Appraisal of a Resort near Victoria, British Columbia

This was an appraisal done for financial reporting purposes for a Chinese corporation that acquired the resort 2 years previously.

 

Chinese investors have already bid up the Vancouver housing market to prices unaffordable to most Canadians. I even have a Chinese friend who owns three Vancouver condos while he lives in the San Francisco Bay Area.

 

Some Chinese investors are now competing with Canadian investors for commercial real estate. Capitalization rates for British Columbia hotels have dropped by half since 2003 (from 12 to 14% to 6 to 8%).  The BC tourist industry has particularly benefited from the until-recent growing oil wealth of western Canada, particularly Alberta.

 

View from my room

 

The subject property is a 5-star bayside resort on Vancouver Island with a restaurant, bar, spa and marina. Guests were observed to be middle-aged couples, presumably Canadian (who else would vacation in Canada in March?), and the ambiance of the resort makes it a good place for “second honeymoons”. Management is by Canadian professionals. In the two years under new ownership, net operating income has increased by almost 5%, with higher gains in gross revenues, occupancy and operating profit.

 

What is unique about this resort, though, is that only 30% of revenues come from room revenues. 53.5% of revenues come from food and beverage operations, which for most hotels normally have low profit margins or are even loss leaders. In this case, though, the profit margin on food and beverage operations exceeded 28%; the food was excellent, and the hotel often serves as a venue for weddings and other community events. The spa contributed another 12% of revenues and the marina contributed about 6% (but was the department with the highest profit margins).

 

I found it unusual that I was hired by an appraisal firm that was hired by another appraisal firm. Perhaps the Hong Kong Stock Exchange is intent upon truly independent valuations, which I would applaud. On this blog I have been critical in the past about the Singapore Stock Exchange, which seems to let corporations hire any appraisal whore that they choose.

 

The financial statements seemed to conform to the new Uniform System of Accounts for the Lodging Industry. I was presented, however, with excerpts from another appraisal done by an unknown appraiser as of the same valuation date. This appraiser was of the opinion that the hotel had appreciated 48% in value in the previous two years, despite only a 5% increase in NOI. I had no details of the appraiser’s income approach, which is the approach I generally rely on for profitable hotels, but I suspect that this appraiser did not adjust the income and expense statements for “reserves for replacement” for FF&E (furniture, fixtures and equipment) and other building components, which I generally see estimated at between 3 and 5.5% of gross revenues for hotels. The general manager of the subject hotel even estimated 4% “CapEx” for the subject resort.

 

The other appraiser’s sales comparison approach was an abomination. The simplest way of comparing hotels is on a “price per room” basis, but this works best for limited service motels which earn their revenues substantially from room rentals. All of the comparable sales prices he used were inflated and incorrect, which would have been easily verified by going on-line to British Columbia’s free land registry web site: http://evaluebc.bcassessment.ca , where real estate sales are publicly recorded. Although publicly recorded sales of BC hotels have been as high as $275,000 per room in the last two years, this appraiser made awkward adjustments (up to 100%) to justify a value of $533,333 per room, without considering that this resort’s restaurant, bar, spa and marina operations accounted for much of the value of the resort.

International investment heats up in the renewable energy sector

Solar-paneled roof of National Stadium in Kaohsiung, Taiwan, producing 1 megawatt of electricity

My appraisal practice has changed significantly in the last year. Whereas I spent the last few years visiting struggling or proposed luxury home subdivisions, hotels, tourist projects and golf communities in foreign countries, my clients have reduced their appetite for such risky ventures. Nowadays more than half of my work involves the valuation of land for solar photovoltaic energy production, AKA solar farms.

There seems to be a great appetite for cross-border investments in renewable energy infrastructure projects. Such projects are able to attract capital from investors not needing high returns, but focused rather on steady, long-term yield from contractual government or utility company payments that reimburse them. Renewable energy infrastructure seems a safe and easy investment compared to foreign casinos and luxury vacation resorts.

Each week brings one or more announcements of cross-border renewable energy deals. Last week, Swiss-owned Adiant Capital Partners sold a 37 megawatt UK solar farm to UK-owned Foresight Group. Canadian-owned Northland Power has announced a $177 million IPO for wind farms in Canada and Germany. Australian fund AMP Capital is entering the Japanese renewables market. The Blackstone Group (U.S.) has announced that its second energy fund, $4.5 billion in size, focusing on renewable energy assets worldwide, has been oversubscribed.

