Avoiding Cultural Gaffes while Appraising Abroad

British innkeeper Basil Fawlty [actor John Cleese] is confronted with an "ugly American"

 

 

One day in Perth, Australia, my Australian hosts and I had some time to kill between property inspections and we settled at a pleasant riverfront café at about 11 am.  Not quite ready for lunch, but having already had breakfast, I asked only for orange juice.  Then I immediately asked if it was “fresh-squeezed”.

 

My hosts immediately asked if I was trying to re-create a classic scene from the BBC sitcom Fawlty Towers, the famous 1979 “Waldorf Salad” episode in which an obnoxious American comes to visit.  I even remembered that episode, particularly since it was the first time I had seen Americans parodied in foreign media. This American from California was portrayed as demanding and belligerent, finishing his demands with the phrase, “or I’ll bust your ass!” And he and his wife insisted on fresh-squeezed orange juice. That episode was hilarious, but it did make me feel uncomfortable wondering if that was how the rest of the world perceived Americans.

 

As a southern Californian, I perceive one dividing line between better-quality and lower-quality restaurants is whether the orange juice is fresh-squeezed.  God knows we have enough oranges in this state, so when the waiter pours the orange juice out of a carton that says “Florida” I judge the restaurant to be “not really trying”.  Traveling in Mexico, I have found that restaurants there would never even think of not squeezing oranges. Naturally, I do not expect oranges to grow in England, but Perth, Australia looks so similar to a California city, with its palms and eucalyptus trees and waterfront, similar to San Diego or Long Beach, that I was disarmed into thinking that fresh oranges would be present.

We had a good laugh, but it was not the only cultural gaffe I’ve made while traveling in Australia.  On one hand, I have found Australians to be refreshingly down-to-earth and approachable, but have mistakenly assumed that this informality extended to attire. Last year, for instance, I again found myself in Perth on a 40 degree Celsius day (104 F), wearing a tank-top, and I spied a lively bar with a t-shirted crowd across from my hotel and tried to enter, but I was refused admittance by the doormen.  At first, I couldn’t even understand what they were talking about, as they use an Australian slang word for tank top, but then I realized that I had seen no one wearing a tank top that day and that I was underdressed for summertime Australia. Bear in mind that I live in a city (L.A.) in which I can dine at a $100 per person restaurant and not have to wear socks.  (We have a surreal culture which has adapted to the demands of imperious Hollywood stars.  If Rob Lowe doesn't have to wear socks at a 5-star restaurant, why should the rest of us?)

 

Likewise, I have been glad that I packed a business suit on my Australian trips, as there are more situations requiring it over there than here in the U.S. I even did a couple of guest lectures at an Australian university and noticed that the Australian faculty wore suits and ties.  If only they could see how California college professors dress – not much differently than their students.

 

Mexico

 

There are many Americans who misunderstand Mexico.  Despite negative portrayals of Mexico in our news media, the concept of courtesy is stronger there than it is in America.

 

Even the poor people practice courtesy.  Once, when I was inspecting a contested property with a Mexican appraiser and his colleagues, we were greeted by residents of a local ejido, a commune composed of agrarian peasants, who politely asked why we there.  When we explained that we were performing a valuation for the owner of the property, they courteously explained that the property belonged to them instead.  No shouting or cursing was involved, unlike the last time I inspected a trailer park in Bakersfield, California.

 

Another time I was traveling in Mexico with another American (not my employee) and three Mexicans, and I felt like my American colleague was raising their eyebrows with his bossy behavior, calling the shots on when and where we would meet and eat and pause for souvenir shopping.  We met for breakfast on the second morning, and although I ordered bistec ranchero (steak ranchero), I received huevos rancheros (eggs ranchero) instead.  My American companion was outraged for my sake and thought I should have had the meal returned to the kitchen, but I was satisfied to eat huevos rancheros to avoid an international incident and any unfavorable impression of Americans, all the while understanding that he came from a city where it is acceptable behavior to stand up and shout “Where’s my f***ing cheese steak?”

Every culture has its blind spot, including our own. Once I was with an American who expressed his moral indignation at the sport of bullfighting. A Mexican responded with "We Mexicans find it strange that you Americans treat your house pets better than you treat your own children."  Touche'.

