Monday, May 29, 2017

Luxury Condominium Towers and Foreign Absentee Ownership



Pavilion Residences Tower No. 3 in Kuala Lumpur
Three months ago I received a request from a Chinese-American bank to appraise an unbuilt condominium as a rental property at The Metropolis, LA’s most extravagant new residential tower yet, which is being developed by the Greenland Group, a Chinese company. 1500 condominiums are being built and offered for sale for prices ranging from $600,000 to $2,000,000.
The Metropolis in downtown Los Angeles


Inquiring with Chinese-speaking Los Angeles realtors, I heard the opinion that many of the buyers at The Metropolis were Chinese and did not intend to occupy their units. I have heard similar rumors for Oceanwide Plaza.

A National Association of Realtors survey a couple of years ago even measured that the percentage of Chinese buyers purchasing such homes for primary occupancy was only 39%.

I turned down the appraisal assignment, as once these towers open and owners place their unoccupied units up for lease, how far will asking rents fall? I don't want to be responsible for a loan loss.

One decade ago, downtown Miami had a problem with empty, see-through condo towers. Miami is not the same town as Miami Beach, an affluent oceanfront community on the eastern side of the Intracoastal Waterway. Downtown Miami has no beaches, and it fronts the Intracoastal Waterway, not the ocean. Capital flight out of South America, particularly Venezuela, took care of that vacancy problem.

With capital flight, the primary objective of the buyer is to move money out of the home country for its own protection into nations with secure property rights and stable political conditions, not necessarily with the expectation of profit.

In New York City, appraiser Jonathan Miller noted that similar condo towers in New York City serve as "safe deposit boxes in the sky that buyers can put all their valuables in and rarely visit."

In a follow-up visit to Kuala Lumpur, I saw a similar phenomenon at work in the luxurious Bukit Bintang section of town, with numerous high-rise luxury condo towers under construction at once. I was already familiar with the 44-story Pavilion Residences towers at the Pavilion Mall; Tower 2 is said to still be only 40% sold, mostly to foreign absentee owners. There are still few lights on at night. Now Pavilion Residences Tower No. 3 is finishing construction.

History has not been kind to condominium communities with low rates of owner occupancy. Ten years ago a CPA friend urged me to buy Las Vegas condos “before it’s too late”, but too many units were bought by investors rather than occupants. The result was an oversupply of investor-owned units which could not pay for themselves, and tumbling condo prices. The more expensive the unit, too, the harder it is to find renters to cover the ownership costs. Wealthy people prefer to own rather than rent.

Flight capital is more patient than investor capital, which lessens downward pressure on prices, but there is another risk, instead, which is when the home country political conditions change enough for foreign condominium owners to bring their capital back home. This can create a sudden surge in condos for sale, such as witnessed in Vancouver at the turn of the century, when condos owned by Hong Kong investors were put on the market all at once.

There is a reason why lenders and Fannie Mae and Freddie Mac instruct appraisers to indicate whether the residence they are appraising will be owner-occupied or investor-owned, and whether the condominium building itself is primarily owner-occupied rather than rented out. Owner-occupied condos are more stable, and when real estate markets decline, investors are much more likely to bail out than owner-occupants.

Sunday, May 28, 2017

Macau vs. Las Vegas Gaming Revenues: A Reversal of Fortune



 
Lately, my post from 6 years ago, http://www.internationalappraiser.com/2011/05/macau-surpassing-las-vegas-as-worlds.html , has had resurgence in readership, but it is outdated now.

Back then I commented that Macau had 4 times the gaming revenues as Las Vegas and was growing rapidly (43% in the previous year) while Las Vegas gaming revenues were shrinking because of the U.S. recession.

Macau Casino gaming revenues topped at $45.27 billion in 2013 and have steeply fallen since then to $28.04 billion in 2016, a decline of 38%.  This may have been caused by:

1. A limit placed by the local government on the number of gaming tables (5500), and

2. Chairman Xi’s crackdown on government corruption. This made corrupt civil servants reluctant to visit Macau, and the rumor was that many of the high rollers were government officials.
Las Vegas Strip gaming revenues have recovered since then, with $6.35 billion in 2015, up about 8% from that time, as the city continues to reinvent itself.

Atlantic City continues to lose gaming revenues to new casinos in the New York and Philadelphia metropolitan areas. Both states have been experiencing about a 3% annual gain in gaming revenues, and Pennsylvania now ranks second nationwide in gaming revenues.

Meanwhile, there is a surprise third place in international rankings.

The U.S. ranks first, with $38.54 billion in gaming revenues, followed by China (Macau), with $28.04 billion.

In third place is Japan, with $12.845 billion in gaming revenues. This is a surprise considering that Japan just legalized casino gambling this year, but what I never thought of before is Japan’s Pachinko Parlors, which more resemble pinball arcades than casinos.  Nevertheless, each one is a place of gambling, and there are 1248 of them in Japan.


Wednesday, May 24, 2017

French Property Portfolio Valuation




Office condo near L'Arc de Triomphe

This was an investment portfolio of 8 properties scattered across France, acquired at various stages between the years 2008 through 2017, for which a nonprofit organization needed an update on portfolio value. The portfolio consisted of residences, office condominiums and a fractional interest in a motel.

