Monday, December 27, 2010

An Asian Growth Story

Could the construction crane be Singapore's new National Bird?

Orchard Road retail - Louis Vuitton, Giorgio Armani

Some readers may wonder if I see any particularly strong real estate markets during my travels, since I seem to so often be reporting bad news.

How about an Asian country that grew faster than China in 2010, with an unemployment rate of only 2%?

That country would be Singapore. Year 2010 GDP growth is now expected to measure 15% as the result of a manufacturing-led growth spurt in the latter half of the year, second in the world to Qatar. Strong population growth (estimated at 1.8% per year), fueled by the developed world’s most lenient immigration policies, is creating a housing shortage.

A recent joint survey by Price Waterhouse Coopers and the Urban Land Institute ranked Singapore as the top investment destination in Asia.

Singapore also has ambitions to be the “Switzerland of Asia”, and one recent bold move by the government has been to double the area allocated to the Financial District, where CBRE has reported the office vacancy rate falling to 6.7% after brisk expansion of financial and legal firms, including major investment banks. Singapore is already Southeast Asia’s regional banking center, but the doubling of size of its Financial District would make it equivalent in size to Hong Kong's. About 7 million square feet are scheduled to be added by 2015. So serious is Singapore about achieving banking supremacy in Asia that they have been holding job fairs in the U.S. and U.K. to recruit banking talent.

Singapore enjoys the commercial advantages of:

1. A large, world class airport
2. English as the official language
3. The world’s busiest port (as measured by shipping tonnage)
4. An efficient, business-friendly government lauded for the absence of corruption
5. An educated and truly multicultural labor force with ties to many disparate spheres of influence. The three largest ethnic groups in Singapore are the Chinese, the Malays/Indonesians and the Indians, enabling ties to some of the fastest growing economies of the world – China, India and the Middle East.
6. No capital gains tax (except on residences held less than 3 years)
7. No restrictions on foreign ownership of commercial real estate.

Real estate prices fell during the Global Financial Crisis of 2008, but residential prices have been rapidly increasing since the second quarter of 2009. The residential price index for the 3rd quarter of 2010 reflected a 22.9% increase since the same quarter a year before. For those who are tempted to speculate, though, the government’s Housing and Development Board has enacted measures to counteract a bubble from forming, such as:

1. The sale of ten major government land sites to residential developers, allowing an increase in residential supply
2. A 3% tax on properties held less than three years
3. Minimum cash down payments of 20% on second homes (when financed by government-regulated lenders) and the elimination of interest-only mortgage loans
4. Continued restrictions on foreign ownership of landed homes (as opposed to condos)
5. Non-renewal of financial assistance to real estate developers

As for multifamily investment and development opportunities, one must consider that the Housing and Development Board owns 81% of rental units in Singapore, and government policy has the potential to mute increasing housing prices, even during a housing shortage. The luxury rental market should be least affected by competition from the government, nevertheless, as is housing for expatriates and immigrants prevented from receiving government-subsidized housing (restricted to Singapore citizens or permanent residents). At today’s rich valuations, with gross annual rent multipliers of about 29, however, development would spell more opportunity than investing in existing properties. Such a high multiplier can only be sustained with ultra-low interest rates, and one cannot predict how long such low rates will continue to last.

On the commercial side, overbuilding is still a possible hazard. For instance, CBRE has reported steadily increasing "capital values" (a valuation-based average rather than a sales-based average, although one would expect valuations to be influenced by recent sales) in the office, industrial and retail sectors, although office and retail rents have declined since last year. Office rents have started to climb again, though, in response to low vacancies, while “prime” retail seems to still have a problem.

Valuations appear to be quite rich. With an average “capital value” of $5800 per square foot and average annual rent of $373 psf for “prime retail” space ($1 SGD = $.77 USD), notably the Orchard Road area of town, the indicated gross rent multiplier of 15.5 seems unsustainable in the face of falling rents. The reason for the falling rents seems to be overbuilding.  According to CBRE. 1.7 million square feet of space was completed in the first three quarters of 2010, 39% of which was in the Orchard Road area, including the new TripleOne Somerset, 313@Somerset and the Mandarin Gallery. Other new malls in Singapore include City Square Mall, Iluma, Yew Tee Point, and Tampines 1.

