Land Management & Economics

By Kim Hin Ho

This book is concerned with a unique, overall land policy optimization model, under active government policy, resulting in the sustainable effectiveness and efficiency of land policy. Such a model distinguishes it from the highly specific urban-planning land use optimization model, meant for optimizing land use specification, strategic land uses, land use restrictions and control, like zoning. Policy input is concerned with a hierarchical and structural definition of policy while ‘Additionality’ looks at land-policy output (outcome) variables, impacting broader land policy efficiency and effectiveness goals, their associated output indicators and the interaction with the macroeconomy.

Long run urban policy-macroeconomy interaction is modeled in a contemporaneous cointegration model estimation, involving different sectors of the economy. The model looks at the equilibrium and optimal land-using economic activities. A dynamic interaction of land policy outcomes and their economic implications is discussed via cointegration tests and modelling.

This book develops a rigorous system-dynamics-based computable general equilibrium model for direct real estate market uncertainty i.e. the frequent mismatch between office demand and supply under the impact of limited land constraint, the domestic common stock market, the macro economy and macroeconomic policy. Such dynamic interaction is structured under the demand-side and supply-side aspects.

The book looks at the binomial option-pricing model by Cox, Ross and Rubinstein, to model the risk-neutral process for short term interest rates, common stock prices and Housing & Development Board (HDB) resale flat prices. Singapore’s Main Upgrading Program (MUP) is a heavily subsidized and highly targeted. Since 1992, the HDB has budgeted some S$3 billion to finance the MUP policy. A positive impact is the asset value enhancement of the HDB flats within the upgraded precincts. MUP subsidies vary significantly with the corresponding option premium. A 3-Room HDB flat owner is more inclined to opt for upgrading while the option premium is deemed to be less attractive for upgrading by the 4-Room HDB flat owner.

Residents’ satisfaction level with town council (TC) services are examined, under different political parties. The concern is to ascertain a housing finance model, which analyzes the affordability of household borrowers for purchasing resale public housing. With Central Provident funds (CPF) usage, total interest paid over the loan life is significantly reduced. CPF as a financial buffer significantly reduce default risks for lender and household borrower.

• Language: English
• Publisher: Partridge Publishing Singapore
• Release date: Jul 21, 2020
• ISBN: 9781543759297

Kim Hin Ho

Dr HO Kim Hin / David is Honorary Professor in Development Economics & Land Economy, awarded by the UK public university, the University of Hertfordshire. He retired end-May 2019 as Professor (Associate) (Tenured) from the National University of Singapore. Professor HO spent the last thirty-one years across several sectors, which include the military, oil refining, aerospace engineering, public housing, resettlement, land acquisition, land reclamation, real estate investment , development and international real estate investing. He spent six years in the real estate career as part of the executive management group of Singapore Technologies at Pidemco Land Limited, and as part of the senior management team of the Government of Singapore Investment Corporation’s GIC Real Estate Private Limited. Seventeen years have been spent in the National University of Singapore at the then School of Building and Estate Management, the Department of Real Estate, School of Design and Environment, where his research expertise is in two areas. First is international real estate in the area of risk-return behavior behind international real estate investing in direct and indirect real estate. Secondly, is urban and public policy analysis involving real estate, sea transport, public housing, land and land use. Schooled in development economics and in land economy at the University of Cambridge, England, he has effectively extended these disciplines to examine his two expertise areas. Apart from being well versed in econometrics, his quantitative interests include real estate demand and supply, investment and finance, artificial intelligent modeling in real estate and system dynamics modeling for real estate market analysis and public policy analysis. He is the Member of the Royal Economics Society (U.K.), Academic Member of the National Council of Real Estate Investment Fiduciaries (U.S.), Fellow of the American Real Estate Society (U.S.), member of the American Economic Association (U.S.) and member of the Economic Society of Singapore and the Singapore Institute of Management. He holds the degrees of Master of Philosophy (1st Class Honors with Distinction), Honorary Doctor of Letters and the Doctor of Philosophy from the University of Cambridge, U.K. He has published widely in top international journals and conferences, in chapters of international academic book publishers. Dr Ho has written 7 major books (including this book), undertaken many consultancies and funded research projects. He has written a total of about 275 published works (with 91 in peer reviewed, reputable international journals). He is an editorial board member of the Journal of Economics & Public Finance, Real Estate Economics journal, Journal of Property Research, Journal of Property Investment & Finance, Journal of Real Estate Finance & Economics, the Property Management journal and the International Journal of Strategic Property Management. He has published widely in conferences, Finance, chapters of international academic book publishers, undertaken many consultancies and funded research projects. He is an immediate past Governor of the St Gabriel's Foundation that oversees nine schools in Singapore; and a District Judge equivalent member of the Valuation Review Board, Ministry of Finance, Singapore, and the Singapore Courts.