There is construction risk, of course, but many transactions are also structured as sale-leasebacks of the land the renewable energy projects are built on. And management risk of renewable energy infrastructure is nothing compared to commercial real estate, unless you have Homer Simpson pushing the buttons.

Renewable energy infrastructure is now so mainstream that Google and Apple are investing, including a Norwegian-owned project in Utah that I recently appraised, in which Google will be partially financing the development of a $157 million solar plant.

Another example of a multinational solar farm venture I evaluated was a duo of Ecuadorian solar farms to be developed by a German manufacturer financed by private money from the U.S. The deal fell through because the German CEO didn’t understand that his firm had to own or buy the properties they would be mortgaging and that licensing and power purchase agreements had to be finalized before the investor would commit funds.

Valuation methods for solar farm land

The approach of choice is the sales comparison approach, which works well in California due to the large number of publicly recorded transactions. Solar farm appraisers are not always so lucky to find verifiable sales, though, in foreign countries and “non-disclosure” U.S. states (such as Utah, New Mexico and Texas) and sometimes must turn to a land residual approach to valuation, in which land values are imputed by valuing the completed project and then subtracting development costs and expected entrepreneurial profit. The recent reduction in development costs has justified rising values of land with power purchase agreements and public approvals.

The role of technology in increasing solar farm land values

The last few years have seen escalating land values in the U.S. southwest for land which has secured conditional or special use permits for solar photovoltaic energy production as well as power purchase agreements with utility companies. The reason for this land price appreciation has been because the value of such land is a residual of the cost to develop it for solar PV use, and the cost of PV technology has fallen more than 50% in the last several years, but rates for electrical usage have not fallen.

Much of the deflation in solar PV development costs is the result of cheaper technology being imported from Taiwan and China. I have recently been on a research trip to Taiwan, for example, to study their solar PV and wind power innovations.

There may be a temporary halt in falling solar PV development costs, however, as the U.S. government in February has imposed “antidumping” penalties on Chinese and Taiwanese manufacturers. The antidumping duty on Taiwanese solar cells is now 20%, and the new duties on Chinese solar panels will range from 39 to 52%.

Wind-powered park at Cijin Beach, Kaohsiung, Taiwan

Also, with the price of oil falling more than 50% in the last year, there may be less public pressure to subsidize renewable energy projects. These combined forces may temporarily stop the tide of rising values for solar farm and wind farm land.

This may be a temporary hiccup, though, in a long-term trend of renewable energy sources to replace fossil fuel technologies as our predominant power production technology, as production costs are likely to continue to fall as technology advances. Compare these advances to shale oil hydraulic fracturing technology, which is only more expensive than conventional on-shore drilling. Ten years from now, the world of energy production is likely to be quite different than today.

Solar-powered golf course in Chiba prefecture of Japan, near Inba, as seen from my plane flight

Wind-powered business park in Kamisu, Ibaraki Prefecture, as seen from my plane flight

What is the Future for Bakken Real Estate?

 
 Dunn County "man camp" operated by Civeo, itself laying off 45% of staff

North Dakota and Canada's Bakken region can be considered a true boomtown economy, and with booms there are often busts based on changing economic circumstances.

The precipitous fall in oil prices is likely to whipsaw the Bakken economy, as shale oil production costs anywhere from $55 to $85 per barrel, and at this moment, West Texas Intermediate oil is trading on NYMEX for $47.88 per barrel. However, this figure represents the value of West Texas oil, not Bakken oil, which must be transported much farther than West Texas oil. The added transportation costs range from $11 to $19 per barrel of oil, meaning that the value of Bakken oil is much lower than for WTI.

This morning, the price offered at the pipeline for Williston Basin Sweet oil was just $31.69 per barrel and the price offered for Williston Basin Sour (meaning high sulfur content) was $22.58 per barrel.

Drilling activity in North Dakota has already been declining, with the number of drilling rigs declining 23% so far since this oil boom’s peak. The reason this number has not declined more is because much of the oil being produced at the moment is "hedged" or pre-sold at yesterday's prices. If current prices stay the same or decline more, the real bust might not occur for a few more months. That will be when layoffs accelerate and the man camps, motels and RV parks start experiencing significant vacancies.

