Risk Premium Assessment for the Sustainable Valuation of Urban Development Land: Evidence from Spain

Round 1

Reviewer 1 Report

In the paper there is often confusion between the appraisal of the land as a real estate (the purchase of a property can only have the purpose of hoarding wealth) and the evaluation of the investment of a building contractor (row 16 and rows 171-73 ) in which the land is only a part of both the total investment and the risk.

The model is based on the opinions expressed by the experts panel which is composed of 12 people, but it has not been explained how the individual judgments were managed, considering that it is impossible for 12 people to have had the same opinion in all the multiple model comparisons (rows 197-203).

Even if the model is applied only when there are no market data, it is appropriate to keep in mind that the results are based exclusively on the opinion of a small group of people and have limited reliability.

All the risk levels (RL1-RL5) were defined with reference to the national risk level of urban development (rows 207-211).

Thus, however, the scale of risk levels is unbalanced, because there are 4 levels of risk higher than the national one and only one of equal or lower risk.

Values on a national scale usually have an average level and it is possible that, in some cases, the risk level is lower or even much lower. This problem affects the step 4 (rows 231-237) for the construction of the Pairwise Comparison Matrix of the risk level.

The range of variation of the Valid Value Range risk premium (rows 260-265) was established with respect to inappropriate bibliographic references. For example, the risk premiums  indicated by laws for tax purposes are not suitable for an assessment from private entrepreneur’s perspective, moreover the laws are not recent (2003 and 2007). Other articles or reports on the real estate sector should be consulted. In any case, is this range related to the risk of the real estate owner or the risk of building contractors?

All these aspects, if not reviewed, weaken the proposed methodology and the results obtained.

- The reasons why the years between the various stages have been quantified in such a way (figures 7 and table 13) should be discussed (since obviously if time changes, the function changes too).

- it would be interesting to insert the EVV vectors in the section 3 to know the weight attributed to each variable and to each stage by the panel of experts.

- add the formula number in row 323

Author Response

We appreciate the comments and the relevant suggestions of the Reviewer. These suggestions are assumed and incorporated.

- “In the paper there is often confusion between the appraisal of the land as a real estate (the purchase of a property can only have the purpose of hoarding wealth) and the evaluation of the investment of a building contractor (row 16 and rows 171-73 ) in which the land is only a part of both the total investment and the risk.”

Authors answer: In fact, the text is modified (in the corresponding lines) to refer to the fact that the land valuation is based on the investment made by a building developer, where that land is only a part of the total investment made.

- “The model is based on the opinions expressed by the experts panel which is composed of 12 people, but it has not been explained how the individual judgments were managed, considering that it is impossible for 12 people to have had the same opinion in all the multiple model comparisons (rows 197-203).”

Authors answer: The text is modified in order to better reflect that the judgments are the result of the sharing of the perceptions of experts in the building sector. After considering these opinions, the author reaches the pairwise comparison matrix.

- “Even if the model is applied only when there are no market data, it is appropriate to keep in mind that the results are based exclusively on the opinion of a small group of people and have limited reliability.”

Authors answer: The result of the analysis of the influence of the estimated variables is carried out after considering the opinions of experts in the building sector and the literature: [46], [48]; besides, new references were added [49], [50] replacing previous ones.

- “All the risk levels (RL1-RL5) were defined with reference to the national risk level of urban development (rows 207-211).”

Authors answer: It is stated that the levels of risk are defined based on research in the domestic sector promotion building to stick to a particular market.

- “Thus, however, the scale of risk levels is unbalanced, because there are 4 levels of risk higher than the national one and only one of equal or lower risk.”

Authors answer: This issue has been clarified; noting that 5 levels of risk have been considered, from the minimum level to the maximum, with RL1 being the minimum and RL5 the maximum. RL1, corresponds to the minimum level of risk of the national sector of building contractors, and RL5 to the maximum risk level.

