【2002年中華民國住宅學會第十一屆年會論文集】
Valuation of Condominiums in Penang, Malaysia: a Hedonic Price Approach
Chin Tung Leong
Abstract:
The hedonic price model was used to investigate the impact of freehold land tenure and cemetery view on prices of condominiums in Penang. Based on the premise that buyers generally prefer properties that are built on freehold land compared to leasehold, condominiums with freehold land tenure would fetch a higher price. Also, condominiums that view the cemetery would be sold at a discounted price because buyers would not favour such views due to personal preferences, supertitious beliefs, or feng shui influence. The sample comprised 164 actual condominium sales transacted in the year of 1998 and 1999. Ten independent variables were regressed onto the price of the condominiums. The results reveal a statistically significant and positive relationship between condominium price and freehold land tenure, but a negative coefficient was generated for cemetery view.
Key words: Hedonic price model, freehold land tenure, leasehold, cemetery view,fengshui, condominiums, Penang.
Introduction
PenangIsland or Pulau Pinang (Island of the Betel Nut) is one of Asia’s most famous islands. Also called the “Pearl of the Orient” and the “Silicon Valley of the East”, the island has a total area of 285 km2, and it is approximately 24 km from north to south and 14.5 km from east to west. With a population that stood at 700,000 in 1998, coupled with rapid growth in the industrial, commercial, and service sectors, there is a great demand for housing in Penang.
Over the last two decades, high land costs and the scarcity of developable land have given rise to the mushrooming of high-rise properties on this small but densely populated island. Records showed that there was a tremendous increase of over 600% in the number of condominiums built between 1995 – 1996 (Geh 2000). In terms of land tenure, both freehold and leasehold land have been intensively utilised for the development of condominiums.
In Penang, tenure of land is categorized into either freehold land or leasehold land. Freehold land tenure means the right to use and enjoy the land for the duration of the life of the grantee and even that of his or her heirs and successors. On the other hand, owners of leasehold land can only claim ownership for a stated period of time. As residential properties are not merely consumption goods but are also regarded as investment goods, many buyers are inclined to prefer condominiums built on freehold land. This is because such properties are perceived to have better resale value. Thus, it is reasonable to surmise that condominiums with freehold land tenure would command a higher premium. For example condominiums in Sri Pinang and Sri York Condominiums which are sited on freehold land in Logan Road and Halaman York, respectively.
In recent years, the construction of condominiums have also encroached into the suburbs and even areas peripheral to cemeteries have been earmarked for the building of condominiums. It would be interesting to investigate if buyers favoured such developments, and whether tenure of land and cemetery view would influence the valuation of condominiums on this island.
Generally, cemeteries are not very pleasant to view at, and most buyers would be unlikely to purchase units that view the cemetery, unless a substantial discount was offered. Also, buyers of condominiums on this island are predominantly Chinese Malaysians. Some amongst them may be superstitious or are staunch believers in feng shui (geomancy). Thus, views of the cemetery, graveyards, and crematoriums may not be so welcomed because they would want to avoid anything inauspicious. The Chinese community in particular, and especially residents of the Buddhist and Taoist faith, dislike being associated or reminded of death and the netherworld. The presence of cemeteries, graveyards, and crematoriums would make them feel uncomfortable, as this is tantamount to living next door to death!
Although, extant literature revealed that numerous studies have been conducted to investigate the relationship between attribute preference and the price structure of properties, to date, there has been no documented empirical work that specifically analysed attribute preference with regard to tenure of land. With the exception of the research by Tse and Love (2000) in Hong Kong, studies on cemetery view are also very scarce. Research employing this approach to study either the attribute of land tenure and cemetery view, has yet to be undertaken to examine the housing market in Penang. Hence, this study was deemed to be essential as it redresses the current paucity of empirical evidence in these areas.
Therefore, the primary objective of this study was to use the hedonic price model to examine the impact of tenure of land, and cemetery view on the valuation of condominium units in Penang. Specifically, this research aimed to answer the pertinent question, “Will tenure of land and cemetery view affect the valuation of condominiums in Penang?”
By employing the hedonic price model, the implicit prices for the attribute of tenure of land as well as cemetery view for private residential condominiums in Penang can be revealed, and other attributes preferred by buyers for these condominiums aptly identified.
This paper is organised into four main sections. Section II, focuses on the review of relevant literature. The research model is presented in Section III. Details pertaining to the population and sample, data, selection of independent variables and functional form and the tests employed are discussed. Section IV reports the empirical results and discusses the findings generated from this study. Finally, Section V gives the implications and concludes the paper.
II.Literature Review
The hedonic price model is used to study the demand side of housing, with the assumption that a property is sold as a package of inherent attributes (Freeman, 1979; Rosen 1974). The market prices of properties are determined based on the evaluation of the buyer on the housing unit’s bundle of inherent attributes, and the hedonic prices are the implicit valuations of the housing unit’s attributes. The regression analysis is employed in the hedonic price approach to estimate the implicit prices.