The effect on real estate will be significant, and I have personally witnessed a similar collapse while working as an appraiser in Houston, Texas, from 1984 to 1987, when I lost my job in the Texas real estate collapse after oil prices fell to $9 per barrel.

Most affected will be the value of land previously considered to have development potential. There has been a proliferation of Bakken-area land parcels being advertised as ideal for business park, RV park or hotel development, at prices up to $200,000 per acre. Most of these are still raw, undeveloped land, and their highest and best use just may be a return to farming or ranching. It may be common to see commercial land values falling by more than 90% as highest and best use changes from commercial to agricultural.

RV parks will also be in jeopardy, as they typically house temporary oil workers who may be first to go as layoffs continue. Other “man camps” are already in trouble. Man camp operator Civeo, featured in the above photo, has announced layoffs for 45% of its total worldwide staff and saw its stock price plunge 50% yesterday. Its stock price is now $3.11 per share, an 89% decrease in the last year.

The lodging industry will also be severely impacted, as many hotel rooms were built to accommodate the boom in temporary workers, and there will be a consequent oversupply of rooms.

PS: Bakken update, January 14, 2015

The number of active drilling wells in North Dakota has fallen to 158 as of today, over 26% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet is $29.44 per barrel and $20.33 for Williston Basin Sour, representing further declines of 7% and 10% respectively in the last week.

PPS: Bakken update, March 5, 2015

The number of active drilling wells in North Dakota has fallen to 113 as of today, 47% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has risen to $35.19 per barrel for Williston Basin Sweet and $26.08 for Williston Basin Sour.

What this means is that Bakken oil producers are receiving 20 to 28% more for their oil in the last 2 months, as North Dakota drilling activity has dropped by 30% in the same time period and inventories shrink.

The consequences for the real estate sector will be negative.  Since the peak of Bakken drilling activity in mid-2012, the number of active drilling rigs has declined from 215 to 113, a drop of 47.5%.  Considering that each drilling rig employs 100 to 125 workers, this represents job losses of about 10,000 to 12,000 workers, workers who were living in motels and RV parks, and some who might have been renting apartments or even searching for a home to buy.  Despite the improvement in the price willing to be paid for Bakken oil, these benefits will go to the oil producers and not the real estate market.

PPS: Bakken update, March 16, 2015

The number of active drilling wells in North Dakota has fallen to 111 as of today, 48% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has plummeted to $28.44 per barrel for Williston Basin Sweet and $19.33 for Williston Basin Sour.

The most active driller in Bakken is Whiting Petroleum (WLL).  It put itself up for sale last week and the stock popped up to $40 per share after reporting interested buyers, at which time I sold this stock short. With current assets and a book value of property, plant and equipment (probably above market value) adding up to $13 billion, and liabilities of $8.3 billion, current market capitalization of $6.4 billion as of this moment seems at least 50% too high.

Related story:  http://on.wsj.com/1BNWrPY

PPS: Bakken update, March 27, 2015

The number of active drilling wells in North Dakota has fallen to 97 as of today, 55% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has increased to $32.44 per barrel for Williston Basin Sweet and $23.33 for Williston Basin Sour.

The most active driller in Bakken is Whiting Petroleum (WLL).  I sold this stock short 2 weeks ago at $40 per share and it closed today at $30.50 per share, for a personal gain of 23.75% in 2 weeks.

PPS: Bakken update, July 15, 2015

The number of active drilling wells in North Dakota has fallen to 73 as of today, 66% below the peak of the Bakken oil boom. The Plains All American Pipeline is no longer publishing offering prices for Bakken crude, but oil prices in general are higher compared to March, and the offering price for Nebraska Intermediate, closest in proximity to Bakken, is $39.50 per barrel today.  This is better news for oil companies, but bad news for Bakken-area real estate, as a two-thirds reduction in drilling rigs means that some oil workers might be moving out of state. The effect on employment could be muted, though, because up until this year, many workers were working double shifts so that they could earn six-figure incomes.  Still, this hinders their ability to pay the inflated rents of yesterday.
 

Another appraisal in Puntarenas, Costa Rica

The subject property was unimproved, mountainous, ocean view land of about 160 acres, located on the Nicoya Peninsula. It has no utilities, paved road access or development entitlements.

