Please read my 2 page article

Question

I have to write an article for a study-tour to Hong Kong. The article is meant for my fellow students in Amsterdam and for the people we're gonna visit in Hong Kong.

The article consists of only 2 pages, so it's only 5 minutes reading. [url=http://willem.wjbakker.com/article.pdf]It can be found here[/url].

I hope someone has got some time left and can point out some things I've done wrong.

There are some things I'm not sure about, e.g. "a bought off contract".

Clive · Accepted Answer

Hi,

It's easier for us to correct it if you post your text here, OK?

Best wishes, Clive

Mrbomb · Answer

Ok, I've corrected some mistakes compared to the PDF file.

The influence of long-lease contracts on the selling prices of houses in Amsterdam

This article is a summary of the research paper written by order of OrtaX Amsterdam, a company that is specialized in model-based valuation of real estate. The main problem that is addressed in the paper is the construction of a model for housing prices with long-lease contracts.

1 Introduction

About 70% of the lands of Amsterdam have been issued with a long-lease contract. Such a contract gives the right to use a piece of land for a certain period of time, mostly 50 years. For this right the long leaseholder has to pay a half-yearly amount which is called the ground rent. When the contract has expired a new contract is made with probably a much higher rent. There are three different ways in which the rent can be paid. Firstly the rent can be fixed for the complete time period of the contract. Another possibility is that the rent is corrected for inflation every five years. The last way is that the long leaseholder buys off his future payments at the beginning of the contract.

2 Long-lease correction

The value of a house depends on a lot of factors. One of those factors is whether there belongs a long lease contract to the land the house is built on. In theory the selling price of a house with a long-lease contract is lower than the price of a house on own land.

The difference in price is called the long-lease correction. This correction equals the sum of future discounted payments and can be split in two parts. The first part consists of the payments until the end of the contract. The second part contains all the payments after the current contract. The parts are called long-lease correction1 and long-lease correction2 respectively.

If there is a long-lease contract belonging to a house the contract can be bought off or not. If the contract has been bought off then in theory the price of a house is higher compared to an identical house without a bought off contract. The difference in price equals the long-lease correction1.

The following model is used to price a house: (see PDF file)

with:

• V : the value of the house,

• LLCi: the long-lease correction for period i, i element of {1,2},

• h: a function of the internal floorspace,

• x: the variables that only influence the internal floorspace or the lot size,

• l: a function of the lot size,

• z: the variables that both influence the internal floorspace and the lot size,

• t: the trend variables.

To estimate the model the natural logarithm is taken on both sides and an approximation is used on the logarithm on the left hand side what results in the following model: (see PDF file)

This model has been used for both family houses and apartments.

4 The results

4.1 Family houses

For this research project a database with 6139 transactions of family houses between January 2000 and March 2006 has been used. From this database 5965 transactions have been considered in the analysis. There are 4746 transactions with a long-lease contract and 3966 of these contracts are bought off. In theory the parameters belonging to the long-lease variables should be equal to -1. The surprising result from this research is that in practice this is not the case.

Buyers of family houses do not take the correction for the first period into account if the correction is less than 5% of the selling price. Moreover, the coefficient for the first period corrections larger than 5% is only - 0.314 where in theory it should be -1. The correction for the second period has a coefficient of only -0.357. This means that for the 4723 family houses for which a model has been built the buyers have paid almost 50 million euros too much.

4.2 Apartments

The database contains 30921 transactions of apartments in the investigated period. Some transactions were deleted what resulted in 30420 usable transactions. From these data 15125 transactions have a long-lease contract and 10626 of these contracts have been bought off.

The results for the apartments are even more surprising. The buyers of apartments, with a contract that has a fixed ground rent, do not take the correction for the first period into account if the correction is less than 3% of the selling price. The coefficient for the first period corrections larger than 3% is -0.501. For contracts with a ground rent that is indexed every five years there appears to be no correction in price for the first period at all. The correction for the second period has a coefficient of -0.675. These results lead to the conclusion that for the 14812 apartments for which a model has been built the buyers have paid more than 50 million euros too much.

