Friday, August 5, 2016

An Appraisal of a Commercial Property in Seoul, South Korea.

A wealthy Korean immigrant died in California and his will left a commercial property in Seoul solely to his only daughter, thereby disinheriting her brothers.  Two brothers traveled to Seoul to have a Korean court overturn the will and obtain partial interests in the building.  They succeeded.  The daughter, in turn, sued her brothers in California court for full ownership, as California Estate Law had been violated. She won.
My assignment was to review a translated Korean language appraisal that had been ordered by a Korean court, in order for me to figure out the damages her brothers had to pay her for stealing part of her inheritance, and testify to this in a California court.
I had been a speaker at a conference sponsored by the Korean Association of Property Appraisers in Seoul in 2008, and was familiar with some of their valuation methods and the differences there are with U.S. valuation methods.
Two differences are:
Land and improvements are valued separately.  This is similarly done in Germany and by U.S. tax assessors, and I’m finding it increasingly necessary in Los Angeles County, where land values are spiraling upwards, calling into question the highest and best uses of many older properties.
Because Seoul is built out and there is a lack of land sales, The Minister of Land, Transport and Maritime Affairs also compiles a “price announcement system” similar to that used in Costa Rica, and appraisers refer to a map to obtain land values. I often find that such price announcement systems fail to keep pace with changing market conditions, especially if created by a government bureaucracy.
These land values maps are overly general, too.  Theoretically, the appraiser should adjust the land value on the map for accessibility, size, market conditions and developability. This appraiser made no adjustments.
In this case no adjustment was made for a 4-story. 7736 square foot building that had no road access (see photo).  It was situated on a 241.3 square meter (2597 square feet) lot in Jongno-gu, which is one of the two wards that compose the central business district of Seoul. The building itself is situated behind and obscured by a taller building and thus had no street access or visibility.
The appraiser stated land value to be 12,210,000 Korean won per square meter, equivalent to $10,912 per square meter or more than $1000 per square foot.  I have seen such land valuations in Manhattan, and since Seoul is a city of 10.2 million people with twice the population density as New York, I did not immediately doubt such a figure.
Nevertheless, the zoning for the site allowed only one extra story of height, and the site was already fully covered.  Accessible only by alley way, there would have to be an assemblage of adjacent parcels if any type of redevelopment could be done.  This made a value of $1000 per square foot unlikely.
Although this building was classified as an office building, its employees were more likely to be employed as seamstresses than office workers.  The lack of vehicular access limited this property’s highest and best use. The size of the lot, less than 2600 square feet, was only about half the size of a typical residential lot, which is not conducive to high-density redevelopment, and the space between buildings was so tight that I could not get a photograph of the whole building in one frame.
To find comparable sales and listings I turned to the auction houses which publish details of their real estate auctions.  They typically publish the original reserve price, which is based on appraised value, and then subsequent reserve prices which are discounted by 20% each month until they attract bidders.  The subject property itself had failed to attract bidders at two auctions and the reserve price for the next auction is now set at 64% of appraised value.
When I saw superior Jongno-gu sites listed for sale at $500 per square foot and one closed sale at $422 per square foot, it suggested to me that a decline in land prices was underway and that the government’s price announcement system had not been kept to date and was forcing Korean appraisers to overvalue properties.  That may be why so many properties were not attracting bids at appraised value or 80% of appraised value.
Are there any factors that would lessen demand for commercial real estate in Seoul?  The Korean economy is at full employment and they report continually rising GDP.  One curious statistic, though, is the year-over-year decline in:
1.       Industrial production
     2.       Producer price index
     3.       Exports, and
     4.       Imports

In the end, the client still needed an opinion of value and I could not agree with the Korean appraiser's estimate of land value. Because land prices had considerably decreased, I went back to price per square meter of building area to find meaningful results. The most revealing data were similarly situated and sized commercial buildings in Jongno-gu, also lacking visibility and access, priced at below $270 per square foot of building area.
One hidden treasure in these alley ways off of the street are blocks of street markets and food stalls.



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