A decade ago, ocean view land parcels were trading at much higher prices because of their value to real estate developers, as each had dreams of building luxury vacation or retirement communities for wealthy foreigners. This same situation prevailed throughout Mexico and the Caribbean, too.

The only problem with this vision is that Costa Rica, owing to its topography and coastlines, has tens of thousands of square miles of land with ocean views, and there aren’t enough homebuyers to take up all the possible lots, particularly when having to compete with many other tropical paradise nations. Partially completed subdivisions ended up competing with other partially completed subdivisions when the market went into decline in 2007, and other projects never moved forward due to the difficulty in receiving all the necessary permits.

The land development approval process can take years in Costa Rica, much like in California, and typically entails:

1. Approval by the “municipality” (similar to a U.S. county),

2. Approval by the national environmental agency, SETENA (Secretaria Tecnica Nacional Ambiental),

3. Approval of all architectural and engineering design by the Department of Professional Responsibility of the CFIA (Colegio Federado de Ingenieros y de Arquitectos) [Translated: the Federal College of Engineers and Architects], and

4. Approval from the Ministry of Health

Last time I was in Puntarenas, in 2012, it seemed that every ocean view parcel of land was for sale and nothing was selling. Little has changed since then, except that asking prices are slightly lower now. Many landowners can’t reduce their prices any more and pay back the debt they’ve taken on. A broker was able to supply one closed sale occurring at a price at only one third of the asking prices of nearby parcels, but no large development parcels have been acquired since 2007.

There are enough land parcels with development entitlements or paved road access or utilities that unimproved land like the subject has little chance in competing for buyers, except at highly discounted prices.

Latest appraisal in Bakken

This  appraisal assignment was of a proposed 35-acre business park in the Bakken area in North Dakota in one of the most active counties for drilling. The owner planned to build a hotel on this site, but wished to sell off 25 acres to other users. Having a hotel on site would be a good draw for a restaurant, for instance, or perhaps offices serving as regional headquarters for an oil or oil service company.

The city with jurisdiction over this site had granted a permit to build a 2-story hotel with 290,000 square feet of floor area with the belief that it would be a 110-room family-oriented hotel. The developer plans to build a 3-story, 400-room hotel. Like many community governments in the Bakken area, the city was rather unsophisticated, not realizing that 290,000 square feet could fit many more than 110 hotel rooms. Nevertheless, the city expressed a desire for a hotel that catered to families whereas the owner/developer is known as a developer of “man camps” – lodging for single oil workers – with small rooms appropriate for single occupants, not families.

Example of hotel operated as man camp by Target Logistics in Stanley, ND

The city’s prejudice against “man camps” and oil worker lodging is becoming common among community governments in the Bakken area. Williams County, generally considered as the locus of the North Dakota shale oil boom, with Williston as its county seat, has issued a moratorium on new man camps and RV parks, as has McKenzie County, with Watford City as its county seat. There is a shared perception that man camps demand extra law enforcement resources, as so many single, bored, lonely, uneducated men in their 20s and 30s increase the local crime rate in such categories as public drunkenness, disorderly conduct, assault and sexual assault. They are paid well, though, averaging about $32 per hour, with many taking advantage of double shifts and earning 6 figures, so theft and robbery is less of a problem.

Temporary worker housing that is needed but unwanted by many local governments

The Bakken area is known for shortages of real estate in certain categories, particularly housing and lodging, but one property type in abundance is raw land. Early successes with Bakken-area business parks have led to a proliferation of “me-too” business parks, often having not yet procured the permits or water necessary for development, listed for sale at inflated prices. The subject property seemed to be in this category. 

Another complicating factor is the recent drop in the price of oil, which closed at $57 per barrel on December 19th. It is estimated that 60% of Bakken’s shale oil wells are unprofitable at below $60 per barrel because of the expense of fracking technology. The cost to develop a new well, furthermore, is estimated to be as high as $85 per barrel. The number of drilling rigs in North Dakota is now 181, 16% below the peak of the shale oil boom.

The few commercial land sales which could be found were of single-user sites of half an acre or less, whereas there is a proliferation of large business parks with unsold lots. In this instance, I had to create a discounted cash flow model with an extended absorption period.