The gross rent multiplier for Class A office is as even giddier 21.7. “Prime residential rental properties” are perhaps the most richly valued at the moment, though, with an average GRM of 29.5. As a point of reference, whenever I see market average GRMs pass 14 in the U.S., it is usually a precursor of a market correction.  The down side of "real estate growth stories" is that pricing can become quite inflated by the onrush of new investors who expect property value appreciation to rescue them from low or even negative current returns.

That being said, I did not see vacancies in Singapore that would put this city-state at risk of soon becoming “The Next Dubai.”  Nevertheless, buying at such inflated prices seems antithetical to the investment advice of such legends as Warren Buffet or Sir John Templeton, who famously stated "The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell."

Perhaps the most attractively valued sector at the moment is the industrial sector, where rents continue to increase and the GRM average is just 12.7. Manufacturing has led the way in the increase in GDP; leading industries are electronics, chemicals and biomedical products. The port itself creates substantial demand for warehouse space.

For those counting on continued 15% GDP growth, the forecast from Singaporean economists for 2011 is considerably more subdued – about 4 to 5%.

Saturday, December 25, 2010

Appraisal in the Dominican Republic

 Beachfront with view of San Pedro de Macoris

The subject property was a 59-acre parcel of raw, waterfront land situated about 45 minutes east of the rapidly growing capital city of Santo Domingo, ten kilometers east of the upscale beach town of Juan Dolio and a couple of miles west of the grimier city of San Pedro de Macoris, an industrial port city remnant of the days when sugar refinement ruled the economy.

The Dominican economy is booming. Tourism has almost reached pre-recession levels and is increasing at a rate of about 5% per year. Demand is also strong for exports of sugar, tobacco, and gold.

The town of Juan Dolio has prospered as the result of a new highway linking it to Santo Domingo, allowing affluent professionals to actually live above a white sand beach while efficiently commuting half an hour to their jobs and enterprises in Santo Domingo, a city of four million residents. New residents in Juan Dolio are more likely to be locals than foreigners, who nevertheless also have a presence there.

This land was part of an overall 252-acre project that was entitled for two 30-story residential towers, a Greg Norman golf course and a marina, among other residential uses. The first phase of the project, consisting of 52 private villas (priced at about $1.75 million each) and the golf course, was under construction on the date of my visit. A marina, sewage treatment plant, and electrical generation plant have not started yet.

The land is owned by a partnership managed by the most successful developer of upscale residential communities in Juan Dolio, including several sold-out condo towers. They pioneered the concept of developing condo towers at the beaches of the DR (Dominican Republic), and have a track record of successful condo development.

When tasked with conducting a market value appraisal, of course, the present owner is not considered in the analysis. Most appraisers are directed by their professional associations or their governments (particularly the U.S. government) to estimate the market value of a property as if it was placed on the open market and someone else is buying it. For lending purposes, that makes sense, as the only scenario a lender needs to consider is the “what if we have to foreclose” scenario, in which the property would indeed be sold to someone other than the current owner. The lender can make exceptions for particularly strong borrowers, but the appraiser cannot.

As is often the case, the property owner ordered his own appraisal from a well-known international appraisal firm,  who estimated a value of $25,625,000, or about $434,000 per acre, which seemed like quite a steep value for so much raw land outside of town, even if it did front the sea. The entitlements are formidable, but is the demand there? The town of Juan Dolio, 10 kilometers west, seems to be undergoing excessive high-rise condo construction, and at least two projects have already failed. Would likely buyers, who are more likely to be affluent professionals from Santo Domingo than foreigners, be willing to commute even further to live in a high-rise?

The actual setting was also slightly less than ideal. Most of the waterfront consisted of protected mangroves, and what little beach there is has been fouled by the mangroves, as can be seen in the above photo. Then there is the view of the decaying electrical plant in the city of San Pedro de Macoris, responsible for frequent electrical blackouts in the area. Of course, when Phase 1 of the project is complete with the golf course and the marina, the views will be much better, but I was hired to do an “as is” valuation.

The only comparable sale I could find subsequent to 2007 was an entitled waterfront parcel on the north shore (near the Playa Grande golf course) which sold this year for $40,000 per acre. The north shore is more dependent upon tourism, however, and not quite as accessible by highway. Nevertheless, I did find listings of other waterfront parcels, entitled and unentitled, at prices not much higher than that, including a 97-acre beachfront parcel ten minutes east of San Pedro with 250 meters of white sand beach, a coral reef, and a private river, situated next to the Bahia Principe La Romana resort, listed for sale at about $51,000 per acre. La Romana is the next major tourist city east of San Pedro.

