Showing posts with label international appraisal. Show all posts
Showing posts with label international appraisal. Show all posts

Sunday, February 18, 2024

The Effect of Chinese Government Policy on the Failures of High-rise Residential Towers in Los Angeles and Other World Cities


Graffiti-clad Oceanwide Towers in LA

In March 2019 I reported on the failure of three 40-story residential towers being built in downtown Los Angeles. (https://www.internationalappraiser.com/search?q=oceanwide) Lendlease, the Australian general contractor, had rocked the LA real estate world by announcing that it had halted construction on Oceanwide Plaza over unpaid bills. The interior remains to be built. There were rumors that the lender had pulled out of the project, but no explanation of why. A press release from China Oceanwide explained the need for capital restructuring and that construction would resume in February 2019. With my own eyes I see the project rotting and covered in graffiti five years later in February 2024. Its location is less than ideal, being across the street from a sports and concert arena occasionally plagued by basketball riots.

At the same time, similar residential towers in LA, New York, Malaysia, Australia and Vietnam, among other countries, have also been failing, towers which were effectively being built for Chinese millionaires trying to get their money out of China. Most did not intend to occupy their new condos.

The Towers of the Waldorf Astoria, developed by Chinese Developer Dajia, is one such project that is also languishing without sales for its 374 units. The Chinese government seized the insolvent Anbang Insurance Goup to sell off its U.S. hotel assets, acquired for $7.45 billion during 2014 to 2016, which includes the Waldorf Astoria Hotel in New York at a price of $1.95 billion. 

One of my first blog posts in 2010, now deleted, was the Forest City development on the Iskandar peninsula of Johor Bahru, Malaysia, and directly across the strait from Singapore. This particular luxury project was also directed towards Chinese investors. I went to an international property buyer conference in Singapore in 2010 and found this to be the most heavily promoted project at the conference, but the scale seemed outrageous in scope -- $100 billion to build 300,000 homes on 4 man-made islands off the southern coast of Malaysia close to Johor Bahru, a bedroom community to Singapore. I deleted my post after being told “Don’t count out Chinese investors!” 
Nowadays, only a fraction of these homes have been built, and most that have been built are still vacant. In hindsight I was really being told not to count out lemmings, even though lemmings can be counted on to eventually jump off the cliff. 

There are two major Chinese government policies that have slowed the demand and financing for such projects:

1. Chinese capital controls on citizens, instituted at the end of 2016 by Chairman Xi Jinping, are preventing the necessary funds from leaving China. The purpose of the new regulations was to reduce “irrational outbound investment.” China has been cracking down on capital flight, characterized by Chinese investors purchasing foreign condos, perhaps to place ill-gotten gains away from capture or perhaps due to distrust of the government. The PRC wants the money back. One expert estimated that the ratio of outbound Chinese capital (back to China) to inbound capital was about 10 to 1 at the time of my last blog post in March 2019. These same controls have caused other Chinese developers to place their North American assets for sale. Greenland, developer of a similar project called Metropolis, a few blocks north of Oceanwide Plaza, placed one of their three residential towers plus their Indigo hotel for sale. 

 2. The “Three Red Lines” policy. This might sound like a cute maxim from Chairman Mao, but it is actually sound banking policy instituted by Chairman Xi Jinping back in 2020. The three red lines are: debt-to-cash, debt-to-equity, and debt-to-cash. If a developer wants a loan from a Chinese bank, these tests must be met. These new controls have sent some major Chinese developers, such as Evergrande and Oceanwide, reeling into bankruptcy.

3. The Communist Party policy switch to "Common Prosperity" in August 2021.  This follows the famous open door policy started by Chairman Deng Xiaoping in 1978, igniting unbridled capitalism with the proclamation, "It is glorious to be rich!" The switch to "Common Prosperity"  is to "reasonably regulate excessively high incomes, and encourage high-income people and enterprises to return more to society.” This might not be good for real estate developers.

Indeed, the Minister for Housing and Urban-Rural Development promised no bailouts for real estate developers, stating "For real estate companies that are seriously insolvent...those that much go bankrupt should go bankrupt or restructured."

Now China and Chairman Xi are facing an American-style real estate collapse, too. The Chinese government did what they had to do, but too late. It was like taking the punchbowl away from a festive party that was already out of control. 

As for the outcome of Oceanwide Plaza, I laid out the following scenarios back in 2019: 

1. A white knight lender from outside China will provide necessary funds to finish this project, 

2. The property will need to be auctioned off to a more solvent owner, 

3. Or in the worst case, if building and safety laws were allowed to continue to be violated, Oceanwide Plaza could end up being 3 decaying 40+ story hulks sullying the downtown L.A. skyline. Scenario number one was a possibility back in 2019. I had at least two inquiries as to whether I wanted to appraise the property, but the clients changed their minds. So, what we see today is Scenario number three, with 40-story towers covered in graffiti and serving as jumping bases for wannabe “spidermen” and their YouTube audiences.