Mainland China Property REITs to Multiply

Boundary between Hong Kong, on left, and Shenzhen, China, on right, photographed from Ramada Hotel
 

I’ve just returned from a recent trip to China, where financial deregulation continues onward. The week I arrived, the Chinese government approved a figurative “Through Train” that links the Shanghai and Hong Kong stock exchanges. And the first two days saw a massive transfer of capital from Hong Kong to Shanghai, with little capital flowing in the reverse direction. Part of the reason is because Mainland China is still perceived as the place where the growth opportunities are, and the Chinese Yuan currency has steadily appreciated relative to the Hong Kong Dollar, which is statutorily fixed to the U.S. dollar. The continuing trade imbalance between China and the U.S. continues to propel the Chinese Yuan slowly higher relative to the Dollar.

In this continuing Chinese financial deregulation, international real estate investors should take note of the proposal to organize mainland Chinese properties into REITs to be traded starting next year on the Shanghai exchange, with assets of these REITs estimated to top $6 trillion by 2020. This is an effort to support “the ailing Chinese property industry”. The Chinese government is also admitting a slowing of the economy as they announce reductions in taxes in order to stimulate business.

But if what ails the Chinese property industry is overbuilding, attracting more investors does not solve the fundamental problems of the industry, which is in need of more tenants, not more investors. More investors just pushes asset prices upward without improving net operating income, thus driving yields down, such as in Shanghai, where current yields were once over 7% but are now less than 5%.

Such compression of yields gives the appearance of improving real estate markets even when fundamentals are not keeping pace. For instance, I blogged last year about a portfolio of southern California industrial and retail properties I monitored over 11 years and found an average decline of 17% in net operating income but and average value appreciation of 28% in the same time period.

It remains to be seen how today’s investors will react to the new possibilities of investing in Chinese REITs. Such REITs often offer the prospects of instant dividends by the use of earn-out arrangements funded in IPOs, which serve as a return of capital rather than as a return on capital. Perennial China Retail Trust is an example, initially stumbling badly in the Shenyang market before finishing more successful projects in Chengdu and Foshan. Initial investors who bought at the 70-cent IPO price saw the stock price plummet to 40 cents before recovering to today’s 54 cents per share. Those buyers at 40 cents, including some insiders, still received dividends from the earn-outs funded in the IPO and profited enormously with the earn-out dividends and partial recovery in the stock price. Buyers will need to scrutinize prospectuses for actual net operating income sufficient to fund the advertised dividends.

Meanwhile, a recent Cushman & Wakefield report shed light on where Mainland real estate capital is headed -- out of the country, to "mature markets", with the U.S. being the favorite destination and United Kingdom in second place, and Hong Kong and Singapore as the preferred destinations for real estate investments in Asia.

The Issue of Client Pressure on Valuation Results in International Appraisals

Costa Rican subdivision overlooking the Gulf of Nicoya

It has been almost 3 months now since I’ve done a foreign appraisal assignment, and there are a couple of reasons for this.

1. I’ve had a large increase in business in appraisals of domestic “solar farms” (photovoltaic energy generation) in the U.S. Southwest, and

2. Foreign appraisal assignments have been offered to me with “conditions” that would compromise the ethical code most appraisers follow, conditions which would require me to deceive lenders or the U.S. Internal Revenue Service.

Here are some situations:

1. An owner of a high-end condo on Grand Cayman Island was fishing for an appraiser who could guarantee that his condo was worth $2 million in every year that he has owned it since 2006. But the Caymans have had the same rise and fall as every other Caribbean condo market, and it would not seem reasonable to anyone, including the Internal Revenue Service, that it had been worth the same amount in every year since 2006. The fact that he did an e-mail broadcast of these appraisal conditions to other appraisers could also end up getting him into trouble with the IRS, who provides rewards to whistleblowers.

2. Developers of ocean view residential subdivisions in Brazil and Costa Rica wanted to me to provide current market value opinions on their subdivisions without having me visit their properties. Yes, I was already familiar with their subdivisions, but a determination of current market value requires me to know current market conditions in these respective localities, requiring that I visit and analyze competing subdivisions, too.

“Desktop appraisals” (appraisals done without a property inspection) have limited reliability for overseas properties and are not likely be taken seriously by lenders, either. I also need to see if amenities, such as the guardhouse, pools, recreational areas are operational and that infrastructural development is continuing.