- “Values on a national scale usually have an average level and it is possible that, in some cases, the risk level is lower or even much lower. This problem affects the step 4 (rows 231-237) for the construction of the Pairwise Comparison Matrix of the risk level.”

Authors answer: Based on the new analysis, by introducing new bibliographical references, the vectors of the risk levels have been modified, resulting in a new matrix of vectors of the risk levels, for each urban state. These matrices are given in the text.

- “The range of variation of the Valid Value Range risk premium (rows 260-265) was established with respect to inappropriate bibliographic references. For example, the risk premiums  indicated by laws for tax purposes are not suitable for an assessment from private entrepreneur’s perspective, moreover the laws are not recent (2003 and 2007). Other articles or reports on the real estate sector should be consulted. In any case, is this range related to the risk of the real estate owner or the risk of building contractors?

Authors answer: The literature was modified to establish the Range of Valid Values of the risk premium. The literature related to laws was excluded. New updated references are incorporated, offering data on profitability and risk collected from a private initiative perspective. It is expressed that the range of risk premiums is made from the point of view of the building developer.  As a result of the introduction of new data, the results are recalculated. The general formulas (1) and (2), which are used to obtain the results, are expressed in the methodology. The resulting equation (3) of the linear regression analysis is included in the results.

- “All these aspects, if not reviewed, weaken the proposed methodology and the results obtained.”

Authors answer: All previous aspects have been reviewed, to collect all the comments and suggestions made by the Reviewer, so that the proposed methodology, therefore, the results obtained can be considered valid.

-" The reasons why the years between the various stages have been quantified in such a way (figures 7 and table 13) should be discussed (since obviously if time changes, the function changes too)."

Authors answer: In section 4. Discussion, it is gathered that in this work we have studied a total time horizon of 10 years, from the current urban state, S1, until they are fully urbanized, S4. If there were changes in the times considered, both in the intermediate periods of time and in the total time horizon, there would also be changed in the function and results obtained. Based on the new analysis, by introducing new bibliographic references regarding the ranges of values of risk premiums. Thus, Figure 7, the formula obtained, Table 13 and Table 14-old have been modified.

-" it would be interesting to insert the EVV vectors in the section 3 to know the weight attributed to each variable and to each stage by the panel of experts."

Authors answer: New tables are inserted - section 3.Results - collecting the Paired Comparison Matrix of the Variables (PCMV), (EVV) and the different Matrix of the Vectors Own Risk Levels (MRLE) of each urban state.

-" add the formula number in row 323"

Authors answer: it was added.  Final del formulario

Author Response File: Author Response.pdf

Reviewer 2 Report

In my opinion the manuscript needs some changes.

Comments

1.     Figure 3 – city limits are not visible.

A strange map - probably with some investment, this is not a typical pure topographic map. Blue line unexplained - maybe unnecessary? The map should be made using GIS. The base map should be a “pure” topographical map, and the analyzed area (boundaries, etc.) should be clearly marked (not general sketch).

2.     Figure 5 - The map should also show the surroundings of the analyzed area (buffer zone). All symbols and colors visible in the map window should be explained (also those in surroundings of the analyzed area). The nearest neighborhood also affects the the risk premium value of investment.

3.     Verse 319 – “is presented below in Table 13.

Due to the changing layout of the text, please avoid in the manuscript the word “below”.

4.     Small gaps in the References section, e.g. the lack of the year of publication (No. 56).

5.     The authors draw over generalizing conclusions. Research conducted on the example of one area, in one city ... And the conclusions are meant to fit the whole world. In my opinion, it is not possible to draw conclusions for other countries on such a small, unverified sample.

6.     The work does not compare the results obtained with the results obtained on the basis of other known and already used methods in risk premium assessment (using scientific, technical and mathematical approaches. This would verify the results).

7.     The discussion section should refer also to the results of other authors.

Author Response

We appreciate the comments and the relevant suggestions of the Reviewer. These suggestions are assumed and incorporated.

