Monday, January 30, 2012

Appraisal in Perth, Australia

This is my third appraisal assignment in Perth. This assignment is similar to any appraisal of a Class C downtown office building in the U.S., only that Perth is experiencing classic “boomtown” economic conditions as a result of it being the corporate hub of the Western Australian mining industry. Chinese demand for Australian minerals has created a huge economic boom for this region, which had previously been languishing between the years of 1990 and 2005.

Price inflation in Perth has been so profound that a can of coke in a convenience store costs 2 Australians dollars (equivalent to $2.12 USD) and a McDonalds breakfast costs 3 times the price in Los Angeles. My host told me that his son is a truck driver earning $180,000 per year, and when I asked other Australians, they confirmed that it was an ordinary wage for Western Australian truck drivers. Some of my appraiser friends in LA would gladly cross the ocean for work paying like that.

The subject property is an older office building constructed in the 1960s and showing its wear. The owner has a plan to renovate the building into commercial condominiums (AKA “strata” in Australia and the UK) and a conditional commitment from an Australian bank once the renovation has been done. My client was to serve as a bridge lender in the mean time and was only interested in “as is” value, however.

The building is 92% occupied in a CBD office market with 96% occupancy, and is predominantly occupied by an English language school and a commercial fitness center.

An English language school is a good tenant to have in Perth, which is very much a city of immigrants. I did my own informal survey of the locals, asking “Are there too many immigrants in Perth?”, to which 28% responded “Yes”, 20% responded “No” and 52% responded “No speak English”. OK, I made this all up – just trying to keep you readers awake.

The main Perth office district, though, is located two blocks south of here on St. Georges Terrace and Adelaide Terrace (same street, two names), and includes high-rise office towers adorned with the names of major banks, whereas the subject is in a secondary, lower-density location of older buildings, some dating back to the 1920s, and can be characterized as a middle-income pedestrian retail environment. There are several nearby restaurants serving either Kebabs or Korean food, for instance.

As is sometimes the case in appraising properties slated for renovation, the owner wanted me to appraise the property as if renovated and subdivided into condos (or strata), whereas the lender was only interested in “as is” value, or what they could sell the property for tomorrow. Despite Perth’s booming economy, it is interesting to note that office buildings trade at capitalization rates in the 8 to 10% range, well above those of California, possibly indicating either that Australian real estate investors have less appetite for risk than U.S. investors or else that there is a feeling that the Western Australian gravy train might not last forever. The fortunes of this region are very tied to China, and if China sneezes, Perth could catch pneumonia.

PS: I've found another low-cost way to get to Australia from the U.S. (besides the unreliable Air Pacific) -- China Southern Airlines. The connecting point is Guangzhou. The Chinese air hostesses are eager to please, but haven't quite mastered conversational English. They serve meals in record time, but when they ask "May I take away your plate?" I found that my usual answer, "Not yet" sounds like "Yes" to their ears, as my unfinished meals got quickly and efficiently whisked away.

Upgraded to first class from Guangzhou to Perth, I was greeted by two airline representatives who were to promptly escort me through customs and security to the first class lounge. When I asked, "Is there food in the lounge," one representative replied, "I don't know about that." When I responded, "Could you let me stop at a restaurant first?" he then replied, "Oh, I thought you were asking if there were fools in our lounge." Rest assured, I am willing to share first class lounges with fools, as long as they are not children.

Be sure to watch the hilarious "in-flight exercise" videos, in which two robotic, unblinking air hostesses perform Tai Chi-inspired exercises while the narrator dispenses pearls of ancient Chinese medical wisdom for each exercise, such as "Subdue the liver, extinguish the wind." What wind would that be?

Next stop: Nayarit, Mexico.

3 comments:

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