Shelf corporations in international real estate transactions

Grand Cayman's famous Ugland House, the address of 19,000 corporations

Most readers know what shell companies are. Many offshore locations, such as British Virgin Islands, Cayman Islands, and Cyprus are known for harboring shell companies because of their privacy laws, and shell companies are sometimes used for illicit purposes, tax evasion and money laundering.

But wait! This Wyoming office building houses 60,000 corporations.






A “shelf corporation” is an aged shell company that has a multiyear history of being in business and may also have a credit history and bank account, but no other assets or income. Shelf corporations are created by third party vendors to sell to buyers seeking a misleading history of credit and longevity for their own new enterprises. These shelf corporations are offered for sale on the Internet. Just do a Google search of “shelf corporation for sale” and you will find many shelf corporations that are legally created in the U.S., in states such as Nevada, Wyoming and Delaware, which promise privacy, secrecy, and protection from litigation. Named directors of these corporations are often down-on-their-luck individuals who consented to sell their names just like they would sell their blood to blood banks.

There are legitimate uses for shelf corporations, too, such as the ability to rapidly start up a business in a state that has a lot of red tape for start-ups.

Since most of my work is for lenders, though, I see the seamier side of this business. If the lender has made a loan to a shell or shelf corporation, and the loan defaults, the lender ends up trying to recover their money from a corporation which has no assets, no income and no accounts receivable.

I am sometimes confronted with purchase contracts in which the seller or buyer, or both, are LLCs, shell corporations or shelf corporations, leaving me unable to judge whether the purchase is an arm’s length transaction (a sale to unrelated parties). As an appraiser, however, I can only estimate a value supported by market data, and if the transaction is not arm’s length, it will become obvious. Many other appraisers will try to “hit the purchase price”, any way, with strange selection of or adjustment to comparable sales.

Every state in the U.S. has either a Secretary of State office or Department of Corporations office from which one can obtain names of the principals of LLCs and corporations, and it is helpful in determining whether a purchase transaction is arm’s length (different names on each side of the transaction), unless those entities are located in Nevada, Wyoming or Delaware.

Working in the United Kingdom last year, I was thrilled with the functionality of the UK Companies House web site – one web site for all of the corporations in the UK, so much easier than working in the U.S. It provided addresses, directors’ names, and dates for and changes of company names or directors. It also allowed me to easily establish that the sale contract I was looking at was for the sale of the property from one shelf corporation to another shelf corporation sharing the same directors — in other words, a completely bogus transaction.

The ICIJ, International Consortium of Investigative Journalists, has been documenting known offshore shell companies and their addresses. If in doubt about an address, one can check it out on their web site, https://offshoreleaks.icij.org/ They also have a list of the nations having the most offshore shell companies, which is helpful in its own right. For instance, a few weeks ago I was looking at a deal in Mexico in which the developer was a company in Cyprus. Red flag. Cyprus is not known for its real estate developers, just its reputation as a haven for shell companies.

Clues that you’re dealing with a shell or shelf corporation include:

1. No web site.
2. The principals of the organization have only hotmail, gmail or yahoo e-mail addresses.
3. The web site is “Under construction”. Sometimes there is verbiage about “amazing things to happen”.
4. No present location for company staff.

For example, in a situation I encountered in 2012, in which a piece of raw desert land was being purchased for $1.6 million above the price it had been listed at for two years, the buyer claimed to be looking for a location to build a 100,000 square foot corporate headquarters building for an unknown high-tech company. They had a web site under construction with the words:

“Company is in stealth mode while we develop the team, the infrastructure and the technology. Details to follow in Fall 2011.”

The corporation had no current location. A search of LinkedIn showed about 4 employees scattered all over the country, hardly enough for a 100,000 square foot building. No plans, specifications or blueprints were presented for the building, only artists’ renderings.

When he was unable to show established business operations, the CEO then talked about “secret government contracts”. Suspecting that my client had not performed due diligence on this loan applicant, I ordered a simple $25 on-line background check on the CEO and found:

1. Two criminal convictions, one for check fraud
2. Two bankruptcies
3. Two legal judgments against him
4. No background in high technology, but a bachelor’s degree in political science.