Literature on the hedonic price approach indicated that price of properties are linked to the preference for particular housing attributes. Numerous empirical studies have been conducted to examine the relationship between attribute preference and the price of properties. For example, neighbourhood attributes, namely quality of public schools (Clauretie & Neill 2000; Haurin & Brasington 1996), proximity to shopping complexes (Des Rosiers, Lagana, Theriault & Beaudoin 1996; Sirpal 1994), hospitals (Huh & Kwak 1997), and places of worship such as churches (Carroll, Clauretie & Jensen 1996), as well as presence of urban forests (Tyrvainen (1997) have been explored using this approach.
Ridker and Henning (1967) and Chattopadhyay (1999), have likewise used this technique to examine the relationship between air quality and property values, while Leggett and Bockstael (2000) assessed the willingness to pay for water quality. Ketkar (1992) investigated the impact of hazardous waste sites, and Halstead, Bouvier and Hansen (1997) studied the effect of landfills. Impact of other negative externalities, for example, crime rates (Thaler 1978), traffic noise (Williams 1991), and airport noise (Epsey & Lopex 2000), have also been empirically studied.
Research have also been conducted on structural attributes such as floor area (Carroll et al 1996; Mok, Chan & Cho 1995), number of rooms, bedrooms, and bathrooms (Fletcher, Gallimore & Mangan 2000; Garrod & Willis 1992; Linneman 1980; Mok 1995; Rodriguez & Sirmans 1994), floor level (So, Tse & Ganesan 1996), and age of building (Clapp & Giaccotto 1998; Kain & Quigley 1970, Rodriguez & Sirmans 1994). Some researchers included attributes such as garage (Forrest & Ward 1996), while others examined the impact of patio, air and water heating systems, and number of fireplaces (Garrod & Willis1992). Structural quality such as exterior structure, condition of floors, windows, walls, and levels of housekeeping have been found to have an impact on house prices, too (Kain & Quigley 1970; Morris, Woods & Jacobson 1979).
Other researchers assert that locational attributes such as distance to the central business district (CBD) and job accessibility affect house prices. Accessibility to the CBD has been operationalised in terms of travelling time, cost of travel, convenience and availability of different transport modes (Chau, Ng & Hung 2001; So et al. 1996). Savings in transportation cost and frequency of transport services appear to have a positive impact on house prices. However, Kain and Quigley (1970) found that higher income households with more education opt to live farther away from the CBD, indicating that house price is determined not only by accessibility or travel costs, but also by air pollution and other environmental attributes of the location.
Other studies used the hedonic price model to estimate the implicit price of views, such as ocean view (Benson, Hansen, Schwartz & Smersh 1998), seaview (Mok et al. 1995), lake-view (Darling 1973) and valley view (Correll, Lillydahl & Singell 1978). However, except for the works of Tse and Love (2000) who found that cemetery view has a negative impact on property prices in Hong Kong, not much investigation has been conducted on the attribute of cemetery view. Generally, dwellings that have a cemetery view are avoided. This is because the view of a cemetery is regarded by Chinese societies as inauspicious as it connotes death and is definitely bad feng shui (geomancy). Apparently, they have this obsession about “luck,” and cemeteries are equated with bad luck.
Relatedly, several studies have shown that buyers, particularly amongst the Chinese community, are very much influenced by superstitious beliefs. Very often, these superstitious beliefs are manifested in their preferences for housing attributes. For example, apartments with lucky floor numbers (e.g., number 3, 6, 8, or 9) have been found to be sold at a significantly higher price compared to those with unlucky numbers such as 4 (Chau, Ma & Ho 2001; Bourassa & Peng 1999).
In spite of the veritable amount of research on house price as a function of locational, structural, and neighbourhood attributes, there has been no record of studies that systematically examine the influence of freehold and leasehold tenure of land on property valuation.
III. The Research Model
Population and Sample
In this study, private residential condominiums were randomly selected from 6 major estate development areas on the island of Penang. The 6 areas are the NorthernCoast, Georgetown, Air Itam/Paya Terubung/Farlim, Greenlane/Jelutong, Gelugor/Batu Uban/Sungai Nibung, and Bayan Baru/Bukit Jambul/Relau/Sungai Ara. Although, theobservations were derived from the 6 major areas of development, the condominium units basically share similar attributes and variations in building qualities are small.
The sample comprised 164 records of sales transacted for the year 1998 and 1999. These two years were selected because the prices during this period were relatively stable.Also, for the purpose of this study, only transaction prices in the resale market were used as these depict the true market prices. Developers frequently sell above or below the market prices, hence sale prices during the launching of new condominium units are often distorted.
