Wednesday, July 23, 2014

Appraisal in Lima, Peru

An interesting cityscape resulting from upzoning approved in the 1990s. Many of the office buildings erected then have a lack of windows.

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.


George Mann said...

$300/sf for downtown Lima land? Is there a CBD higher than that in the USA? Those are some steep prices!

Vernon Martin, MSRE, CFE said...

Manhattan and LA, at the very least, and the prices are influenced by allowable FAR in a prime location. China's Greenland Corporation just paid $144,769,500 this year for an 8938 sf site in downtown LA. That's over $16,000 per square foot. As for Lima, I first thought that $300 psf was farfetched, but then changed my opinion when I found out the office vacancy rate in the financial district (San Isidro) was only 1% and the subject property is attracting offers at that price.

Vernon Martin, MSRE, CFE said...

Last time I appraised land in downtown Manhattan, for instance, the purchase price amounted to $7638 psf of land area, and the FAR was almost 34, and this was a site being purchased for assemblage purposes.

Angelo said...

Hi Vernon, Love the article. My first guess is that you studied some kind of Econometrics or Statistics for a degree. I actually found this article interesting since i am researching the prices of Lima, Peru in Lince, where we are about to sell about 650 meters squared land that is in a great location. I am a Real Estate Agent licensed in Florida at the moment. Currently I hear that area is running for around $2,500 per meters squared. Yet in Miraflores and San Isidro are running around 3k. I am advising the family to sell it as soon as we can because i do not want to risk another dry buying time like we suffered in the United States. Although the vacancy rate of commercial is extremely low and also residential.

What do you think?