an extension protection, those with legally unprotected leases granted by the current Hong Kong government are sold at a substantial discount of around 8%. Similar contracts issued during the colonial era suffer an additional discount of about 8% due to their reneging risk. Our parsimonious model matches well these empirical discounts across long-term lease horizons, and the estimated structural parameters imply that to extend their leases homeowners expect about an additional 20% ground rent after 2047. The discount is higher when people's confidence declines and where residents feel more uncertain of the city's future, but lower when the transaction involves a mainland buyer and a local seller.

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Suggested Citation

He, Zhiguo and Hu, Maggie and Wang, Zhenping and Yao, Vincent, Valuation of Long-Term Property Rights Under Political Uncertainty (August 2020). NBER Working Paper No. w27665, Available at SSRN: https://ssrn.com/abstract=3670500

Zhiguo He (Contact Author)

University of Chicago - Finance ( email )

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Chicago, IL 60637
United States

HOME PAGE: http://www.zhiguohe.com

Maggie Hu

The Chinese University of Hong Kong ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Hong Kong, N.T.
Hong Kong

HOME PAGE: http://sites.google.com/site/maggiehuresearch/research

Zhenping Wang

State of Wisconsin Investment Board ( email )

121 E Wilson St
Madison, WI 53703
United States

Vincent Yao

Georgia State University - J. Mack Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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