Friday, December 24, 2021

Appraisal in Panama

Looks like rice cultivation

This was a litigation situation in Panama in which 3 different Panamanian appraisers had already appraised a group of agrarian properties which were near each other, with the highest appraised value more than 5 times the lowest appraised value. I was asked to make an independent appraisal.

Two appraisals had been done for the respective litigants, and one had been done by the Panamanian government. One of the litigant’s appraisals and the government appraisal quickly became suspect when it became obvious that these appraisers had not visited the properties. One property was actually a revenue-producing rice farm, and another was a residential property, but two of the three appraisers did not know this, casting doubt upon their inspections of the properties. If they had just consulted Google Earth, they would have seen the rice cultivation and the residence.

My appraised value came in second highest because I was only one of the two appraisers to notice a rice farm instead of a vacant agricultural parcel. I elected to use local comps (from the same “corregimiento” which translates as “township”) rather than use superior locations outside of town.

Thursday, October 21, 2021

Appraisal of Coastal Land on a Pacific Island

Notice the proximity of the cliffs and the calm, reef-protected waters. 


Some of my appraisal assignments call for “second opinions”. This one called for a third opinion, as appraisal reports had been respectively submitted by two MAIs who resided on the island. The estimates of value were more than $50 million apart. Who was right? Who was wrong? 

A survey measuring more than 250 acres had been done 8 years previously after an assemblage of smaller lots had been rezoned to hotel use. This survey was officially accepted by the local government, but the survey had a strangely unprofessional appearance. The survey was two-dimensional except for a central portion of the site which was described as “cliff face area” and drawn 3-dimensionally, including ravines within the cliffs, and this area was given a significant amount of site area, 63.5 acres, even though the cliffs appeared to be almost vertical. Had “vertical” become the “new horizontal” on this quaint island? Upland area had been measured at 110 acres and beachfront area had been measured as 105 acres.






Survey  
These cliffs are mislocated on the survey

Google Earth now gives us tools in measuring land, and the differences between the satellite view and the survey were quite apparent. The survey showed the cliffs by the shore at only the northernmost part of the property, whereas they seemed to be touching the shore in 3 different places from south to north in the satellite photo. 

Measuring all site area below 50 feet in elevation, I found only 36 acres of beach land, not 105 acres. 

Surveys of tropical beaches often have to be redone every few years due to beach erosion or accretion as a result of tropical storms, and this island experiences plenty of storms, but the loss of 70 acres of beach land seemed to be too much to be believable for a coral reef-protected beach like this one. 

I had to conclude that the survey was inaccurate to begin with, due to its strange measuring conventions, seemed almost to exaggerate this site's beach land and overall site area. 

In addition, as I have constantly maintained on this blog, the most accurate technique for valuing beach land is the use of “price per lineal meter” or “price per lineal foot” as the unit of comparison. The use of price per square foot or price per square meter yields less precise results, as the value on the beach side of the property is so much more than the value of inland area. Every statistical analysis I have done indicates that price per lineal measure provides the least variance among possible beach land valuation results. 

Nevertheless, the appraisers were both using price per square meter as their metric. I asked one why, and the response was that there was no public data on beachfront or waterfront length on this island, so price per square meter is what they felt that they were limited to.

For certain comparable sales and listings, though, there were satellite photos, some of which were sufficient to make estimates of the beach length. Some times using the right metric requires some extra effort.  The comps for raw beach land were in a range of $1650 to $2500 per lineal foot of beachfront.

That's enough of today's lesson, but I want to discuss the politics I sometimes have to contend with on foreign assignments such as this. The politics typically comes from loan salesmen and/or jealous, mediocre appraisers.

1. "These are the acknowledged appraisal experts for this island! They are MAIs! How dare you challenge their expertise in their own land. You are geographically incompetent!"

First of all, these grand poobahs did not even agree on value. One estimate was almost three times as high as the other one.  They did not even measure the length of the beach, the most important part of the property. They used outdated sales from prior to the pandemic, and did not notice beach property listings at much lower prices than yesterday's sales. I have always wondered why The Appraisal of Real Estate, the most comprehensive real estate appraisal textbook in the U.S today, spends less than one paragraph explaining how listings can be used to estimate market value in declining markets.

I have had no prior experience with this island, but I have spent the last 15 years appraising beach properties in Fiji, Hawaii, Brazil, Barbados, Puerto Rico, the Dominican Republic, Costa Rica, Mexico, U.S. and Canada.  So that is my statement of geographic competency.


Saturday, March 28, 2020

A Recent Appraisal in Costa Rica's Zona Maritima




Most of the real estate in Costa Rica consists of "freehold" or "fee simple" interests in real property, or in other words, properties with titles, estimated to cover about 85% of the country.