Traveling abroad, I am sometimes offered food that could be considered strange to Americans, particularly when traveling in China, where I’ve been served snake, dog and donkey meat, but I cheerfully eat it and say “Thank you.  It’s delicious.”  I consider respect for other cultures to be part of appraiser professionalism.  It is also keeps an appraiser's mind open to differing concepts of value in other cultures.

 

 



The Beijing Gateway Plaza fraud controversy

Almost any real estate valuation report in the world has the same “limiting condition” buried within the report which reads more or less as follows:

“We have relied to a very considerable extent on the information provided by the owners and have accepted their representations of tenancy, occupancy, financial performance, site area and floor area, which we assume to be true and accurate. We take no responsibility for inaccurate client-supplied data and subsequent conclusions related to such data.”

What if the property owner lied, though? Then, the accuracy of the valuation is compromised. This is a problem the world over, particularly when the property owner is the one who hired the valuer.

This week’s lawsuit by Tin Lik, a Hong Kong developer, against the trustees of the RREEF China Commercial Trust is an interesting example of the consequences of misrepresentations. This lawsuit came immediately after the June 30th judgment against Tin Lik in the case of HSBC Institutional Trust Services v. Tin Lik, decided by The High Court of the Hong Kong Special Administrative Region.

HSBC Institutional Trust Services was the trustee of the RREEF China Commercial Trust, a Hong Kong REIT having the Beijing Gateway Plaza office complex as its sole asset. On June 4th, 2007 the Trust bought Gateway Plaza from Tin Lik based on Tin Lik’s representations of rental income, representations which were discovered to be false by the newly appointed REIT manager, RREEF China REIT Management Limited, who then calculated the financial value of the discrepancies to be HK$278,526,708. These discrepancies and the estimation of financial loss were later reviewed and confirmed by an independent subcommittee which included an un-named international accounting firm.

On September 7, 2007, Tin Lik agreed to pay the full sum of HK$278,526,708 and promised to make further payments if that sum was later found to be insufficient. Such an action is tantamount to a guilty plea.

A new valuation of the property was done on September 30, 2007, establishing a value of HK$3,699,000,000. After taking into consideration the HK$278 million already paid by Tin Lik, the Net Asset Value attributable to all the unit holders was still HK$69,663,000 lower than if the rents had never been misrepresented.

The Sale and Purchase Agreement by which the Trust acquired Beijing Gateway from Tin Lik established monetary “set-offs” for other discrepancies as well, such as breach of warranties. Tin Lik had warranted certain equipment such as lifts (elevators) and HVAC as being in good repair and reasonable working order, having been regularly and properly maintained and not dangerous or obsolete, but some of the equipment had to be repaired or replaced.

There was also a guarantee of billboard rental income of RMB35 million for the first year, 38 million for the second year, and 40 million for the third year, but the tenant defaulted.

Based on the breach of warranties, the REIT manager calculated further “set-offs” due from Tin Lik as being:

HK $216,890,160 in 2007
HK $ 35,270,591 in 2008
HK $ 11,533,376 in 2009 and
HK $ 12,902,544 in 2010, which adds up to HK$276,596,671 additionally due to the Trust from Tin Lik.

Tin Lik disputed the set-offs and on May 20, 2010, sent a letter demanding repayment of the HK$287,497,000 he paid on September 7, 2007 to settle discrepancies related to rental income. Unfortunately, the property was sold to Mapletree India China Fund on February 3, 2010, and after the sale, a Special Resolution of the unitholders was passed on March 31, 2010 to terminate the Trust and delist it from the Hong Kong Stock Exchange.

Tin Lik is now contending that he was coerced into admitting fraud and making the HK$287,497,000 payment to the Trustees in his new lawsuit, which seeks to recover that payment.

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Hong Kong: Lofty Housing Prices, Low Capitalization Rates

As a global financial center, Hong Kong ranks third and is rapidly catching up with New York and London, bringing in expatriate financial workers to fuel the Asian financial expansion, as Hong Kong is clearly the financial hub of the Asia-Pacific region. Its shortage of land also has created some of the world’s highest real estate prices.