In the end, I estimated a value substantially less than that of the international firm, whose analysis did not present any land sales subsequent to 2007 and reconciled higher priced listings without any discussion of utility availability or the likelihood that the sales price would be lower than the listing price.  Then again, I was hired by the lender and not the property owner.

An amusing incident happened at the Santo Domingo airport on the way home.  All flights bound for the U.S. are subject to secondary hand screening at the gate.  Card tables are set up and security guards comb through all carry-on luggage.  A young lady went through my luggage and then said "Shake your body".

That's just what I did, but I apparently misunderstood her accent.  She then said, "No. I check your body" and then proceeded to pat me down. 

It brought back a memory from another Latin American airport in which a woman chased after me shouting "Cher!  Cher!"  I didn't turn around because I have no interest in Cher and wish she would just retire like she keeps on promising to.  Apparently the woman chasing me was a security guard needing to see the claim check for my luggage. "Sir, Sir" was what she meant to say.

Friday, October 22, 2010

Appraisal in northern Saskatchewan


The property consisted of 190 acres in northern Saskatchewan in a summer tourism area. The local topography is glacial moraine, similar to Minnesota and Wisconsin, and features thousands of small lakes. The largest lakes have attracted small villages of summer cottages, most of which are unoccupied during the long winters at this latitude (53 degrees north).

Despite the booming Saskatchewan economy, buoyed by increasing world demand for potash, oil, and wheat, northern Saskatchewan remains a sparsely populated, slow-growing region. The local "Rural Municipality" (the Saskatchewan equivalent of a county), for instance, was last measured as having only 846 residents, increasing at a rate of about 17 new residents per year.

These 190 acres were acquired in 2007 and 2008 with the intention of building another vacation home subdivision. Unlike other vacation home subdivisions in the area, though, this property is not situated on a large lake, but has several small lakes within. Its terrain is quite hilly.

As nearby subdivisions continue to struggle to sell lots, the developer made the decision to seek a zoning change to allow development of a high-density senior "care and wellness facility" (with assisted living) and multifamily housing (fourplexes). This change in plans from conventional residential development to a "care and wellness" facility reminded me of my last appraisal in Costa Rica (see March blog), as the decision to develop a care facility in a remote, rural location usually occurs as an afterthought when the developer runs out of viable options.

Successful assisted living facilities usually have most of the following attributes:

1. Close proximity to a hospital. (The subject property is 35 minutes away from the closest one, and winter road conditions can prolong the journey to the hospital.)

2. Flat terrain. Seniors in ALFs often have trouble walking, and hills, particularly ice-covered hills, can limit their mobility outside the care center building itself. (My own father lives in an ALF in New Hampshire.)

3. Close proximity to relatives and friends. (The subject property is 113 km north of Saskatoon, a city of 223,000, the presumed source of most of the new residents, and the local area is very sparsely populated -- 846 residents in the entire rural municipality.)

4. Desirable climate. That needs no further explanation. On the plane ride to Calgary, for instance, I met a senior couple from Alberta (next to Saskatchewan) who had just made an offer on a house in Las Vegas.

In other words, there seems to be no compelling reason for most seniors to relocate to remote northern Saskatchewan. Sending Granny to isolated north Saskatchewan, moreover, doesn't seem much kinder than the ancient Inuit custom of launching infirm seniors into the sea on ice floes.

One nice thing about appraising in Canada is the provincial land registry systems. Sales data can be obtained for free in Alberta, for a small fee in Saskatchewan, or for a higher fee in British Columbia from a private vendor, such as Landcor. Most legal descriptions are based on the TRS system (township-range-section), and can be easily located on maps.

My client was interested only in the "as is" value of the site. Searching within a nine-mile radius plus the local rural municipality, land sales in the last 18 months ranged from $200 to $1500 per acre, and there had been no land sales above $295,000. The requested loan amount was more than $10,000 per acre.

The developer had hired his own Canadian appraiser, who estimated the value at $20,000 per acre, but this value was predicated on several undisclosed "hypothetical conditions", such as the subject land being rezoned and legally subdivided, and able to sell out its lots. Current zoning only allows two to four dwellings on the entire 190 acres, though.

