Regime uncertainty: Christchurch edition (continued)

By Eric Crampton 18/02/2013

Suppose you owned an earthquake-damaged Christchurch hotel. Suppose further that you’re trying to decide whether to rebuild in place, rebuild elsewhere in Christchurch, or take the money and run. If you’re inclined to stay here, do you rebuild now or later?

Hotels like being next to convention centres. The big central plan has a big convention centre in it. But nobody has said anything about who will own it or quite who will pay for it. In the absence of concrete funding arrangements, it would be pretty hard for our hypothetical hotelier to know what to do:

  • Rebuild now and hope that the Convention Centre goes ahead in the spot they’ve designated?
    • But what if nobody agrees to stump up the money and they go ahead with a smaller center someplace else?
    • And what if the somewhere else is just where you’ve already started building your hotel and compulsory purchase is an option?
    • You’ll get some rents in the interval before the other players move – there seem to be serious capacity constraints in accommodation. But the risks are pretty big too.
  • Rebuild later when you can be certain about whether the Convention Centre goes ahead?
    • You lose out on the rents you could have had in the interval, but hotels last a long time and getting the location wrong can be costly in the longer term.
Central and city government dithering over the convention centre can be pretty costly. It isn’t hard to imagine worlds where it’s better to have certainty that it won’t go ahead than uncertainty for another couple of years, even if we assume that convention centres are a good thing for governments to spend money on.

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