In a recent government auction of land, for instance, three sites sold for a combined price of about $700 million. Sung Hung Kai properties, for instance paid $4.49 billion Hong Kong Dollars, or about $577 million USD, for the sloping 3.63-acre former Lingnan University site, equivalent to $1160 USD psf of land or about $3650 USD per buildable square foot, as the maximum allowed buildable area is only about 180,000 square feet. Completed homes, having views due to the slope of the site, are forecasted to sell for over $5000 USD psf.

China Overseas Lands bought a 30,237sf site in Kowloon for HK$578 million, or about $74 million USD, equivalent to $2458 psf of land. They expect to build only ten houses, which will sell at a price of over $3000 USD psf. The price per buildable square foot is $1850 USD.

While these land prices might not seem high by Manhattan standards, when one considers the low density zoning, the price per buildable square foot is much higher than Manhattan.

Real estate prices have been rapidly climbing in sympathy with near-record sales prices, and a high-floor condo near Lingnan University recently raised its asking price to over $3000 USD psf, with other sellers reported to be increasing their asking prices from 10 to 30%.

The highest recent home sale, at 20 Peak Road, was HK$750 million, or almost $100 million USD, equivalent to the highest residential sale ever achieved in the U.S. The average luxury home price psf was estimated by CBRE at HK$21,351, or about $2700 USD per square foot, 14.5% higher than one year ago, and the overall residential property index jumped 24% from one year ago.

Meanwhile, just as in Beijing and Singapore, the Hong Kong government is taking extra measurements to prevent a housing price bubble fueled by speculators, instituting a 5 to 15% tax duty on residential resales within two years of purchase, and lowering LTV (loan-to-value ratios) to 50% on all non-owner-occupied residential properties, in addition to the aforementioned auction of government land (although the balance between supply and demand could have been improved with some up-zoning).

The vacancy rate for the luxury rental market was last measured by CB Richard Ellis at 1.9% and falling as highly paid financial industry workers are imported into Hong Kong.

The highest reported recent house rental was about $25,000 USD per month for a house at The Peak, and the highest flat rentals have been at about $20,000 USD per month. CBRE estimated the average rent psf for luxury flats at HK$37.70 psf, or about $4.75 USD psf. Serviced apartments, a typical housing option for a visiting expatriate, are leasing in the range of HK$44 to $57 psf per month, 13% higher than one year ago..

As for multifamily investment, unleveraged yield rates are now below 3%, fed thus far by ultra-low mortgage interest rates by local banks, lower than 1% until recently, but some lenders are now starting to raise rates, with Hong Kong Financial Secretary John Tsang warning consumers and investors not to count on cheap credit forever. Meanwhile, mortgage interest rates are also increasing in mainland China.

Is the Hong Kong housing market a bubble waiting to burst? Housing prices were actually slightly higher in 1997, before the Asian financial crisis of 1998, which was started by a real estate bubble in Thailand. This time, the Hong Kong government is doing its best to implement measures to achieve a “soft landing”, legislating conservative LTV ratios and short-term gains taxes unheard of in the United States.

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Beijing housing shortage

Typical Danwei-type housing for middle classes

Luxury housing for upper classes





Beijing is one of those boom towns that suffers from a severely constricted housing supply, despite valiant state planning efforts. Whether in a centrally planned economy or an exclusively market-driven economy, though, this is a natural occurrence that comes from rapid economic growth. Rapid growth is hard to plan for, although China has been known to build residential communities in anticipation of growth, sometimes prematurely, such as the Zhengzhou New District.

The Government is encouraging both public and private housing development in an effort to solve the housing shortage. The “which is better, Communist or capitalist housing solutions?” debate was answered a generation ago by Deng Xiaoping, Mao’s second successor and architect of the modern Chinese economic miracle, who quoted a Szechwan proverb that it matters not whether a cat is black or white; if it can catch mice, then it is a good cat. This saying particularly resounds with me, as I have a black and white cat that catches numerous rodents, brings them into the house, and then forgets to kill them. Not a good cat.