Data Collection
All the data were sourced from Raine and Horne International Zaki & Partners Sdn. Bhd., a professional real estate agent in Penang.
To verify the attributes of the units in the sample, visits to the condominiums were carried out. On-site observations were also conducted to ensure there was homogeneity in the sample. This is important because the element of bias due to differences in structural and neighbourhood quality can be minimized.
The Variables
Apparently, there are many potential attributes that can affect prices of properties, thus it will be a formidable task to identify every attribute. Butler (1982), opined that to some extent, all estimates of hedonic price models are misspecified, therefore, models that use a small number of key variables generally would suffice. Mok et al. (1995) also justified economizing on the number of variables because biases due to missing variables is small and have negligible prediction and explanatory power on the equation. Hence, only variables that are major influencing factors were selected.
In this study, the dependent variable was the price of private residential condominiums as stipulated in the sales and Purchase Agreement expressed in Ringgit Malaysia (US$1 = RM3.80). A total of 10 independent variables were selected and regressed against the price of the condominium units. They were selected so as to capture a range of potential locational, structural, and neighborhood influences that are relevant to local conditions. Age of the building, however, was disregarded because most of the buildings in the sample were relatively new, and the age variation was small. These variables are listed in Table 1.
TABLE 1
Housing Attributes
Attributes / Definition / Variable / ExpectedSign
Locational (L) / Distance to Central Business District (in km) / DCBD / -ve
Seaview / SEA / +ve
Cemetery view / CEM / -ve
Tenure of land / TEN / +ve
Structural (S) / Actual floor area (in ft2) / AFA / +ve
Floor level / FLO / +ve
Neighbourhood (N) / Facilities / FAC / +ve
Environmental quality / QUA / +ve
Shopping centres / SHOP / +ve
Premier school / SCH / +ve
Dependent variable / Selling Price / P
In terms of descriptive statistics, the condominiums in the sample have a mean price of RM202,558.39 with a standard deviation of RM51378.77. The cheapest condominium in the sample was priced at RM130,000.00 while the most expensive was tagged at RM335,000.00. The distance to the central business district, that is the city-centre of Georgetown from the condominiums ranged from 1.1 km to 18 km. The mean distance was 8.57 km and the standard deviation was 4.34 km. As for actual floor area of the condominiums, the mean is 980.47 square feet and the standard deviation was 172.91 ft2. The actual floor area ranged from as small as 688 ft2 to as big as 1632 ft2. The sample comprised condominium units located on the first floor to condominiums with floor level as high as 31. The mean floor level was 8.80 and the standard deviation was 6.46.
Locational variables
With respect to the locational variable, distance to Central Business District (DCBD) was measured as the actual road distance in kilometres from the selected condominiums. Central business district was operationalised as the city centre in Georgetown, Penang. As distance to CBD is generally associated with accessibility and convenience, the coefficient was predicted to be negative. It was expected that the farther away the condominiums were from the CBD, the lower would be the price of the units.
As past studies have proven that view and quality of view do play a role in impacting property values (Benson et al. 1998), it was expected that the regression coefficient for the variable seaview (SEA)in this study would be positive. This is because a panoramic view of the sea was deemed favoured by almost all the buyers. Seaview was treated as a dummy variable. Any condominium that could view the sea from any angle in the unit was assigned a value of 1, otherwise it was assigned a value of 0.
Generally, buyers do not favour views of the cemetery (CEM) as it is considered bad feng shui (geomancy). Even for feng shui sceptics and those who are not superstitious, cemeteries typically generate feelings of morbidity and gloom. Thus, a negative coefficient for cemetery view was predicted, as buyers would not place a high premium on such units. Any condominium that could view the cemetery from any angle in the unit was assigned a value of 1, and 0 otherwise.
As for the tenure variable in this study, any building with freehold title (TEN) was assigned a value of 1 and with leasehold title, a value of 0. Generally, buyers prefer, and are willing to pay more for properties that are built on freehold land compared to leasehold land because such properties have better resale value. Therefore, the regression coefficient for TEN was expected to be positive.
Structural Variables
The actual floor area in square feet (AFA) was used to measure the size of the condominium units. A positive regression coefficient was predicted for AFA because extra space adds value, particularly to non-landed properties such as condominiums.
The floor level (FLO) included the car park level (if the car parks provided were on the same block of the condominium units). The coefficient for the floor level on which the unit is located was predicted to be positive, implying that the higher the floor, the more expensive the unit. This is because higher levels usually get better views of the surrounding area. Units on higher levels are also relatively quieter and cleaner.
Neighbourhood variables
All the neighbourhood variables were treated as dummy variables. The provision and availability of facilities (FAC) will elevate the value of condominiums, thus a positive coefficient was expected. Condominiums with a swimming pool and at least three other types of facilities such as gymnasium, tennis court, community hall, and security services were assigned a value of 1, and 0 otherwise.