The remaining 15% is leasehold land known as “concession properties”. Concession properties are considered desirable because they are at the beachfront, where titled land is not available.

All Costa Rican beach properties are located in what is known as the Maritime Zone, a 200 meter strip starting from the average ocean high tide line. The ZMT (Zona Maritima) is divided into a 50 meter strip closest to the shore known as the public zone, which cannot be privately occupied, and the remaining 150 meters can be applied for “concession” in the corresponding Municipality. 

Think of “concession land” as a “concession stand” at a ball park or a fair. All Concession land is leasehold land, with lease payments going to the municipality; it cannot be privately owned, but real estate developers and wealthy homeowners can lease and develop these properties profitably.

The subject property was zoned as a “Hotel and Touristic Zone”, which is a valuable zoning classification to have, and the owners wanted to develop it with a hotel, but the key to maximizing the value of the land is to have an already-approved hotel development plan in place, as it can take years to get a hotel project approved. Otherwise the concession is only worth half as much

PS: Next stop, Greece, or maybe not so, with the Greek nation on Coronavirus lockdown. Non-EU citizens are not allowed to visit until after April 18 and I could not negotiate a later appraisal deadline.

Thursday, December 20, 2018

Revisiting Jinbao Place and Beijing's Luxury Retail District

Jinbao Street is a premier luxury shopping street in Beijing, like Rodeo Drive in Beverly Hills. In its two-block stretch there are three 4 or 5-star hotels and Bentley, Ferrari, Maserati and Mercedes dealerships. In my return this time, I found an Aston-Martin dealership in the lobby of my hotel, The Regent.

Jinbao (translated as “golden treasure”) Street is the best-known destination for Beijing’s wealthiest shoppers.

Seven years ago, I reported on a struggling three-year-old, 40,000 square meter (430,000 square foot) luxury mall known as Jinbao Place which stood largely vacant on this otherwise busy street. Above the second floor in this seven-stories-above-grade mall, almost all the space was vacant. The seventh floor, the restaurant floor, had only a roast duck restaurant.

At that time, I thought the problem was that most luxury retailers had already saturated the Dongdan district that contains Jinbao Street and the famed Wangfujing pedestrian mall, anchored by the newly renovated Beijing APM mall, formerly known as the Sun Dong An plaza. There seemed to be an Omega watch store on almost every block.


What a difference seven years makes, though. I found the Jinbao Place mall to be at stabilized occupancy. I counted three vacancies and a good number of shoppers. This time I dined at a Japanese restaurant, noticing that their lobster dinner was priced at 2500 yuan (about $350).

The famed Wangfujing pedestrian mall, a few blocks west, was at full occupancy, as was the APM mall. This location seems to be at the epicenter of Beijing wealth. The only thing I can witness in several visits to Beijing is its continuing prosperity.

So I was wrong about this one in 2011.

Wednesday, November 14, 2018

Update on the Eminent Domain Case in Seoul











The dependent variable that the valuation algorithm solves for is the price per square meter of land area, not building area, because land in Seoul is worth far more than most buildings on it due to the shortage of land.
Notice that almost every input variable is a dummy variable. Dummy variables are binary variables with the value of 1 or 0, depending upon the presence or absence of a particular condition, such as being “adjacent to a narrow road”.
There are only two quantifiable input variables in this model: the land area and the distance to railways or highway. Missing from this model are so many quantifiable variables such as distance to subway stations, distance to shopping, distance to schools, quality of schools, floor area ratio (ratio of building area to land area), and land slope.






The Korean client’s lawsuit against the private taking ultimately lost in Korean courts, but the treaty between the U.S. and the Republic of Korea mandates an international arbitration for a U.S. citizen.  We expect to be heard at the International Arbitration Centre in Hong Kong.













Sunday, October 21, 2018

Why I Don’t Appraise in Antarctica



























Saturday, September 1, 2018

An Industrial Building Appraisal Done to both USPAP and RICS Red Book Standards















24) The observed condition of the foundation, roof, exterior walls, floors, heating system, plumbing, insulation, electrical service, and all other mechanical and constructions based on a casual inspection only and no detailed inspection was made.  The structures were not checked for building code violations, and it is assumed that all building components meet applicable building codes unless so stated in the report.  

Because no detailed inspection was made, and because such knowledge goes beyond the scope of this appraisal, any observed condition or other comments given in this appraisal should not be taken as a guarantee that a problem does not exist.  Specifically, no guarantee is made as to the adequacy or condition of the foundation, roof, exterior walls, interior walls, floors, heating system, air conditioning system, plumbing, electrical service, insulation, or any other detailed construction matters.  If any interested party were concerned about the existence, condition, or adequacy of any particular building or site component, we would strongly suggest that a construction expert be hired for a detailed investigation."