1. Figure 3 – city limits are not visible.

A strange map - probably with some investment, this is not a typical pure topographic map. Blue line unexplained - maybe unnecessary? The map should be made using GIS. The base map should be a “pure” topographical map, and the analyzed area (boundaries, etc.) should be clearly marked (not general sketch).

Authors answer: A new Figure 3 is provided, made through GIS. The study area and the limits of the city are expressed in the legend.

2. Figure 5 - The map should also show the surroundings of the analyzed area (buffer zone). All symbols and colors visible in the map window should be explained (also those in surroundings of the analyzed area). The nearest neighborhood also affects the the risk

premium value of investment.

Authors answer: A new Figure 5 is provided. In fact, the near environment also affects the risk of the investment, and is taken into account in the analysis of the variable V1- Location. The paired comparison matrix of the variables is provided.

3. Verse 319 – “is presented below in Table 13.

Due to the changing layout of the text, please avoid in the manuscript the word “below”.

Authors answer:  the former line 319 corresponds with the current 395, in which the word “below” is replaced by “in the next table”.

4. Small gaps in the References section, e.g. the lack of the year of publication (No. 56).

Authors answer: The references were revised. Therefore new references were added.

5. The authors draw over generalizing conclusions. Research conducted on the example of one area, in one city ... And the conclusions are meant to fit the whole world. In my opinion, it is not possible to draw conclusions for other countries on such a small, unverified sample.

Authors answer: The Conclusions are reviewed to incorporate the Comments of the Reviewer. They show that the exposed methodology has been used to calculate the risk premium for the valuation of urbanizable land within the studied sector. It also reflects that it could be extrapolated to other areas, obtaining different results, depending on the analysis of the influence on the risk of the variables considered.

6. The work does not compare the results obtained with the results obtained on the basis of other known and already used methods in risk premium assessment (using scientific, technical and mathematical approaches. This would verify the results).

Authors answer: A comparative analysis of the proposed model is carried out with other methods used to estimate the risk. The results obtained are analyzed with those of other works.  It is verified that they are effectively within the range of values collected in other works for the building sector in Spain, providing citations of the corresponding references

7. The discussion section should refer also to the results of other authors.

Authors answers: The Discussion section is extended to refer to the results of other authors, which are cited. The references were expanded.

Author Response File: Author Response.pdf

Round 2

Reviewer 1 Report

The paper was modified according to the previous suggestions, but it is still unclear how the experts panel’s judgments were considered.

On the contrary, in the last manuscript the paragraph was deleted and it was only written "consider the opinions of experts in the building sector" and it is not explicitly stated who expressed the judgements in the comparison.

You wrote just in the answer “the judgments are the result of the sharing of the perceptions of experts in the building sector. After considering these opinions, the author reaches the pairwise comparison matrix”. However this answer is not satisfactory and affects the scientific validity of the model which cannot be defined as a robust one.

Author Response

                We appreciate the comments and the relevant suggestions of the Reviewer. These suggestions are assumed and incorporated.

 - “The paper was modified according to the previous suggestions, but it is still unclear how the experts panel’s judgments were considered.”

 ANSWER:

 It is clarified how the judgments of the group of experts were considered, incorporating the corresponding citations of works in which reference is made to the formation of the groups of experts to carry out the AHP.  The responsibility for the judgments has been shared equally among all the group members.

After, they came to the outcomes of forming a paired comparison matrix of the variables and a paired comparison matrix of risk levels - for each variable.

 - “On the contrary, in the last manuscript the paragraph was deleted and it was only written "consider the opinions of experts in the building sector" and it is not explicitly stated who expressed the judgements in the comparison.”

 ANSWER:

To clarify the participants’ on the judgments, a new table was added (Table 2). At table 2, is presented the formation and characteristics of the group (with their expertise and number). 

