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."

"We must avoid herds and bubbles"

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.

Appraisal of a Residence in Cuba

In the almost 14 years of writing this blog, my practice has shifted from large international projects financed by big lenders to smaller properties involved in estates and divorces. It’s often the case that the bereaved family or the spouse does not even know what Dad’s property or the other spouse’s property in the Old Country looks like, but they need a valuation, and don’t want to spend the money for me to make the trip there. This home in Cienfuegos, Cuba, is such an example. I sometimes have to turn to remote valuation methods instead. 

Google Earth sometimes works wonders but is not as complete or even available in some countries, such as Iran, Morocco or Cuba. In this instance I hired an English-speaking tour guide to visit the address and discreetly take photographs. It worked well because Cienfuegos is a tourist town on Cuba’s south coast. 

Another complicating factor was the need for a retrospective appraisal report for a date 3 years ago in a country which has no public database available and only a fledgling home sales industry. In situations like these I like to turn to Internet archives and hope to find real estate listings relatively close to the date of value. 

In this case, I was able to get my comparable listings from the DetrasDeLaFachada.com web site archives within a month of the date of value. Homes for sale at that time were listed in the Cuban Convertible Peso currency. From 1994 to the end of 2021, Cuba had a special currency, “Convertible Peso”, pegged to the U.S. dollar. The regular Cuban Peso is a completely different currency and is much less in value. The advantage of this pegged currency is that one is likely to be looking at the same value as if the home is sold in US dollars. 

Aerial photos were also helpful in comparing the locational differences of the comparables. Two larger homes in the Historic District were both for sale for about 714 CUCs per square meter, whereas a smaller home inland in La Gloria neighborhood was listed for only 500 CUCs per square meter. In coastal areas property values lessen as one travels inland, and one advantage of being closer to the water for many Cuban citizens is the refreshing sea breezes that can cool down the heat in homes without air conditioning. The Historic District, on the other hand, was judged to be slightly superior to the subject neighborhood.

The lesson learned here is that there are an increasing number of Internet tools available to help with remote valuation – Google Earth, Google Translate, Internet archives, real estate listings, ads from tour guides, English teachers, real estate salespeople, etc.

German Property Portfolio Valuation

 

Four story commercial property in downtown Hannover 

The actual valuation assignment was to appraise a one-half ownership interest in four rental properties in the cities of Hannover and Kiel in Germany. These were multifamily, mixed use and one retail property. 

These interests were inherited by a U.S. citizen, but the other half owner is German. 

To value a partial interest, one has to discount for an owner’s lack of liquidity, lack of control, lack of marketability and lack of mortgage financing. 

Finding comparable sales is extremely difficult, especially in a country of such strict privacy laws as Germany, and because only about one out of about every 500 property sales in western capitalist societies are of fractional interests. 

The ultimate intended user of the appraisal was the Internal Revenue Service, so the appraisal report had to be an English language report done by an IRS “qualified appraiser” who prepares an appraisal report compliant with USPAP, the Uniform Standards of Professional Appraisal Practice. Much of my international work is this kind – inheritances, gifts and the increase in tax basis to spouses of decedents. 

I used a technique known as “factor-based fractional discounting”, a technique developed by the Appraisal Institute, in which individual value factors are quantified and discounted, such as asset risk, profitability, condition, liquidity, diversification, size of interest, lack of control, quality of management and growth potential. I also had to do this method in my last jobs in Korea and Mexico as well as one of the French properties I handled in 2017.

The trip to Germany took place during the New Year Holiday, and it rained every day I was there.  I bought a raincoat of the German fashion name "Camp David", no relationship to the U.S. President's weekend white house. Here I am displaying it.

 

I finished the trip in the charming city of Hamburg. Perhaps John F. Kennedy would have said "Ich bin ein Hamburger!"

