positive externality of building refurbishment

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An empirical study on the positive externality of building refurbishment

Housing has long been regarded as a durable commodity (e.g. Fitzpatrick and Gory, 1989; Wieand, 1999). This assertion is reasonable because housing usually lasts for 20 years or more. Yet, buildings, like other physical commodities, are subject to wear and tear (Burton, 1933). They will eventually fall into a state of dilapidation if they are not properly maintained. A wave of building dilapidation sooner or later results in urban decay, which has been a major eyesore in many well-developed cities (De Kleijn, 1986; Andersen, 1995). The government estimated that there were now around 42,000 private buildings territory-wide in 2004 (Housing, Planning and Lands Bureau, 2004). The unsatisfactory conditions of aging buildings in Hong Kong and the reluctance of building owners to carry out safety inspections of their properties voluntarily are evidenced by the large number of complaints about such dangers from buildings and accidents involving building structures in recent years. If truth be told, even in the absence of government intervention, property owners are willing to invest to improve their buildings because refurbishment or maintenance works can enhance the market values of refurbished properties (Holm, 2000; Gregg and Crosbie, 2001). Chau et al. (2003), applying a hedonic price analysis, found that refurbishment brought about a 9 per cent increase in the prices of the properties in the refurbished buildings, which far exceeded the cost of refurbishment.

Nonetheless, the authors of these studies presumed that the benefits of building refurbishment were confined to the refurbished properties only. What they largely ignored was the possible positive externalities of the building refurbishment. Recalling Lancaster's (1966) seminal customer behaviour theory, we may realize that housing can be regarded as a multi-dimensional good differentiated into a bundle of attributes that vary in both quantity and quality. Founded on this premise, the market value of a residential property is the aggregate of market values of varying amounts of its attributes (Kain and Quigley, 1970). Of various housing attributes, locality, which is a function of the quality of the surrounding environment, can be considered the most important attribute for property valuation. Therefore, it is sensible to conjecture that value enhancement documented in BSP Writers (2004) and Chau et al. (2003) was, to a certain extent, attributed to two forces: improvements in the subject buildings and improvements in other buildings of the same estates. If this is the case, housing refurbishment not only adds value to refurbished housing, it also poses a positive externality to other properties in the neighbourhood.

At least, building refurbishment (particularly improvement to the external fac¸ade) is intuitively expected to have a positive impact on properties in adjacent buildings because of the improved visual quality enjoyed by residents in the latter.

In fact, there are a number of studies on the aesthetical or visual impact of the surrounding environment on property values, even if they have only contributed a
small part to the large body of literature focusing on the effects of the neighbourhood quality on property values (e.g. Jacobs, 1941; Li and Brown, 1980; Colwell et al., 2000; Boyle and Kiel, 2001). Among these studies, most showed that the visual quality of the surrounding environment had a great influence on property values. same token, poorly maintained buildings should depress the value of neighbouring properties. Negative externalities are created by the unsightliness of the poorly maintained properties. Refurbishing these poor buildings should reduce or even counter the externalities to their neighbourhoods. As suggested by Pavlov and Blazenko (2005), a property owner tends to undermaintain his/her properties because he/she does not recognize the positive externalities of maintenance for his/her neighbours.

However, Pavlov and Blazenko only presented their ideas analytically. There is still a lack of empirical studies on the externalities of building refurbishment or maintenance.

While everyone would eventually benefit from improving the conditions of the buildings, no one wants to take the first step (because the market value of the properties improved at the beginning of the process would be depressed by the deterioration of the other properties), and all would benefit from being among the last (since their unimproved properties would increase in value as a result of the investments made by the others). Such a positive externality of refurbishment leads to market failure. In this circumstance, the rehabilitation or refurbishment process never gets off the ground, and the result is that the investment in building improvement is far less than society would like. Education on the value of building improvements is conducive to the long-term sustainability of the rehabilitation effort, and should therefore be incorporated into all urban renewal strategies. Nonetheless, the effects of community education on urban renewal may not materialize within a short period of time. For a more immediate effect, the government should take a bold and determined step to make building owners to undertake the upkeep of their own properties and lure the
developers to instigate redevelopment projects in old districts.

A review of the BURA awards for best practice in urban regeneration Good examples of ``dockland'' projects are Gloucester, Swansea, Cardiff and Liverpool. Up until the mid-1980s, for example, the site of Gloucester Docks embracing 24 listed buildings, four listed structures and almost a hectare of water was substantially derelict and under-used. Here the regeneration project, based on a planning brief set by Gloucester City Council and with the support of the British Waterways Board, sought to exploit the waterside location and its associated heritage. Six listed warehouses have been refurbished and one rebuilt to provide office, retail, museum and restaurant facilities. The Swansea Maritime Quarter covers some ten hectares of former dockland immediately to the south of the centre of the city. The docks were closed in 1969 and work on filling in the dock basin was started and then abandoned. The City Council embarked on a major regeneration scheme in 1980 and the project saw the area
transformed into a thriving area with over 100 residential units, shops, businesses, a museum and a marina. Liverpool's Albert Dock scheme has become one of the UK's top heritage sites with some six million annual visitors at the time of the award in 1993 to attractions such as the Tate Gallery, the Merseyside Maritime Museum, Animation World and the Beatles Story.

Environmental improvements are often the most obvious and tangible manifestations of successful regeneration. In many places, the accent has been on the sensitive and creative refurbishment of buildings and on the development of attractive, aesthetically pleasing and lively environments which provide a high quality environment for contemporary modern uses. The Albert Dock, once a totally abandoned and neglected eyesore, is now visually stunning and by the early 1990s had surpassed the city's two cathedrals and the Royal Liver Building as Liverpool's most photographed and painted building.

Pathways to success

After periods of continuous expansion following the industrial revolution many of the major cities in the industrialised countries of Europe were faced with problems related to de-population and collapse in traditional sources of employment for host populations (Berg et al., 1995). Traditional economic activities were in decline and urban populations were relocating to suburbs, smaller towns and peripheral locations. In a number of cases the urban centres were abandoned most particularly by higher income earning residents and larger industrial employers. This caused the foundation of many cities in Europe to be substantially eroded. Local governments under severe financial pressure reduced spending allocations for aspects of city infrastructure, transport and other municipal facilities. In addition urban centres became the focus of unemployment, crime, decay, and further problems of congestion and pollution became significant issues.

Tourism and its recognition as a significant industry was at the core of the regeneration strategy for the city (Sneddon, 1996).

Key agencies in the reorientation of the cities' economy have been Glasgow City Council and Glasgow Development Agency (and previously the Scottish Development Agency). The council strategy for tourism focused on:

(1) developing significant and new tourist attractions;
(2) attracting and establishing major events;
(3) marketing the city as a destination through the city Tourist Board and Convention Bureau;
(4) investing in a range of environmental projects;
(5) developing Glasgow as a major destination for cultural tourism;
(6) supporting and developing cultural industries.

Clearly tourism is now established as a prime industry that catalyses economic and employment activity and diversifies the economic base of urban destinations such as Glasgow and Dublin. Most particularly tourism generates employment for relatively low skilled labour, a segment of the labour market acutely effected by downturn in traditional manufacturing industry and who can be problematic in terms of assistance via job creation. Urban tourism further benefits the host location in terms of its ability to significantly influence the level of infrastructure and support services, etc.