 - “You wrote just in the answer “the judgments are the result of the sharing of the perceptions of experts in the building sector. After considering these opinions, the author reaches the pairwise comparison matrix”. However this answer is not satisfactory and affects the scientific validity of the model which cannot be defined as a robust one.”

 ANSWER:

The expert´s perceptions were used to perform the analysis of the variables that influence the risk of investment. Each expert develops its hierarchy and makes its assessments - through the application of the geometric average, the group valuations results was obtained [42, 46]. Therefore, the paired comparison matrix of the variables and the paired comparison matrices of the risk levels are formed.

This manuscript is a resubmission of an earlier submission. The following is a list of the peer review reports and author responses from that submission.

Round 1

Reviewer 1 Report

The paper presents a model to assess the risk premium corresponding to four different land development stage by using the Analytic Hierarchy Process with the aim to provide specific risk rates to appraise land value along the time. The paper provides also an empirical application to a land in Badajoz (Spain).

The paper focuses on an interesting topic, the methodology is well described but it is necessary to make some corrections.

Especially in the abstract and conclusions, embedding and explaining the aim of the paper more clearly and how to relate the findings to other comparable cases.

I suggest the following revisions:

Rows 23-25 the findings of the study should be described more clearly (to affirm that the premium risk decreases is too simplistic).

Row 117 It might be useful to add a plan of the city.

Row 124 Check the sentence “The sector doesn’t….”

Rows 123-129 As each country has different planning rules, it is needed to explain what are the coefficients in table 1. Is the coefficient value related to square metres?

Row 141 The linear interpolation is not always the best choice. I suggest to write just “through interpolation”, as this section describe a general methods, and to choose the best typology of interpolation according to the data. In the case study the linear interpolation is adequate.

Rows 189-90 The risk levels are described in comparison to the “market risk.” But which is this market? is it the urban market? or is it the regional or national one?

Rows 194-230 Check the numbers of the bullet points and words in table 2.

Row 252 “it can be”

Row 284 “Table 8”?

Rows 297-307 It is not immediate to understand how the RP_ì are obtained. The calculation of one of them might be added, as an example.

Row 381-386 It should be explained how to use the resultant premium risks, and to which massive assessment this methods might be applied.

It is not clear if the results can be used for the appraisal of other lands. If it is possible, what are the constraints? In any case the validity of the results does not last long, as all the economic and financial variables might vary.

Author Response

The performed reviews are at red color (text)

The comments and suggestions of the Reviewer were considered.

- Rows 23-25: The study findings are described in a more clearly way. Besides, it explains how and why the risk premium decreases.

- Row 117: A map regarding the study area location was added (Figure 4).

- Row 124: Revised.

- Rows 123-129: The coefficients’ are explained in Table 1. The table were extended by introducing new data relating to the area of the sector.

- Row 141: The linear interpolation is modified; in fact, a regression analysis is performed establishing the equation and the graph.

- Rows 189-190: The risk levels are based on the risk of the national market. It is considered the same as the local market, there is no fluctuations or risk mismatch between them.

- Rows 194-230: The numbers and data regarding Table 2 were confirmed.

-Row 252: Revised.

-Row 284: Revised.

- Rows 297-307: The manner of obtaining the Risk Premiums associated with the Risk Levels was explained. The formula for the calculation were inserted. The calculation of the risk premiums associated with the Risk Levels in the state S1 are added as an example.

- Row 381-386: The calculations were further explained.

Author Response File: Author Response.doc

Reviewer 2 Report

Comments

1.     The Abstract does not mention the study area.

2.     Is it necessary to refer to STUD? Why is not the SD concept enough? The introduction section does not explain or justify it.

3.     The text of the manuscript is underdeveloped. Some errors are annoying and ambarrassing. i.e. about the location of study area.. (“We’ve targeted an area on the southeast of Europe for the study”??? Spain is not the southeast of Europe…), what is exactly most important in the sentence… “The Guadiana river crosses the city, one of the most important of the peninsula” ?