"Today is the Day, Club Wyndham!" Why Timeshares, Fractional Vacation Home Ownerships and Condotels are a Bad Deal

 

        Condotel unit in Waikiki

By now there are millions of disappointed investors in these types of properties. The most important investment lesson learned is that these buildings are deteriorating assets that have ever increasing maintenance needs.

When timeshares and other forms of fractional vacation ownership became popular in the 1970s, the U.S. economy was experiencing a high rate of price inflation. Real estate was known to provide protection from inflation, because property values were increasing at a similar rate of return, and leveraged rates of return were even higher. In the early 1980s, condotels had also become the rage in Miami Beach.

My mother was a realtor in the 1980s, and she and her fellow agents were all directed by their broker to buy timeshare units at a resort in western North Carolina. They were told that they were fixing their vacation costs at 1980s prices while their investments would continue to appreciate in value as vacation travel would become more expensive in the future. 

By 2007, my mother was retired and living on a limited fixed income. The maintenance fees on the timeshare had increased to $40 per month and she asked me to take over the deed and use the unit as I wanted. I never visited the actual unit, but since it was part of Club Wyndham, I exchanged my week for other places each year – Hawaii, San Francisco, New York, San Antonio and Mexico. My week only counted for 3 days, though, for a stay in Honolulu, San Francisco or New York.

Now the maintenance fees have increased to $139 per month, meaning that I would be paying $1668, or $556 per day, for annual 3-day stays in Honolulu, San Francisco or New York, which I could get for a lesser cost without any sort of vacation club ownership. Since 2007, these maintenance fees have increased at an 8.66% rate of annual inflation in a period in which the U.S. CPI has increased at only a 2.4% rate of annual inflation.  But this is not fraud, it is the simple arithmetic of property depreciation.

Why are timeshares and  condotels a bad deal?

It's the maintenance fees, Stupid!

This leads me to an important concept that gets forgotten in the real estate investment world, that buildings are deteriorating assets. Over time, income for a real estate asset will increase approximately at the rate of inflation, while expenses increase at the rate of inflation plus the rate of depreciation. Anyone who tells you differently, including Wall Street, is selling something, paid to sell something, and paid to deny arithmetic.

Hospitality assets deteriorate even faster than most other real estate assets because of the exacting standards of the hospitality industry, under constant pressure to renovate. This is why maintenance fees are always rising so much faster than consumer price inflation for timeshares and condotels and other fractional vacation interests. And you, the investor, will be contractually obligated to pay these increasing maintenance fees for the rest of your life and the lives of your heirs! Thanks, Mom.

Meanwhile, an excess of vacation properties was built between 2005 and 2008, and values plummeted after the Global Financial Crisis of 2008 and some have not yet recovered due to the oversupply. 

As for condotels, I first witnessed them in the early 1980s, spurred by the 15-year Accelerated Cost Recovery System enacted by the Economic Recovery Tax Act of 1981, but the Tax Reform Act of 1986 took away these benefits, and the burgeoning oversupply of vacation units killed the condotel industry, a historical fact that keeps getting forgotten after each time this industry collapses.

Constant problems with condotel investments include 1) high maintenance fees, many more than $10 per square foot per year, 2) having to share 35 to 50% of revenue with management without any guarantee of occupancy, 3) having to compete for occupancy with other owners, 4) having to frequently buy new furniture packages to comply with the hotel franchise rules, 5) HOA dues, 6) housekeeping fees, 7) special assessments, and 8) elevated insurance costs. On top of that, this is an investment type that rarely experiences capital appreciation. If capital appreciation was reasonably expected, the developer would never have wanted to sell units prematurely, right?

Condotels continue to re-emerge as a brilliant new concept before crashing in flames yet again and then forgotten. Some friends of mine were just pitched by WorldMark this week for a condotel investment in the California Wine Country.