Unlike the U.S., Canada does not statutorily require an appraiser to estimate "as is" value or to disclose hypothetical conditions in the report, which can seriously impair the credibility of a Canadian appraisal report. That might be the reason I get sent so often to Canada.
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Tuesday, August 10, 2010

Appraisal of Retirement Villages in Australia


Included in the collateral for this mortgage loan application were two retirement villages in Western Australia.

Australian “Retirement villages” have no exact equivalent in the U.S. As multifamily properties, they physically resemble "active senior" retirement communities in the U.S., but rather than selling or leasing the residential units, the landlord trades long-term leasehold interests (20 years or more) to incoming aged residents for an interest-free loan of a substantial amount, to be repaid when the resident leaves. The developer/owner then collects: 1) reimbursements of operating expenses, 2) a deferred management fee equivalent to 4% per year up to a maximum of 20%, applied to the resale price collected by exiting residents (these numbers vary by state), and 3) a deferred charge equal to 1.5% per annum to place in a sinking fund for capital replacements, also collected when the tenant leaves.

Most of the income of these retirement villages consists of the collection of deferred management fees, which when applied to the sale of the leasehold interest to another incoming resident, allows the landlord to share in the property price appreciation.

The whole success of this property type with Australian institutional investors has been based on constant price inflation, which has been the norm for Western Australia, even until today, due to the booming mining industry in that state and Chinese demand for minerals. The ability to apply the deferred management fee to the outgoing price gives the landlord a chance to share in the capital appreciation of the individual unit.

What is less clear is how the system would work if the living units were to decrease in value (which is not currently the case). Would the landlord have to make up for resident loan shortfalls if the units are turned over at lower prices? The lease contracts I saw were not clear about this, and in asking why this problem was not dealt with in the contracts, the response suggested that such an event would never happen, that retirement village units would always go up in price, just as they have done until this day. (Remember when American investors talked like that?)

Of course, the closest equivalent to this retirement village concept in the US is the continuing care retirement community which takes large, upfront, refundable deposits. Unlike Western Australia, there are bankruptcies occurring in this industry in the U.S., the most notable one being Erickson. Such a scenario seems to be considered unthinkable in Australia. Am I being too jaded by my American experience?

Of more immediate concern to this industry, however, is a June 9th Draft Ruling from the Australian Taxation Office (equivalent to our IRS) which will require purchasers of retirement villages to pay 10% GST (Goods & Services Tax) on the interest-free loans from the village residents in addition to the tax already paid on the assets being purchased. Based on my calculations for these two properties, the additional tax would wipe out most of the owner's equity in these properties as retirement village buyers discount their purchase offers accordingly. It seems like a very unfair tax, but is consistent with ATO's aggressive new creation of taxes, such as the new 40% tax on mining profits.

Special thanks to those Australian experts who have guided me along the way, particularly Peter McMullen of Jones Lang LaSalle, John Martin of Australian Property Consultants in Perth, and once again Professor Matt Myers at the Royal Melbourne Institute of Technology.

Wednesday, July 28, 2010

Appraisal of aged care homes in Australia


I'm currently working on a portfolio of aged care facilities (or nursing homes) in Australia. The loan applicant has presented me with valuations of these homes as "going concerns", whereas my client is predominantly a real estate collateral lender.

The going concern value of an aged care home includes:

1. the value of the real estate, both land and building
2. the value of the operating business, particularly the bed licenses.
3. the value of the F,F&E (fixtures, furnishings and equipment), and
4. the value of the accommodation bonds (which serve as interest-free loans to the landlord), paid by the incoming residents.

My client, a private lender, is primarily interested in what they can take possession of and sell within six months in the event of a foreclosure.

In the event of a loan default, it is unlikely that there is any business value left.
One of the facilities had previously gone bankrupt, and the bed licenses were revoked. Furthermore, in Australia, unlike the U.S., the bed licenses travel with the operator and are not tied to the real estate. In sum, business value cannot be considered as security for a mortgage loan for these nursing homes.

2 of the 3 homes were more than 30 years old. Thus, the FF&E was highly depreciated and would probably command minimal salvage value. FF&E also make poor collateral because it can disappear, either to freelance thieves or else carefully planned midnight relocations involving moving vans.