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Copyright © 2020 by HO, Kim Hin / David.

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CONTENTS

Foreword

Acknowledgements

About the Author

Introduction

Chapter 1    The Marginal Opportunity Cost of Land (MOCL) Model

Chapter 2    The Land Policy Input and Output Analytical (LPIOA) Model

Chapter 3    A Long-Run Cointegration Model

Chapter 4    An Urban Growth Model Under Limited Land

Chapter 5    Asset Value Enhancement of Singapore’s Public Housing Main Upgrading Policy (MUP) - A Real Option Approach

Chapter 6    Town Councils And The Singapore Experience

Chapter 7    The Conclusion

References

FOREWORD

Over 100 years ago, this was a mud-flat, swamp. Today, this is a modern city. Ten years from now, this will be a metropolis. Never fear.

(The first Prime Minister of Singapore Lee Kuan Yew, 1965)

This book is concerned with a unique, overall land policy optimization model, under active government policy, resulting in the sustainable effectiveness and efficiency of land policy. Such an overall land policy optimization model distinguishes it from the highly specific urban-planning land use optimization model, which is meant for optimizing land use specification, strategic land uses, land use restrictions and control, like zoning.

The overall land policy optimization model is not a singular model but consists of the following distinct and innovative models, namely,

• The marginal opportunity cost of land (MOCL) conceptual model.

• The policy input and output analytical (PIOA) model under a hierarchical land policy structure and the ‘Additionality (i.e. additional impact)’ conception.

• A Long-run cointegration model.

• An Urban growth model under limited land.

Under the MOCL conception, a large land-using office complex for instance should be made to compete with other large land-using projects like the industrial complex, retail complex, port complex and housing. Productivity of land for the land-using office project should be compared with its productivity in other land-using projects after the office complex is installed. MOCL is concerned with the marginal increments of land to say the office complex to adjust at the margin between the large land-using office complex and other large land-using projects.

Policy input under the PIOA model is concerned with a hierarchical and structural definition of policy while ‘Additionality’ looks at land-policy output (outcome) variables, impacting broader land policy efficiency and effectiveness goals, their associated output indicators and the interaction with the macroeconomy. Additionality is the extent to which something happens as a result of a land policy that will not have occurred in the absence of that policy.

The MOCL, PIOA and additionality analyses are based along the expectation that land policy can conform to a structural definition, which in turn is a function of specific objectives, capable of sustaining the effectiveness and efficiency of land policy. The result is a focused treatment of the dynamic aspects of a policy-based land optimization model.

The long-run policy-macroeconomy interaction is modeled in a contemporaneous cointegration model estimation, involving different sectors of the economy. A theoretical spatial equilibrium framework is also developed to enable a closer look at the equilibrium and optimal land-using economic activities. The discussion involves a dynamic interaction of the land policy outcomes and their economic implications through the cointegration tests and modelling.