In total the buyers of houses in Amsterdam have paid more than 100 million euros too much. A lot of money can thus be saved by future buyers by looking better at the long-lease contracts belonging to the houses.

Clive · Answer

Hi,

I've done my best with this, but it's a bit technical in parts.

Please read carefully, as some corrections were very small.

If I ever buy a house in Amsterdam, this will be useful.

Best wishes, Clive

The influence of long-lease contracts on the selling prices of houses in Amsterdam

This article is a summary of a research paper written at the request of OrtaX Amsterdam, a company that specializes in model-based valuation of real estate. The main problem that is addressed in the paper is the construction of a model for housing prices with long-lease contracts.

1 Introduction

About 70% of the lots inAmsterdam have been issued a long-lease contract. Such a contract gives the right to use a piece of land for a certain period of time, mostly 50 years. For this right, the long leaseholder has to pay a half-yearly amount which is called the ground rent. When the contract has expired, a new contract is made with probably a much higher rent. There are three different ways in which the rent can be paid. Firstly the rent can be fixed for the complete time period of the contract. Another possibility is that the rent is corrected for inflation every five years. The last way is that the long leaseholder buys off his future payments at the beginning of the contract.

2 Long-lease correction

The value of a house depends on many factors. One is whether there is a long lease contract for the land the house is built on. In theory the selling price of a house with a long-lease contract is lower than the price of a house on its own land.

The difference in price is called the long-lease correction. This correction equals the sum of future discounted payments, and can be split into two parts. The first part consists of the payments until the end of the contract. The second part contains all the payments after the current contract. The parts are called long-lease 'correction 1' and long-lease 'correction 2 'respectively.

If there is a long-lease contract belonging to a house, the contract can either be bought off or not. If the contract has been bought off, then in theory the price of a house is higher compared to an identical house without a bought off contract. The difference in price equals the long-lease 'correction 1'.

The following model is used to price a house: (see PDF file)

• V : the value of the house,

• LLCi: the long-lease correction for period i, i element of {1,2},

• h: a function of the internal floorspace,

• x: the variables that only influence the internal floorspace or the lot size,

• l: a function of the lot size,

• z: the variables that both influence the internal floorspace and the lot size,

• t: the trend variables.

To estimate using the model, the natural logarithm is taken on both sides and an approximation is used on the logarithm on the left hand side which results in the following model: (see PDF file)

This model has been used for both family houses and apartments.

4 The results

4.1 Family houses

For this research project, a database with 6139 transactions involving family houses between January 2000 and March 2006 has been used. From this database ,5965 transactions have been considered in the analysis. There are 4746 transactions with a long-lease contract and 3966 of these contracts are bought off. In theory the parameters belonging to the long-lease variables should be equal to -1. The surprising result from this research is that, in practice, this is not the case.

Buyers of family houses do not take the correction for the first period into account if the correction is less than 5% of the selling price. Moreover, the coefficient for all first period corrections larger than 5% is only - 0.314, where in theory it should be -1. The correction for the second period has a coefficient of only -0.357. This means that, for the 4723 family houses for which a model has been built, the buyers have paid almost 50 million euros too much.

4.2 Apartments

The database contains 30,921 transactions involving apartments in the investigated period. Some transactions were deleted which resulted in 30,420 usable transactions. From these data 15,125 transactions have a long-lease contract and 10,626 of these contracts have been bought off.

The results for the apartments are even more surprising. The buyers of apartments, with a contract that has a fixed ground rent, do not take the correction for the first period into account if the correction is less than 3% of the selling price. The coefficient for all first period corrections larger than 3% is -0.501. For contracts with a ground rent that is indexed every five years, there appears to be no correction in price for the first period at all. The correction for the second period has a coefficient of -0.675. These results lead to the conclusion that, for the 14812 apartments for which a model has been built, the buyers have paid more than 50 million euros too much.

In total ,the buyers of houses in Amsterdam have paid more than 100 million euros too much. A lot of money can thus be saved by future buyers, by looking better at the long-lease contracts for the houses.

Anonymous · Answer

Thank you very much for your help Clive. Your corrections were really useful for me.

Please read my 2 page article

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