4.     The text lacks information about formal and legal conditions (possibilities) of investments implementation in Spain…Is the planning and spatial development law in Spain different in each region?

5.     „The development stages” should be described more in detail and showed on a map of  study area. What these areas stand out. It is worth adding an orthophotomap, picture…

6.     Study area should be described more in detail. Also Figure 2 should be changed. The province of Extremadura and Badajoz municipality should be marked. In the Figure 3 the exact limit of the study area should be marked. Legend, scale etc. is aslo missing.

7.     What exactly do the symbols mean: SUB-CC-6.1-5?

8.     Please explain what kind of document is the City Urban Planning? What is its purpose, on what scale it is developed. Which year is it from? The planning considerations in the analyzed area should be explained in detail.

9.     Please explain: How were the parameters for table 1(Sector Urban Use Conditions.) calculated? What does the analysis of the sector have to do with the research area?
What area was analyzed? We do not know the exact boundaries, area in ha…

10.  What was the knowledge of the research area by the 12 experts ??? Why, among the 12 experts, there are no sociologists of the city? What decided about the selection of experts?

11.  Discussion of the results is very poor. Why are the conclusions not in a separate section? The discussion section compared to the introduction is short and refers to few authors. Conclusions should be drawn in points (if possible).

Author Response

The performed reviews are at red color (text)

The comments and suggestions of the Reviewer were considered.

1.- The study area was mentioned in the abstract.

2.- Revised. However, in the proposed scheme, the existing link between the estimation of the risk premium for the valuation of the land with urban development with sustainable urban development is justified.

3.- Revised.

4.- The requested information was expanded.

5.- The considered urban states are described in more detail.

6.- Revised, and new figures were added.

7.- Clarified the meaning of - SUB-CC-6.1-5.

8.- The Plan typology was explained in a more detailed way.

9.- Further explanations were added.

10.-  The experts' panels were further explained.

11.-  The discussion was extended.

Author Response File: Author Response.doc

Round 2

Reviewer 2 Report

1.     My note No. 2 has not been properly taken into account. “Is it necessary to refer to STUD? Why is not the SD concept enough? The introduction section does not explain or justify it”. It is not enough to shorten the name of the term…It is simply incorrect!  Sustainable Territorial (SD) is not the same as Sustainable Territorial and Urban Development (STUD).  Which authors use only a short form of SD? The SD abbreviation usually means a Sustainable Development. I did not meet with the concept of Sustainable Territorial (ST?) in literature… If, it occurred as Sustainable Territorial  Development. There is still In the introduction section, you still need to explain why it is applied in the article STUD, (not only sustainable development - SD) and what exactly it is about (Citing specific explanations of other authors).

2.     Figures 2 and 3 should be combined. But Figure 2 only in the window as a background ... In figure 3 please add the administrative division of the region.

3.     Figure 4 – there should also be exact boundaries and scale, also the city limits

Figure 4,5,6, - add what map is in the background and specify the source.

4.     rows with formulas (378-380 and 329-330 ) should be moved to the methodology section.

5.     Please add under each table (Figure) source (or “own work”)

6.     The discussion section should refer to more authors (papers).

Author Response

TO THE REVIEWERS

Round 2

The requested reviews are in Green text

Reviewer 2:

Many thanks for the comments which in fact enriched the manuscript. Thus, the comments and suggestions of the Reviewer were considered.

1.- Changed “Sustainable Territorial and Urban Development” (STUD), for “Sustainable Urban Development” (SUD).

2.- We've merged Figures 2 and 3. In this new figure (fig. 2) is exposed the regional administrative nomenclature.

3.- The new figure 3, has now the city boundaries and scale.

4.- The formulas have been moved to the methodology.  

5.- Below each table we put reference from where it has been collected; and, in case of own elaboration – we also identify it.

6.- We have added new references to the discussion section.

Once again, thanks for the comments and recommendations.

Best,