The accommodation bonds are not the possession of the care home operator but are actually interest-free loans from the incoming patients, to be paid back when the patient leaves, either for another home or else for the afterlife. The Australian valuer placed a value on these bonds for the interest that they can collect while held by the operator, but many aged care organizations treat these bonds strictly as a liability on their balance sheets. In the case of the bankrupt home mentioned above, which was the Bridgewater facility in Roxburgh Park, the accommodation bonds went missing after the facility failed. $8.5 million in funds vanished and cannot be located.

In the final analysis, then, I am judging that the only appropriate collateral for a mortgage loan secured by such facilities is the value of the real estate itself, which means that I may have to analyze these facilities as vacant (and one already is).

I will update the blog when I return to the U.S.

Monday, May 31, 2010

Vernon Martin Wins Appraisal Institute Award for Article in The Appraisal Journal

The following announcement was made in the Spring 2010 issue of The Appraisal Journal, the peer-reviewed publication of the Appraisal Institute, by the Journal's editorial board:

Vernon Martin, CFE, is the winner of the 2009 AIET Armstrong/Kahn Award and a $1000 honorarium for his article, "Preventing Fraud and Deception," published in the Spring 2009 issue of The Appraisal Journal.

The AIET Armstrong/Kahn Award is presented by the Editorial Board for the most outstanding original article published in The Appraisal Journal during the previous year. Articles are judged on the basis of pertinence to the appraisal practice; contribution to valuation literature; provocative thought; thought-provoking presentation of concepts and practical problems; and logical analysis, perceptive reasoning, and clarity of presentation. This award is funded by the Appraisal Institute Education Trust.

In his article, Martin focuses on common methods of deception used in fraudulent schemes involving commercial properties and land, including deceptive purchase agreements; deceptive financial statements; misrepresentation of occupancy or tenancy; misrepresentation of property characteristics; undisclosed conditions negatively affecting value; and unrealistic projections of sales, income, or expenses.

Vernon Martin is the principal and founder of American Property Research, a real estate advisory and appraisal firm in Los Angeles, and has been a practicing commercial appraiser since 1984 and a certified fraud examiner (CFE) since 2004. Martin has served as the chief commercial appraiser at three national lenders and also teaches real estate valuation part-time at California State University, Los Angeles. He has studied at the College and the Graduate School of Business of the University of Chicago, and he received his master of science degree in real estate from Southern Methodist University's Cox School of Business.

Monday, March 15, 2010

Appraisal in Costa Rica

The property consisted of three parcels of raw land totaling 92 acres adjacent to a remote beach in Guanacaste, a northwestern province of Costa Rica. The owner wished to finance construction of a 5-star hotel, tourist hospital and wellness center. The owner had signed a management agreement one year ago with Barcelo Hotels, a Spanish-owned luxury hotel group with many existing hotels in Mexico and the Dominican Republic. There were Costa Rican appraisals estimating the combined property to be worth about $26 million “as is”.

Although written in Spanish, the Costa Rican appraisals seemed to contain too much hyperbole to be considered objective. For instance, what were described as 360 degree panoramic views were largely obscured by hills and protected mangroves. The appraisers also assumed that 25 kilometers of unpaved road leading to the project would soon be paved and they valued “protected” (unbuildable) land at 80% of the value of buildable land. (Twenty percent would be a more reasonable number, since nature preserves do add some incremental value to adjacent development land.)

The owners claimed to have full entitlements to build the project, but the submitted documents only indicated approval to build 12 seven-story condominium towers on one of the three parcels, and these approvals were from 2007. The owner had decided to turn the condo towers into hotel rooms, without creating architectural drawings or plans, and there was no documentation that a development plan for a hospital and wellness center was even under consideration by local authorities. There were no drawings, plans or specifications for the revised development plan, other than a generalizd aerial view of the proposed project. The only site work had been to drill two authorized wells.

There were factors that caused great doubts about feasibility, the first of which was the lack of paved road access. The closest paved roads were in Santa Cruz, 25 km away, and the 6-month rainy season and rugged topography of this region can make road travel difficult, as roads are occasionally flooded during the rainy season. Four wheel drive vehicles are needed for half of the year. This is not a good setting for a 5-star hotel, but for a hospital, the setting was particularly doubtful. Successful tourist hospitals are typically located near airports, indicating that accessibility is a strong selection criterion of a hospital. The notable tourist hospitals in Costa Rica are CIMA, Clinica Biblica and La Catolica, located in the capital of San Jose, and the first two are already developing similar facilities near the Daniel Oduber airport in Guanacaste, with La Catolica also considering a branch there.

