Winner’s curse in the HK land sale market

March 7, 2018 / By

Last week, the Hong Kong Government announced that starting second quarter of 2018, tender amounts from all tender submissions in the government land sale market, will be published on an anonymous basis. In the past, only the winning bid’s tender amount was disclosed.

In auction theory, winner’s curse happens when the winning bid in an auction exceeds other competing bids as well as the inherent or true worth of an item. This is a recurring phenomenon in common-value first-price sealed-bid auctions currently used in Hong Kong. Also known as blind auctions, the bidder has no knowledge of other bids and receives limited feedback for future tenders. It is assumed that the value of a site is approximately the same for all rational bidders, taking into account similar profit margins as well as development costs.

In the city’s public land sale market, there has been strong evidence of the winner’s curse, especially as the bidding process has turned more competitive in recent years. Of the last 52 residential tenders awarded since 2015, about half the winning bids exceeded the higher end of market expectations.

Source: Lands Department, market sources, JLL

However, the disclosure of all submitted bids, is poised to be a game changer.

Implications for the land sale market

  • Reduced winner’s curse. Accessible information will help bidders update their beliefs about the valuation adoption strategy of others. Knowing the amount of the second highest and remaining bids will allow bidders to mitigate aggressive bidding in subsequent tenders to reduce the curse.
  • The underbid pay-off effect. Those suffering from loser’s regret, given the missed opportunity to win at a favourable price, may face higher pressure to “beat the average” in their next tender attempts with their understanding of contenders’ bids.
  • Fewer low-ball bid submissions. Previously, bidders could enjoy the publicity associated with a tender regardless of the submitted tender amounts. Under the new scheme, low-ball submissions are expected to bring increased scrutiny from shareholders and potentially put a developer’s reputation on the line, especially when a limited number of bids are received.
  • Improved knowledge transparency. Less experienced developers, including new market entrants, will be able to make more informed bidding decisions; contrary to the past when local heavyweights had the upper hand given their extended bidding experience. The accuracy of land valuations may also see improvement with the availability of more data points.

The market will likely see fewer eye-popping bids in the land sales market, a likely culprit in the housing prices rally—up 30% since the last trough in May 2016. However, there could be an upward clustering effect of bids arising from the underbid pay-off effect. The revelation of bids close in proximity to the upper end of market expectations could have a reinforcing effect on the positive growth in housing prices.

Notwithstanding the winner’s curse and bidding strategy dilemmas, land sites in Hong Kong are likely to remain sought after against steady economic growth and a still optimistic market outlook. Per our forecasts, residential capital values have room to grow another 10% in 2018, having gained 15% in 2017.


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