Needless to say, real estate prices in France became quite volatile after 2008, with some areas recovering shortly, others experiencing a second recession, and the prices in far northeastern France, in Lille and Hauts de France, seem to have never recovered, with Lille having precipitously declined in the last year. This area north of Paris is known as France's Rust Belt, and Lille was particularly dependent upon the textile industry.

There were also certain metropolitan areas, Paris and Bordeaux, which had some 20+% price gains during their holding period. This has been attributed to foreign buyers. Paris is one of those world cities that attracts “flight capital”, money brought in by foreign investors who fear their own governments. London, New York, Los Angeles and San Francisco are other examples. Bordeaux has also attracted foreign buyers through its increasingly attractive quality of life and beautification, with accelerating price appreciation over the last year.

Overall portfolio value increased 4.1% over the holding period, with the winner being Chatillon, a southwestern suburb of Paris, which appreciated by about 25%, and the loser was Lille, a northeastern industrial city, with a depreciation of 18%.
Loser: Lille



Winner: Single family dwelling in Chatillon, suburb of Paris
PS: It seems that the French and American peoples have been the best of friends during the worst of times -- The American Revolution, World War 1 and World War 2. In more recent years there have been complaints that Americans are rude and that French are rude. In 5 days in France I encountered only 2 rude Frenchmen, but one taught me an important lesson -- that I had failed to learn the rules of French courtesy.

I walked into a Parisian bar and asked for a glass of Armagnac. The bartender looked indignantly at me and sarcastically said "Bonjour!" It seemed that I had offended him, so I asked "Pardonnez-moi, je suis américain. Qu'est-ce que c'est le problème?"

He then explained that in France, bartenders and waiters are considered professionals and expect to be greeted as equals, not servants, and the proper greeting is Bonjour or perhaps Bon Soir.
That's good to know, and I will henceforth greet all servers in whatever nation I am working in.

On the other hand I have seen more than one American tourist exasperatingly ask "Where's the Eiffel Tower?" The French refer to this landmark as "La Tour d'Eiffel." It seems that the French would like us to learn a few words of French before we visit their country.




Tuesday, May 23, 2017

Another appraisal in Seoul: Eminent Domain in a "Property Price Announcement" system

This US citizen is suing for better eminent domain compensation

Imagine having your property taken by the government and not being fairly compensated.  The 5th Amendment to the U.S. Constitution guarantees Americans and others “just compensation” for the taking of their private property, usually at market value or maybe value in use. Article 23(3) of the Constitution of the Republic of South Korea also provides that  expropriation, use, or restriction of private property for public necessity and compensation therefore shall be governed by law, provided that in such a case, just compensation shall be paid.

Suppose a U.S. citizen has her residence taken in a foreign country and is offered unfairly low compensation for the taking.  If the foreign country has a free trade agreement with the USA, such as South Korea, that U.S. citizen has the right to a hearing of her grievance at ICSID, (International Centre for Settlement of Investment Disputes)an arbitration subsidiary of the World Bank. Most hearings take place at their Washington, DC offices, but other closer venues are being made possible.

As I explained in a previous blog post about a Korean appraisal assignment,(http://www.internationalappraiser.com/2016/08/an-appraisal-of-commercial-property-in.html), a Korean appraiser separately values land and building, similar to what is done by U.S. tax assessors or German appraisers.  Government-ordered appraisals, however, are not allowed to estimate the land's market value. Instead, appraisers must consult a "Officially Announced Land Price" system in which land values are annually determined by the Minister of Land, Infrastructure and Transport. This is a departure from the concept of market value that underpins the concept of "just compensation" in the U.S. and Korean constitutions, to a "price announcement system" in use by other countries with high urban land price inflation, such as Costa Rica, where appraisers consult a map to determine the land value. The government therefore prevents property owners from receiving market value in their own misguided efforts to control land prices.

Korea’s Officially Announced Land Price system was enacted in 1990 as a countermeasure against land price inflation. It was designed to act as a price control, but price controls are often counterproductive, as seen during the Nixon-era price controls enacted in the U.S. in the early 1970s. It only proves the scarcity of land or goods, which in itself is what enhances value. This concept is usually presented in the first chapter of any appraisal textbook.
The irony of the heavy use of eminent domain by the Seoul Municipal Government for redevelopment projects is that the government itself is creating the land scarcity that drives up land prices.

Seoul is a rapidly growing city that now has twice the population density as New York City.  Land prices have consequently skyrocketed, and there is nothing a price announcement system can do about that.  One example: last year Hyundai bought a 20-acre site in Gangnam for more the $10 billion ($500 million per acre) to build their new corporate headquarters. Samsung was the rival bidder.

While this particular condemnation lawsuit I am involved in might seem just like a chance for a property owner to get rich, there are hardships involved for the family who has to relocate. They explain that the approximately $700,000 offered to them is inadequate to find a substitute residence in an area where comparable houses are now priced closed to $2 million. So this becomes a hard luck story, too.

For all other U.S. citizens, including naturalized citizens, who fail to get fairly compensated for government-seized properties in other countries, this is an example that justice can still prevail.  Please feel free to contact me with your situation.


Other related posts:

http://www.internationalappraiser.com/2016/08/an-appraisal-of-commercial-property-in.html
http://www.internationalappraiser.com/2011/05/oversupply-shock-wave-hits-seoul-cbd.html