The short- to mid- term interaction is conceptualized under a system-dynamics-based dynamic computable general equilibrium model estimation of urban growth under limited land. The focus is system dynamics modelling, a specific dynamic computable general equilibrium (DCGE) model, of urban growth under land limitation within the context of say the large land-using commercial office sector. Such a focus highlights the structural interaction and dynamic causation between land policy and other domestic factors that contribute to national and economic development. For model completeness, the DCGE model falls under the broader class of ccomputable general equilibrium (CGE) models, which in turn constitute a class of economic models that use actual economic data to estimate how an economy may react to changes in policy, technology or other external factors. A CGE model consists first of equations describing model variables, and secondly, a very detailed database that is consistent with the model equations.

Chapter 5 has developed a unique and rigorous system-dynamics-based dynamic computable general equilibrium (SDBDCGE) model for a key aspect of real estate market uncertainty, i.e. the frequent mismatch between office demand and supply under the impact of limited land constraint, the domestic stock market, the macro economy and macroeconomic policy. The dynamic interaction of such a key aspect of office market uncertainty can be structured under the demand-side and supply-side aspects. On the supply-side aspect, a downward-sloping convex nonlinear behavior relates the fraction of land occupied for office space to the changing level of new office space completion factor, taking into consideration an approved plot ratio (PR). This nonlinear behavior is an integral part of office space stock line control loop, resulting in the accumulation of the office stock. Both the demand-side and supply-side aspects are influenced by the wider economy and depend on macroeconomic policies like economic growth policy, interest rate policy and fiscal.

Prices in the form of office rents, total returns and CVs affect changing office investment. These prices are determined by office demand and supply regardless of the speed of adjustment. Office demand in turn depends on macroeconomic policies like economic growth policy, interest rate policy and fiscal policy. Macroeconomic factors are envisaged to influence the movement of office prices because private investors and developers tend to view the office sector as an alternative to the domestic share market. This is attributed to balanced portfolios so that the rate of return in the domestic common stock market moves in line with the office sector. Equity-investment prices may well vary with office prices, proxied by a composite private office price index. The algebraic relationships among the cause-and-effect variables are achieved through analytical relations based on prior experience or expert knowledge and robust econometric model estimations where possible, owing to data availability. The main advantage of system dynamics modeling itself involves the insightful adoption of feedback control loops and the principle of loop dominance. The overall system dynamics model is validated within the context of the Singapore economy, inclusive of the domestic stock market, and the office sector.

A sufficiently long data set over the period say between 1993 and 2004 at quarterly frequency, and from several domestic authoritative sources, has been utilized. The research hypothesis is validated through the formulation of the conceptual causal (cause and effect) loop diagram for the SDBDCGE model. Economic expansion is imperative in influencing the growth or moderation of the office sector endogenously, through several key macroeconomic variables and expectational factors. The scenario planning analysis that is conducted from the SDBDCGE model has enhanced the understanding of the structural causal factors and their relationships at work between say the office sector, limited land constraint, the domestic stock market and the developing as well as the maturing phases of economic expansion. The office sector is on the whole susceptible to GDP growth policy that affects both the GDP expansion in actual terms and the expectations for office rents and returns.

The econometric model estimates in relation to the wider economy and the office sector are reliant on the data set and the period say from 1993 to 2004. Although stable for the period concerned, the model estimates may change along a time line, going forward. They will need to be re-estimated as more and new data becomes available. The corresponding initialization of the overall structural dynamic model would also need to be re-calibrated in the process. Hence, empirical validation of this overall model does matter for its continued and accurate use. In addition, the structure of the underlying causal relationships may well be different in different cities, apart from the island-state of Singapore in the Southeast Asian region.

The scenario planning analysis can be even extended to develop the ex post outlook, incorporating limited land constraint, the office sector, the domestic common stock market as well as the wider macro economy. Another similar kind of the SDBDCGE model is to involve the non-office real estate sectors and the macro economy. The latter model can be realized through a combination of system dynamics modeling and advanced econometric modeling, to readily capture and understand the dynamics of the structural causal relationships in the different real estate sectors.

