ECONOMICS UNIQUENESS

INVESTING IN THE SENSE OF PLACE ■ 25
Th e urban economics approach provides the basic model to value a property
in the intervention area. A general expression is of the form:
ΔV i = f(I i , ΔH i , U, ΔV – , ΔH – )
Th e fi rst argument in the hedonic price function above is total investment
I i on the property, some of which can be funded by the transfer T i provided by
the project. Th e second argument, ΔH i , refl ects the outcome of private decisions
related to the heritage value of the property itself. In the case of generic buildings,
there is no decision to be made: it can be safely assumed that their heritage value
is nil both before and aft er investing, so that ΔH i = 0. Th e same applies to buildings
with architectural value if their owners decide not to alter their character; on
the other hand, demolition of the buildings or an intervention that substantially
damages their key features would imply ΔH i < 0.
Th e last three terms in the hedonic price function embody what that wellknown
phrase “location, location, location!” means in real estate parlance. One of
them captures the increase in the quality of the surrounding urban infrastructure,
which is a function of project spending U on access to water, improved sanitation,
and the like. Th e other two, common in the empirical literature on hedonic
pricing, refl ect the change in the average market price of properties in the area
of intervention as a result of the project and the average change in their heritage
value, ΔV – and ΔH – , respectively. Th ese two variables are directly related to the
benefi ts of the project to society as a whole, ΔV and ΔH, with the bar on top of
them simply indicating that they are computed as averages over all the properties
in the area of intervention.
All partial derivatives of this hedonic price function are positive, which means
that an increase in the value of any of the fi ve arguments results in an increase
in ΔV i ; conversely, everything else being equal, a decline in the heritage value of
a property reduces its market price. Th e second derivative of the function with
respect to I i is supposed to be negative. Th is means that spending twice as much
on a property does not result in a doubling of the associated capital gains.
Local residents and outside developers have to choose the value of their spending
I i that maximizes their profi t P i , taking the net transfer T i from the project as
given. Th ose with property rights on buildings with architectural value also have
to decide whether to preserve them or to demolish them (or undermine their
historic character in some other way). Th e expression of profi ts at the individual
level is the same as the expression of private returns P at the aggregate level:
P i = ΔV i − (I i − T i )
However, there is an important diff erence between maximizing private returns
at the aggregate level and maximizing profi ts at the individual level. Th at diff erence
stems from the fact that individual investors take the change in the property