Academic journal article The Town Planning Review

Effects of Urban Renewal on Non-Subsidised Property Owners: Evidence from East Germany

Academic journal article The Town Planning Review

Effects of Urban Renewal on Non-Subsidised Property Owners: Evidence from East Germany

Article excerpt

Urban renewal programmes intervene in the housing market by offering different kinds of subsidies that support the improvement of public spaces or selective demolition. The central aim of this paper is to disentangle the economic impact of these subsidies on property owners and investors by exploring the value of residential real estate. There is limited knowledge as to which type of owners benefit from such actions and whether they even benefit at all. One may expect that the indirect effects of a regime of regulation inspire more confidence in market recovery from the perspective of property owners. By using the theory of real options it is assumed that urban renewal raises the option premium of a property which in turn represents an opportunity to the owners to use and develop their property. This opportunity is based on expectations of higher revenues in the future. The hypothesis of an increasing option premium is explored using data from a large urban renewal programme in East Germany.

Keywords: urban renewal, real options, East Germany, subsidy, property value

(ProQuest: ... denotes formulae omitted.)

Introduction

In many cities, especially in regions with economic decline, policymakers try to support local development and fight urban blight by introducing urban renewal projects. Such projects are generally justified by the assumption that there are negative externalities within the existing urban structure which deter property owners from investing in deprived areas and which lead to the problem of inaction (Arvan and Nickerson, 2006; Cho, 1971). Such externalities are, for example, a negative perception of the location or unattractive buildings in the neighbourhood. If dilapidated buildings in the neighbourhood negatively impact one's return on investment, more and more property owners will decide not to invest. This damage of mutual confidence can result in poor housing quality, deferred maintenance, social instability and a reduction in the quality of life. Schall (1976) proposes that public urban renewal measures can erase negative externalities and raise the quality of an urban neighbourhood from a slum to distinct levels which can be maintained autonomously by local property owners. This process requires cooperative behaviour and it is questionable whether urban renewal will always work in this optimal way.

Property owners may exhibit free-rider behaviour since the positive externalities from urban renewal are capitalised in the land rent and individual investment may not be needed in order for them to benefit from urban renewal. This possibility of a crowding out of housing investment by increasing housing externalities and increasing land rents (because of urban renewal activities) has been modelled recently by Rossi-Hansberg et al. (2010). There are several empirical evaluations and case studies which discuss the efficiency of urban renewal activities in terms of costs and benefits, for example, in the US. These studies include Anderson (1964), Davis and Whinston (1961), Schaaf (1960), Wilson (1967), Gotham (2001) and Newman (2004). Cost benefit analyses were used in Austria (Morawetz et al., 1988) and Hong Kong (Lee and Chan, 2008) to identify the effects of different approaches of urban renewal. In Germany, some macroeconomic studies on urban renewal programmes concentrated on the multiplier effects of the subsidies (DIW, 1996, RWI, 2004). One relevant result from these studies is that the success of urban renewal is rather limited. It seems that technological and economic trends, which lead to the decline of cities or city neighbourhoods, are too strong so that the use of subsidies to revitalise urban areas proves of little success (Glaeser 2011). Programmes which focus directly on improving living conditions and the employment situation of people in deprived neighbourhoods - like the area-based initiatives in the UK - have been found to have positive effects on employment (Gutiérrez Romero, 2009). …

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