A study of the Greenwich, Connecticut real estate market has found that part of the price one pays for a house in the affluent community is due to the option to redevelop it rather than interior square footage, lot size, number of bedrooms and bathrooms and other current house characteristics, according to Katsiaryna Salavei, Ph.D., assistant professor of finance at Fairfield University's Dolan School of Business.

Dr. Salavei, who co-authored the study with John M. Clapp, Ph.D., professor of finance and real estate at the University of Connecticut, said the main contribution of the study is that they were able to estimate the value of option to redevelop. Many prior papers established that redevelopment potential should increase the value of the property, but were not able to empirically estimate the value of redevelopment option. "We find that in Greenwich an average house contains only about 1.8% value of option to redevelop. However, for large lots the value is higher and equals 3.5% compared to 1.1% for small lots."

Dr. Salavei found that the value of option to redevelop is greater for older homes on large lots. She says the selling price of homes 80 years old and older on large lots - considered as those above 16,000 square feet, or 0.367309 acres - contain a 10.5% premium for option to redevelop. Interestingly, there are very few, if any, empty lots for development in Greenwich, which increases the value of option to redevelop an existing property.

The implication of the study for homebuyers is that if one does not plan to redevelop a house, they should avoid buying property that has large value of option to redevelop, such as properties on particularly large lots.

The study's findings are shared in a research paper, entitled "Hedonic Pricing with Redevelopment Options: A New Approach to Estimating Depreciation Effects," accepted for publication in the Journal of Urban Economics, one of the top economics journals.

Greenwich, located in the most southwestern part of the state, has some of the most expensive real estate in the nation. The study analyzed 7,976 sales between 1994 and 2007 of single family residential properties. For that time period, an average Greenwich house had a lot size of over 50,000 square feet, was built in 1945, and had an interior square footage of 2,855. The mean house price was over $1.5 million.

It was also determined that in addition to option to redevelop the following characteristics of Greenwich homes drive their value:

• Key driver of value is interior square footage.
• Having three bathrooms adds 8% to house value.
• Having more than five bedrooms adds 6% to house value.
• Location within one mile of the harbor adds over 17% to house value.
• View of Long Island Sound adds 8.5% to house value.
• Being within 300 feet of a railroad track subtracts 7% from house value.
• Property value is decreasing in age until age of 45 years and is increasing in age thereafter.

Interestingly, when land value is high, small upgrades and redevelopment of a home's interior is valuable, but not when the land value is very low.

Posted On: 12-17-2009 10:12 AM

Volume: 42 Number: 155