Industrywide failure to consider buildings as deteriorating assets

The real estate industry in the 1980s newly embraced a valuation method called “Discounted Cash Flow Analysis”, in which valuations were based on 10-year cash flow projections. The only problem was that most of the DCF practitioners inflated income and expense projections at the same identical rate of inflation, not acknowledging that buildings were deteriorating assets in which operating expenses increase faster than income over long term. Every DCF valuation thus became inflated, and hundreds of millions of dollars were lost in the collapse of the commercial real estate and savings and loan industries in the late 1980s and early 1990s.

As for Club Wyndham, I was satisfied with the exchange possibilities, but displeased with the high-pressure sales tactics used on me whenever I showed up to peacefully use my reserved unit. 

Twice when I stayed in Manhattan, for instance, the unit was not ready on time, even if I arrived at 8:30 pm, and then I would be handed off to a high-pressure salesperson trying to convince me to buy more points or I would never be able to stay in New York City again. 

There were also the mandatory Information Breakfast Meetings I was supposedly required to attend during every stay at any Club Wyndham property. The first time, in Hawaii in 2007, I showed up and was denied admission because I did not bring identification, which was fine with me. They must have thought I was a cheap tourist attempting to steal their orange juice and plastic-wrapped muffins.

In San Antonio, Texas, I attended their Information Meeting on a Sunday morning, to which I was bussed several blocks away to assure that I would not escape during the brutal Texas summer heat. The speaker casually chatted with me before the Meeting started, mentioning that he had been a flight attendant before entering the esteemed career of timeshare sales. I had orange juice and muffins and scrambled eggs. 

When he started the Information presentation, the only information he provided for the first 15 minutes was about himself, in which he had elevated himself to the status of being a former airline pilot. Then he asked all of us to chant the phrase “Today is the Day!” I felt like I was trapped in an Amway sales rally and quietly left, walking several blocks back to a very nice unit on the San Antonio Riverwalk. 

When I returned to my building, the doorman had already been alerted in advance of my escape. He asked me if there was a reason why I left the Information Meeting so suddenly. I just said, “Today is not the day.”

PS: See the film Glengarry Glen Ross. Watch this film about desperate timeshare salesmen even if only for the outstanding acting performances of the late Jack Lemmon, Al Pacino, Alec Baldwin, Alan Arkin, Kevin Spacey, Ed Harris, etc.

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.

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.

Another appraisal in Seoul, Gangnam-style

 

The subject is a 14-story office tower in Seoul, built in 2006, with a height of 182 feet. Gross building area is 70,310 square feet (6532.81 square meters), covering most of the site.

This was yet another valuation assignment done for inheritance purposes as wealthy Korean immigrants to the U.S. pass on valuable real estate assets to their children. This particular building is situated in Gangnam-gu, one of the three major business districts in Seoul, and the most modern one. Most office buildings in Gangnam were built after 1990.

As luck would have it in this very active Seoul office market, two very comparable sales were found to have occurred in the last month within 2 blocks of the subject, and a third comparable sale was found about one mile west, having occurred three months ago. All were very similar office buildings less than 15 stories in height.

The last measured office vacancy rate in Gangnam was 4.2%, office building sales are amazingly active, and Seoul is a surprisingly easy place to appraise office buildings.

Appraisal in Quebec: A Lesson on the difference between “Aggregate retail value” and “Market value”

The properties consisted of scattered land parcels of almost 2000 acres zoned for recreation and tourism, including a golf course and a lodge, in a rural part of Quebec in the vicinity of the Ottawa and the Coulonge Rivers. The rivers and lakes provide boating, fishing, and waterfalls that attract a moderate number of tourists, and second homes are sometimes built or bought by urban residents from Ottawa or Gatineau, about 150 km away.

There had been a few lot sales over the last 12 years at prices sometimes exceeding $100,000 (CAD) for the best lakefront lots. The developer had employed a Canadian residential appraiser to appraise a few lots between 2008 and 2012, but never ordered an appraisal of the entirety of the property holdings, which would have required a commercial appraiser. Instead of ordering new appraisals, the developer just had the original appraiser (from Gatineau, 150 km away) send annual letters expressing his opinion that values had not changed. This does not quite meet the standard of a current market value appraisal, though. When lots don’t sell as predicted, an appraiser must always consider that the market may have changed.