The idea for this project is that the hospitals would specialize in cosmetic procedures and that patients had the choice of convalescing in a time-share wellness center or else in a room in a 5-star hotel. Get a face-lift, for instance, and spend a month recuperating while gazing at the ocean. Still, the concept of a hospital so far removed from paved roads seemed to be far-fetched. Imagine being sore from a tummy-tuck operation and then having to return to the airport over bumpy, gullied roads.

The other factors that made me believe that this was not a serious project were:

1. The property is listed for sale for $8,500,000, entitlements included.
2. The property was previously listed for sale in 2008 for $5,500,000 and marked sold.
3. The construction cost estimates were quite incomplete, as were designs, drawings, plans, and specifications.
4. The lack of housing in the area for hospital or hotel support staff.

Considering that the owner had originally conceived of condo towers and townhouses on his property, the change to hotel and hospital seemed like an afterthought. This was a parcel of land in search of a profitable use, not a hospital enterprise in search of an ideal location.

As in Mexico, comparable sales are hard to come by in Costa Rica. There is no rule that the sales price recorded has to be accurate, and there are other circumstances that induce sellers to record false prices. I turned to listings of entitled land and unentitled land to set a ceiling of value for the property, and there are getting to be more fully entitled projects put on the market today just as in U.S. beach communities, too. I found entitled projects priced as low as $20,000 per developable unit, and unentitled ocean-adjacent land in Guanacaste priced as low as $10,000 per acre. I valued the hotel parcel as entitled land and the other two parcels, with no proven entitlements, as unentitled land.

Unfortunately, when looking at lending opportunities in Latin America, I see too many deals like this one, with the property listed for sale at a fraction of the value estimated by local appraisers, with the owner meanwhile spinning a fanciful story of a world-class development project. Lender beware!

My observations about international real estate deals are essentially this:

The least desirable properties must travel the furthest to find buyers or lenders. Good real estate opportunities tend to get picked off by local investors and lenders.

Sunday, February 21, 2010

Appraisal in Fiji

The assignment was to appraise one square mile of swampy, beachfront land, as seen above, adjacent to one of the primary resort areas of Fiji, known as Denarau.


Nearby Sheraton Fiji Resort on Denarau Island

Denarau Island isn't actually an island, but a peninsula separated by a river with only one bridge, guarded by security, thus effectively restricting access to all but vacationers and those who serve them.

Denarau is considered quite a successful development today, with 5 star resorts by Sheraton, Westin, Hilton, Wyndham and Sofitel, but according to former University of the South Pacific real estae professor Matt Myers, the first developer failed and it took the second developer about 20 years to turn this former mosquito-infested mangrove swamp into the resort paradise it is today.

One of the issues to consider in this appraisal assignment was that none of the appraised land was "fee simple" or "freehold". Only 8% of the total land area of Fiji is freehold land. 88% of the land area is owned in common by indigenous Fijians, and is leased to prospective users by the Native Land Trust Board, typically for 99-year periods. (This is similar to landownership in the Hawaiian Islands, for instance.) The remaining 4% of Fiji’s land area is owned by the state and is known as “Crown Land”. It is also leased by the government to prospective users for 99-year lease terms. Freehold is the preferred form of ownership, but ground lease terms are not usually onerous, thus creating positive leasehold value for possessors of leasehold interests.

208 acres consisted of "crown leased" land with 97 years remaining on the lease, but another 53 acres were land that was "native leased" with less than a year remaining on the lease. There was no way that my lender client was going to accept an expiring lease as collateral, and I thus could not assign it value, with the leasehold interest expiring so soon.

A second complicating factor was the physical developability of the land itself, which had a high water table, making landfill necessary. Most of the site is heavily wooded, with mangrove being the main species near the beach. Mangrove swamp is expensive to deal with, for several reasons:

• Significant landfill would be required.
• Mangrove swamps produce dark sediments which foul beaches (see above photo), thus requiring the importation of new beach sand and are impossible to drive on.
• Mangroves are a protected species and the government will require the developer to relocate the plants.
• Flood prevention measures would be needed (river dredging, etc.).

Utilities have not yet been extended to this part of Fiji, either.