In Chapter 6, Real option analysis and option pricing, is are widely debated in the finance and economic literature. It has elped to resolve the deficiency of the traditional DCF approach to mitigate risk and enhance the flexibility in investment decision making. The consequential development of real option models and the advancement in computing power have enabled the growing deployment of these models to direct real estate investment opportunities. Chapter 6 highlights the binomial option-pricing model, proposed by Cox, Ross and Rubinstein, CRR, (1979) and which can model the risk-neutral process for short term interest rates¹, common stock prices and even the HDB resale flat prices. The CRR binomial option pricing model may well be appropriate to represent the movement of the underlying HDB resale flat prices, which is subject to private market forces in HDB’s large scale public housing secondary market.

Singapore’s highly effective public housing policy has housed an overwhelming proportion of about 87 percent of the population. The Housing and Development Board (HDB), as the national housing authority, is shifting its wealth redistributive focus to more allocative efficient housing policy initiatives in the presence of scarce resources for public housing. The Main Upgrading Programme (MUP) is therefore a heavily subsidized and highly targeted public housing policy. Since its inception in 1992, the HDB has budgeted some S$3 billion to finance the MUP policy. Revisions in the MUP policy are made regularly to keep it closely relevant to the general public’s expectation and feedback. A positive impact is the asset value enhancement of the HDB flats within the upgraded public housing precincts. The value of the upgraded HDB flat, particularly with the space-adding item (SAI), has improved considerably. The embedded real option premiums for HDB flats under the MUP policy are found to be around S$10,300 for a 3-Room HDB flat and S$2,000 for a larger 4-Room HDB flat. These real option values are estimated from both the binomial real option pricing model and the Samuelson-McKean model.

Chapter 6 shows that the MUP subsidies have a significant impact on the corresponding option premium. A 3-Room HDB flat owner is more inclined to opt for upgrading while the option premium is deemed to be less attractive for upgrading in the case of the 4-Room HDB flat owner.

Chapter 7 examines the residents’ satisfaction level with the town council services, under different political parties by their respective town councils (TCs). Examination is conducted via available data from mass media and Town Council Management Reports (TCMR5) for deeper understanding of the respective TCs. A pilot survey is conducted with a smaller size of 60 respondents, to ensure correctness of the survey questions and that the respondents can understand the questions. Chapter 7 involves the collection of primary and secondary data. Primary data comprises site visits to the respective TCs. Chapter 7 is concerned with ascertaining the housing finance model and assumes a commonality in terms of mortgage instruments, to be analyzed with household borrowers for the purchase of a single resale public or private housing.

Findings affirm the importance of the Members of Parliament’s (MPs) presence and interaction with residents owing to a positive correlation with residents’ level of satisfaction. MPs should note to have more interactions with residents. Financial analysis affirms the CPF’s role of improving loans affordability of loans to household borrowers. With additional CPF usage, the total interest paid over the loan life and affordability are significantly reduced. The CPF as a financial buffer can significantly reduce default risks for lender and household borrower.

Main limitation is the political sensitivity of the topic. Effectiveness of the TCs is based on residents’ satisfaction with TC services under different political parties. Their satisfaction pertains to different contributing factors under different political parties. To support the survey, observations are made at two Meet-the-People Sessions (MPSs) at the AHTC and AMKTC respectively. Observations are meaningful in providing more insights on the perception of the MPs and the TCs. Virtually no study of this nature has been undertaken.

Happy reading.

Yours sincerely,

Professor (Dr) HO, Kim Hin / David

Singapore

November 2020.

ACKNOWLEDGEMENTS

The author wishes to extend his most sincere appreciation to the School of Design & Environment, under the highly able Deanship of the Provost & Chair Professor (Dr) LAM Khee Poh, of the National University of Singapore. The same wish is extended to the University of Hertfordshire in Hatfield, UK. These two tertiary institutions of higher learning and research are globally leading Universities, inspiring and encouraging both modern and contemporary project management.