More important to understand, though, is the common mistake that laymen make in assuming that market value of the entirety of lots is the sum of the retail lot values, or “aggregate retail value”.  This would only be true if the entirety of the lots could be sold in less than a year. In a slow-moving market like rural Quebec, though, the absorption would take many decades. The American Uniform Standards of Professional Appraisal Practice (USPAP) and U.S. federal banking regulations are clear that “market value” is not aggregate retail value but must be discounted for time and holding costs to be considered “market value” for lending purposes.

From a lender’s point of view, “bulk sale value” is the more acceptable estimate of value. If the lender must foreclose, they want to know how much money they can get back in a reasonable amount of time, usually no more than a year. A lender is not going to wait 36 years for all the lots to sell out. That requires an appraiser to do a lot of discounting for holding costs, marketing costs and expected rates of return on such an investment. For this reason, there are often great disparities between “aggregate retail value” and “market value” for such large properties.

As beautiful as rural Quebec is, I was disappointed in my search for French cuisine. Staying in Bryson, Quebec, I asked the front desk clerk if there was a restaurant in town. She said yes. I asked “So, what’s its name?” She said “Restaurant”. As with the other Quebec restaurants in the area, the menu items were confined to sandwiches, burgers and pizzas. It seemed like any American restaurant, except when the waitress stopped by to ask “C’est bon?” [Is it good?] This question took me by surprise, as the whole order had been taken in English, and being on the border with Ontario, most people in this area spoke to me in English.

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Financial Trouble at Oceanwide Plaza and the Effect of Chinese Capital Controls on Certain North American Real Estate Markets

Oceanwide Plaza, March 18, 2019

Some Hong Kong appraisal firms subcontract North American appraisal work to me. The work is for financial reporting purposes, as the property owners are publicly traded firms, and I have gotten used to the writing reports in compliance with the Hong Kong Institute of Surveyors.

On January 28 I was asked to bid on an appraisal of Oceanwide Plaza being built across from Staples Center, a leading sports and concert venue in Los Angeles.  Oceanwide Plaza had just topped out with three towers of 40 or more stories. This was said to be a $1 billion project.

I was surprised by this request because just the previous week, Lendlease, the Australian general contractor, had rocked the LA real estate world by announcing that it had halted construction on Oceanwide Plaza. The interior remains to be built. There were rumors that the lender had pulled out of the project, but no explanation of why. 

In November 2018 the FBI served a search warrant to China Oceanwide Holdings in an investigation of local public officials and Chinese developers regarding bribery, extortion , money laundering and kickbacks relating to 4 prominent Chinese real estate developers, including China Oceanwide and Greenland Group (developer of the new Metropolis condominium/hotel project nearby). No charges have been filed against China Oceanwide or the others.

A press release from China Oceanwide explained the need for capital restructuring and that construction would resume in February. With my own eyes I saw the project still stalled as of March 18, 2019.

Here are some hypothetical explanations for the continued shutdown:

1.       Chinese capital controls, instituted two years ago, are preventing the necessary funds from leaving China. The purpose of the new regulations was to reduce “irrational outbound investment and to improve the development of China’s overseas investment.” China has been attempting to crack down on capital flight resulting from a slowing economy and downward pressures on the exchange rate. 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, has placed one of their three residential towers plus their Indigo hotel for sale. There seems to be a pattern here of Chinese developers now placing their properties for sale, as Dalian Wanda sold its unbuilt One Beverly Hills project (valued at $444 million) last November, and Oceanwide itself placing its unbuilt 80 South Street project in Manhattan for sale for $300 million after buying it for $390 million 3 years ago. Meanwhile, the Chinese government has seized the insolvent Anbang Insurance Goup and will be selling off its U.S. hotel assets, acquired for $7.45 billion during 2014 to 2016, which includes the Waldorf Astoria Hotel in New York, which itself cost $1.95 billion.