"Chairman Meow" - Feline founder of a rodent "catch and release" program -- caught outdoors, then released into the Martin household. In debating communist vs. capitalist solutions to solve housing needs, Deng Xiaoping quoted a Szechuan proverb that it matters not whether a cat is black or white; if it can catch a mouse, it is a good cat. Deng may have been right about many things, but wrong about my cat. Both black and white and catches mice, but fails to kill them. Not "a good cat". Realistically -- is this the face of a mouse-killer?


High housing prices and rents

A joint Wharton/National University of Singapore study found that housing prices increased by 225% in the last 8 years and Beijing land prices increased by 800%.

There are anecdotal reports that Beijing housing prices average 27 times annual household income. Unlike in the Western world, mortgage loans are limited to no more than 50% of value; nevertheless, additional leverage is often obtained from close relatives.

In an American city, housing prices at 27 times annual household income would be a precursor of a bubble waiting to burst, but only because American housing purchases have become highly leveraged investments in which the homeowner can quickly owe more than the house is worth, incentivizing the homeowner to walk away from his home via foreclosure, short sale, or deed in lieu of foreclosure. It’s harder for a Chinese homeowner to walk away from substantial equity or loan obligations to family members.

The Chinese housing model is less dependent upon leverage, while the family residence is considered to be the most secure asset a family can own. This environment also attracts speculators, which the Government continues to try to quell with new policies to curb housing price inflation, most recently tne "Eight National Measures" whose policies include 1) no bank financing for third home purchases, 2) minimum cash down payments of 30% for first home purchases and 60% for second home purchases, and 3) restricting home sales to only "registered residents".

The hukou system classifies citizens by their place of origin, thus limiting their mobility or restricting the right to services in the cities they move to. Preferential treatment is extended to "registered residents". It creates an almost apartheid system pitting rural vs. urban residents. The hukou system of classifying residents limits home purchases in cities with housing shortages to "registered residents" or "migrant residents" who can establish that they have lived and paid taxes in the city for at least 5 years. ("Migrant residents" have become marginalized similarly to illegal aliens in American and British societies.)

The sale of homes held less than 5 years is also taxed. The Central Bank has also raised bank reserve requirements 16 times over the last year and a half to rein in bank lending. Reserves are now required to be 21.5% of deposits.

Residential rental property investments are also priced very high, with sales prices reflecting annual gross rent multipliers exceeding 40 -- even higher than in Singapore or Hong Kong.

The China Daily reports a study by the Chinese Academy of Social Sciences that property prices in Beijing and Shanghai are 30 to 50% above market value. Their definition of market value obviously differs from that of other countries, as "market value" usually represents the price that a property would sell for under ordinary arm's length conditions, a definition commonly used in the U.S. The idea that everything is selling at above market value suggests a different definition of market value than held in the U.S.

With the Beijing housing shortage, the renter is in a particularly difficult position. One computer graphic designer explained to me that he pays about 70% of his monthly income on rent for his Beijing apartment, a rent equivalent to about $1000 USD per month, double what he was paying 5 years ago. He explains that recent college graduates often form groups of 6 or even 8 to rent one apartment, dividing the living room into individual living units.

Those who might consider Beijing housing prices to be a bubble, should take note that most bubbles collapse from falling demand or supply increases well in excess of demand, which so far does not seem to be occurring in Beijing. In American housing bubbles, one can observe that the most supply-constricted markets, such as Manhattan or San Francisco, suffer the least depreciation in economic downturns. One thing that prolongs the Chinese Bubble, too, is the lack of property taxes, which makes carrying costs low for real estate speculators. This is starting to change, now, with the cities of Shanghai and Chongqing instituting residential property taxes, with assessment rates ranging from .4% to 1.2%. This could curb speculation, although Chinese investors have few other choices of investments; Chinese stocks are considered riskier investments than housing and are down about 25% this year.

One interesting twist to the Chinese housing market is that all properties are leasehold. The residential land leases from the government are 70 years in length. As is customary with leasehold properties, improvements must be removed by the end of the lease. This creates interesting repercussions for the Chinese housing market. What happens to resale value after a few decades? Will family heirs have considerably diminished hereditary rights to housing? What resale values are possible for older homes nearing the end of their 70-year leases? It will be interesting to watch this grand housing experiment.




An answer to the overpopulation problem? -- from engrish.com

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