ABOUT THE AUTHOR

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Dr HO Kim Hin / David is Honorary Professor in Development Economics & Land Economy, awarded by the UK public university, the University of Hertfordshire. He retired end-May 2019 as Professor (Associate) (Tenured) from the National University of Singapore. Professor HO spent the last thirty-one years across several sectors, which include the military, oil refining, aerospace engineering, public housing, resettlement, land acquisition, land reclamation, real estate investment, development and international real estate investing. He spent six years in the real estate career as part of the executive management group of Singapore Technologies at Pidemco Land Limited, and as part of the senior management team of the Government of Singapore Investment Corporation’s GIC Real Estate Private Limited. Seventeen years have been spent in the National University of Singapore at the then School of Building and Estate Management, the Department of Real Estate, School of Design and Environment, where his research expertise is in two areas. First is international real estate in the area of risk-return behavior behind international real estate investing in direct and indirect real estate. Secondly, is urban and public policy analysis involving real estate, sea transport, public housing, land and land use. Schooled in development economics and in land economy at the University of Cambridge, England, he has effectively extended these disciplines to examine his two expertise areas. Apart from being well versed in econometrics, his quantitative interests include real estate demand and supply, investment and finance, artificial intelligent modeling in real estate and system dynamics modeling for real estate market analysis and public policy analysis. He is the Member of the Royal Economics Society (U.K.), Academic Member of the National Council of Real Estate Investment Fiduciaries (U.S.), Fellow of the American Real Estate Society (U.S.), member of the American Economic Association (U.S.) and member of the Economic Society of Singapore and the Singapore Institute of Management. He holds the degrees of Master of Philosophy (1st Class Honors with Distinction), Honorary Doctor of Letters and the Doctor of Philosophy from the University of Cambridge, U.K. He has published widely in top international journals and conferences, in chapters of international academic book publishers. Dr Ho has written 7 major books (including this book), undertaken many consultancies and funded research projects. He has written a total of about 275 published works (with 91 in peer reviewed, reputable international journals). He is an editorial board member of the Journal of Economics & Public Finance, Real Estate Economics journal, Journal of Property Research, Journal of Property Investment & Finance, Journal of Real Estate Finance & Economics, the Property Management journal and the International Journal of Strategic Property Management. He has published widely in conferences, Finance, chapters of international academic book publishers, undertaken many consultancies and funded research projects. He is an immediate past Governor of the St Gabriel’s Foundation that oversees nine schools in Singapore; and a District Judge equivalent member of the Valuation Review Board, Ministry of Finance, Singapore, and the Singapore Courts.

INTRODUCTION

Land Management and Economics

Ngiam (2006), a former and leading Permanent Secretary of the Ministries of Finance, Trade & Industry and National Development, recounts his episode as a young officer in the Singapore Administrative Service in drafting a vital Cabinet memorandum. The memorandum proposes that compensation be paid for land acquired to exclude its potential value:

"Why should this be excluded? We saw no reason why landlords should benefit from public infrastructural investment in roads, drainage, sewerage, power and water pipelines, etc. We would pay only the market value of raw land before public development. Our policy discouraged land speculation. The development charge imposed for change of use falls within the same concept. In effect, the State creamed off about half the potential value. Very few governments are electorally strong enough to implement such a robust policy. But the PAP(Peoples’ Action Party) government did."

(Ngiam Tong Dow, 2006)

Ngiam interestingly augments his observations on what Singapore did on its land pricing policy, in relation to the opportunity cost concept, to send prices and valuations so high as to mitigate Singapore’s loss of competitiveness:

"Sadly, the clarity of thought shown by Dr Goh [Keng Swee, Cabinet Minister & Deputy Prime Minster, 1970s & 19080s] in pricing land has been lacking in more recent years. Relying on the concept of opportunity cost, the Chief Valuer, at the behest of either the Ministry of National Development or the Ministry of Trade and Industry (I am not sure which), has valued land across Singapore using Raffles Place [the core