2.       Lack of buyers. As local realtors speak of the residential sales slowdown at the Metropolis, the same forces may be working against Oceanwide Plaza. One realtor said that 60% of the residential sales at the Metropolis were to Chinese buyers who did not intend to occupy their units. A Chinese-American bank even asked me to appraise one of the units as a rental property, and I told them that if 60% of the units are placed for rent at the same time, there is no way of estimating how far market rent would fall. Downtown Los Angeles already has a 17% residential vacancy rate, the highest vacancy rate since the 1990s. Capital controls could be affecting these Chinese buyers, too. Some say their main reason for purchase was to remove capital from China, either because they do not trust their own government or perhaps to place ill-gotten gains away from capture.

More news came out in February about $62.5 million in mechanic’s liens on Oceanwide Plaza, but more intriguing was some private correspondence from general contractor Lendlease to some of its subcontractors, stating that Oceanwide “had failed to maintain the minimum contractually required payments for both your and our work”, yet Lendlease, with an $814 million construction contract, had not filed any mechanic’s lien yet.

Looking at the bigger picture, the Chinese capital controls law passed two years ago will be starting to affect certain North American real estate markets, such as Los Angeles, San Francisco, Vancouver and New York, which have been highly boosted by Chinese investment. The Chinese government measures net capital flow to the United States, which has been profoundly positive for a few years, but in the last quarter of 2018, the net capital flow was a huge $54.6 billion outflow of capital back to China. Forbes Magazine estimates that China has lost $3.8 trillion to capital flight during the last decade. They want their money back. One expert estimated that the ratio of outbound Chinese capital (back to China) to inbound capital is about 10 to 1.

As for the outcome of Oceanwide Plaza, there are various scenarios:

1.       A white knight lender from outside China will provide necessary funds to finish this well-located 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 be violated, Oceanwide Plaza could end up being 3 decaying 40+ story hulks sullying the downtown L.A. skyline.

I told the Hong Kong appraisal firm that they should ask to be paid in advance, which is not the custom in this type of financial reporting work. They replied, "Noted, with thanks".

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.

Update on the Eminent Domain Case in Seoul

https://www.internationalappraiser.com/2017/05/another-appraisal-in-seoul-eminent.htmlMy previous post on this matter spoke of a naturalized U.S. citizen who was having her home seized by the Seoul Municipal Government for a private development project. She was one of a few holdouts who insisted that she was not being properly compensated for her home in downtown Seoul. Both the U.S. and Republic of Korea constitutions and a treaty between the two nations guarantee “just compensation” for citizens who have their properties condemned for beneficial public projects, such as highways and public railways, in a system commonly known as “eminent domain”.

This particular case is reminiscent of a famous eminent domain case in the U.S. known as Kelo vs. City of New London, in which the city of New London, Connecticut was attempting urban renewal through the use of eminent domain for a private real estate developer. Mrs. Kelo was the lead plaintiff. The Kelo case went all the way to the U.S. Supreme Court, who decided in 2005 in favor of the city of New London and defended the concept of private takings. The project ultimately failed, returning New London back to its blighted state and costing taxpayers $78 million. 

The system of reimbursing displaced real estate owners changed in South Korea prior to 1990 due to the rapid appreciation of land prices and values.  Rather than compensating property owners according to “market value”, which is the fundamental concept of “just compensation”, the government moved to an “announced price” system that some other governments use to accomplish price controls which effectively avoid paying full market value for expropriated property. The city of San Jose in Costa Rica is an example. This announced price system is known in Korea as the “Officially Announced Land Price” (OALP).  

The Seoul Municipal Government’s OALP operates from a CAMA (Computer-Aided Mass Appraisal) system, based on statistical algorithms, much like many cities in the world do. At the Pan Pacific Congress of Appraisers, Valuers and Counselors in Seoul in 2008, which I attended, the OALP algorithm for Seoul at that time was presented in English as follows:

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.