The third complicating factor was economic. Tourism to Fiji has been affected by the recession, causing discounting of already existing hotel rooms in Denarau. Denarau is just 20 minutes away from the failed Momi Bay Resort that was originally to be managed by JW Marriott, and the other major Nadi-area resort development, Naisoso Island, is struggling.

As in the Barbados assignment, most of my market data came from local journalists or real estate brokers. (One thing I like about these former British Commonwealth nations is that people write well and abundantly). I tried to hire a local appraiser to help me, but I did not find one with the same sense of urgency that my client had.

Appraising in Fiji seemed much like appraising in the Caribbean. The two dominant industries are Tourism and Sugar, and the island is a former British colony. Tourist develoments are kept removed from native communities, and the government is pro-development, despite the frequent coups d'etat, which are never violent.

Fiji has considerable natural beauty and posh hotel resorts. I would highly recommend mosquito repellent if you go there; there are occasional outbreaks of Dengue Fever, which causes painful bone inflammation.

Next stop: Playa Azul, Guanacaste, Costa Rica.

Sunday, January 17, 2010

Appraisal in Barbados






I got called on Dec. 17th with an intriguing appraisal assignment--the valuation of about 250 upland acres in Barbados with entitlements for a 5-star golf resort and 124 luxury villas.

Normally, such a project in a tropical upland location would be a long shot (in terms of feasibility), but this project had secured a hospitality contract with Banyan Tree Hotels and Resorts, known for their 5-star resorts in Asia, Mexico and the Middle East.

One of the international development trends of the last few years has been to pair luxury residential development with a 5-star hotel, a pairing that creates a value-enhancing synergy. The developer plans to use Banyan Tree's management to provide services to the villa owners, such as housekeeping and room service, so that they are not burdened with having to hire their own staff. Such a concept has great appeal to the rich, such as Simon Cowell and Sir Andrew Lloyd Webber, who have pre-purchased villas each worth over $20 million (USD) in another Barbados project to be managed by Ritz Carlton.

The photo shows the raised foundation of the hotel-to-be and pools for private villas which are carved out of calcified coral bedrock, which is much like limestone.
I found real estate prices in Barbados to be higher than in any other Caribbean destination I've been to. There is a reason for that which goes back at least three decades. Barbados was the only Caribbean island to receive Concorde flights (the supersonic Lockheed SST). The flight from London took only 3.5hours, and for the busy, accomplished, British multi-millionaire, Barbados became the most convenient and preferred vacation destination. Since then, the Island has built an impressive industry catering to the super-rich, with world class golf courses, fine dining and luxury shopping. The week I was there, the following celebs were in town: Simon Cowell, Siena Miller and Gerard Butler.

There are two successful inland luxury residential developments in Barbados: the Royal Westmoreland, which has a world class golf course, and Sugar Hill, where Tony Blair resides, and which has a world class tennis resort. Both are not far from the beach, and Royal Westmoreland also has impressive ocean views from its upland location. Apes Hill is a new project farther inland and has recently completed a magnificent golf course and claims to have sold out lots in its first phase (not quite evident in my personal visit). One of the residents will be pop star Rihanna, who was given a free lot. No homes have been built yet, though, and there are rumors that the first phase has not actually sold out, with further development temporarily halted.

Barbados has not been isolated from the world's economic troubles, and has felt an impact from a decline in tourism of more than 10%. The leading source of tourists is the United Kingdom, which has suffered from an almost 25% decline in the value of the Pound relative to the Barbadian Dollar over the last two years. Whereas luxury residential development was considered a sure thing in Barbados not long ago, projects are now getting suspended. The Ritz Carlton project, for instance, shut down last February but is said to be reopening soon as a result of new ownership and a partnership with the Barbados government.

Other appraisers might ask how one goes about finding comparable sales data in a situation like this when Government offices were closed Christmas week. The appraiser profession in Barbados seems to be focused on individual residential properties, and the brokers on the big deals, such as Knight Frank and Saville's, seem more likely to be located in London than in Barbados.

I used journalists and bloggers, who are in abundant supply in Barbados and write in English. Moreover, the press is more likely to write about high profile comparable sales than about run-of-the-mill properties. I also perused real estate listings of large, entitled, resort-quality parcels.

In any event, it appeared that entitled resort-quality land was being marked down close to about $100,000 USD per entitled unit (hotel or residence), although the most recent listing to hit the market, the shuttered North Point Surf Resort, is listed at $71,875 per unit, suggesting a free-falling market for resort development land.
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