This was a one-acre site, improved with an old mansion from decades ago, situated in Lima’s main financial district, San Isidro. Per JLL (Jones Lang LaSalle), the office vacancy rate in San Isidro was measured at the end of 2013 at just 1%, so a site such as this one would have great value to commercial real estate developers.
Many Latin American cities are divided into municipios, or municipalities, which are similar in concept to the boroughs of New York City. During the 1990s, the municipio of San Isidro, a sort distance south of Lima’s central business district, was upzoned to building heights ranging from 4 to 32 stories, and most of the banks relocated to this district, making San Isidro Lima’s de facto financial district, but also home to many embassies, too. This is one of the nicest areas of Lima.
Lima and Peru have in recent years undergone rapid economic expansion, averaging 7% per year and predicted to be 6% this year, and the supply of office and residential space has been unable to keep up with rapidly increasing demand from redevelopment ventures. This has resulted in urban land values spiraling upward, quadrupling since 2006.
In places like Manhattan, New York, such land is often appraised on a “value per square foot of allowable building area”, which is based on land prices divided by site area divided by FAR (Floor Area Ratio). Such a method does not work quite so well here in Lima because many lots are so small that high density construction is not efficient, partially because of required setbacks. There are many lots of less than 400 square meters (4280 square feet) zoned for 7 stories of construction, and perhaps their main value is to serve as part of an assemblage of a larger site, which is being done all over the financial district in San Isidro.
The Lima office of Colliers International, which seems to be the most active global broker in Latin America (based on seeing their signs), was generous in providing comps. However, I found that price per square foot of FAR was not working as a unit of comparison; it was seriously undervaluing many sites with allowable building heights of 7 stories, which are selling for more than $3000 per square meter.
Because of the number of available comps, I performed a regression analysis on the data in order to isolate possible adjustments to comparable sales for both building height and for site area. Because of low sample sizes in commercial real estate markets, such regressions cannot meet the high standards of the scientific community, yet they are better than pulling adjustments out of thin air, the last resort of many appraisers. The regression suggested an adjustment of $170 per square meter of site area for extra floor allowed to be built. The adjustment for site area was more understated, a premium of $60 per square meter for every extra 1000 square meters of site area.
This assignment reminded me of a similar assignment in San Jose, Costa Rica last summer. The shortage of land within the central cities of prospering Latin American cities is resulting in a profound amount of redevelopment, and it must be an exciting time to be a real estate developer in many Latin American cities.