Since the Ministry of Land, Infrastructure and Transportation is the same Korean ministry that exercises the powers of eminent domain and licensing and discipline of appraisers, there is also an inherent conflict of interest. Per scholar Byungkoo Cho, “when MOLIT perceives a certain compensation amount to have been calculated as excessively high, the appraisers may receive disciplinary actions such as suspension of business or revocation of licenses.”Byungkoo Cho, “Just Compensation in Eminent Domain in Korea: From the Perspective of Fairness,” Eminent Domain: A Comparative Perspective (2017, Cambridge University Press).

Nevertheless, MOLIT does measure the disparity between its announced prices and market-based sales transactions, and most recently disclosed that average OALP was only 63.3% of actual sales prices in year 2014, and considerable land price inflation has occurred since then. By my calculation, OALP in 2016 for this neighborhood averaged only 27.5% of sales prices, with the highest reading being 41.5%.

Public assessment agencies often conduct their own internal assessment/sales ratio studies (or sometimes sales price/assessment ratio studies) to calibrate their systems.  Some masterful studies have been published by the states of Washington and Virginia in the U.S.

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.

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Why I Don’t Appraise in Antarctica

Esperanza, the only actual town in Antarctica

In the by-line of my blog I mention that I have appraised real estate on every continent but Antarctica. I have not written off that possibility, but doubt that there will be a situation which would call for a real estate appraisal.

For one thing, there is no civil authority or indigenous people in Antarctica, and thus no property rights.  Seven nations had staked territorial claims on Antarctica before the United Nations passed the Antarctica Treaty of 1959, which subsequently prevented any further territorial claims in Antarctica, but allows any nation to establish stations for peaceful scientific research.  

The seven nations claiming territorial rights are the United Kingdom (who got there first), Argentina, Chile, Australia, New Zealand, Norway and France.  Nazi Germany did make a half-hearted attempt to stake a claim by using aircraft to drop giant swastikas as borders to its claim but gave up their claim after their military defeat. 

The British, Argentinian and Chilean claims are overlapping, though, and some may remember the 1982 war between the British and the Argentinians over their conflicting claims to the Falkland Islands in the South Atlantic, which were populated by 1820 British subjects and 400,000 sheep. Such a war over Antarctica would seem sillier.  The year-round total human population is only about 1000, and there is no use fighting over penguins.

There are some reasons why there may be no reason for real estate appraisals in Antarctica. First, the research stations are government-owned and would not be subject to property taxes. 

Secondly, there seems to be no serious active market for the trading of real estate (except for a few entrepreneurial foreign realtors who think they can attract residents).

Thirdly, setting up a plat map system is confounded by the fact that most buildings are built on ice on a constantly moving ice sheet which is hundreds of meters thick. The land underneath is worthless and the buildings would constantly moving over multiple parcels.

Then, there is the vacancy rate. 62 out of 156 research stations are closed, making for a 40% vacancy rate. They are still owned by their respective nations, but 18 of these stations are technically considered abandoned, many by nations such as Japan, Belgium, the Netherlands and the Soviet Union which perhaps reevaluated their need to be down there. These installations are for the taking. That is the equivalent of no market value.

Argentina is the only nation which has established an actual permanent town, Esperanza, as seen above, even flying in pregnant women to have their babies born there to establish some vestige of Antarctic citizenship and right to some type of territory. Military troops are also stationed there. Territorial claims might mean something if valuable minerals or oil are discovered, and the underwater continental shelf could be holding some surprises.

Although the mid-winter average temperature has increased by 6 degrees centigrade (10.8 degrees Fahrenheit) in the last 50 years, Antarctica remains the harshest environment on Earth.  Most of the 4000 people working there in the summer leave before the winter, when the weather is so harsh that planes cannot travel there for several months. There is an estimated 1000 who stay during the winter, but cabin fever can get dreary, and medical emergencies cannot be promptly handled.

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