I could go on and on, but I quickly came to the conclusion that his company did not exist and his lack of recent accomplishments suggested that he may have been the kind of person typically recruited as a “straw buyer” in a fake purchase scam. If you participate in certain LinkedIn real estate groups, for instance, you may sometimes see offers of up to $50,000 to participate as a front man in a commercial real estate purchase. This is called “nominee fraud” by the FBI.

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.

Common Denominators Seen in Mexican Land Scams

 

After six years of appraising in Mexico I’ve seen the following patterns that warn me when I am being deceived.

1. My favorite one is when the loan applicant’s representatives take me to a prime location and then point to their property in the distance. “There it is,” they tell me. I tell them that my client requires me to set foot on the property, which is not really true (setting foot on the property is my requirement), but wouldn’t I look foolish and my client be harmed if I didn’t know find out that the land is a mangrove swamp? Sometimes it’s hard to tell from above, as can be seen in the following photos from Isla Mujeres:

 

2. Another pattern is when excuses are made as to why I cannot meet the property’s true owner. A common response is “We have power of attorney; it doesn’t matter,” but the document supposedly conveying the power of attorney is not convincing, either that is excessively old, it conveys power to yet another individual who is not present, or it does not actually convey power of attorney and the loan applicants are just hoping that I can’t read Spanish. Some feel compelled to provide a photocopy of the owner’s driver’s license or passport, hardly a standard of proof.

3. The borrower’s representatives all have business cards labeling them as marketing or public relations consultants, yet they claim to be real estate developers. “Show me your development plan” is a good question to flush out fake real estate developers.

4. When I request a current predial (property tax bill) for the property, deceivers instead supply a predial from years before. Years 2008 and 1993 are favorite years. Year 2008 is the year before Mexican tourist land values started crashing. Year 1993 was the year that the peso was devalued by 1000:1, so every assessed value appears 1000 times larger than it actually was. The inability to obtain a current predial might also indicate that the borrowers do not actually currently represent the true land owner.

On a related note, Citibank announced in February fraud-related losses in Mexico of $400 million in their Banamex subsidiary and has also experienced hundreds of millions of dollars in losses in previous years in ill-fated Mexican residential subdivisions.  In 2011, I pitched my own Latin American appraisal services to their chief appraiser for Latin America, who is actually a gringo in Atlanta. I was then told that I cannot serve Citibank because I am "not a national firm", even though the first three years of my career were spent at international firm Jones Lang Wootton, now JLL.

Next year, a client hired me to appraise a proposed residential subdivision outside Mexico City and also hired the local Cushman and Wakefield Valuation and Advisory Services office in Mexico City.  C&W came up with an appraised value 15 times as high as mine and the client got us on a 3-way conference call to resolve this discrepancy. The C&W appraiser was a young girl right out of college.  I noted that her report had incorrect zoning for the site.  She said that she did that because the broker told her to, but there was no documentation that a change in zoning was occurring and the neighboring subdivision had only been able to sell less than 20 lots. My client told her "Don't assume anything".

Perhaps Citibank's insistence on using "national firms" is what has caused them so many losses in Mexico? Perhaps this also explains why Cushman is facing over $10 billion in appraisal malpractice claims.

 

Appraisal of a proposed resort project near the Canadian Rockies

 

Curiously dead ground vegetation for a proposed vacation resort

These were 130 acres in a town west of the Canadian Rockies popular with snowmobile enthusiasts. Local leaders want to make their town the “Next Canmore”, an expensive vacation community about one hour's driving distance west of Calgary and the first town east of Banff, Alberta's most famous ski destination. This town, though, was 300 miles west of Edmonton.

The local authorities, eager for economic development, had granted entitlements to a developer to build 183 condos and 70,000 square feet of commercial space. To impress how much political support she had for this project, she invited the mayor to have lunch with us. I ordered a “moose burger”, but I was also informed by the two that the restaurant didn’t really serve moose meat.

No feasibility study had been done, but I was told that there was a waiting list of 250 for the condos, and substantial "verbal interest" for the commercial space (meaning no leases or letters of intent). It turned out that the waiting list for the condos was just as real as the mooseburgers. It was just a collection of names and addresses of people who had responded to ads in snowmobile magazines, and there had been no discussion of prices, nor had there been any contracts signed.

The condos were priced quite steeply, from $430 to $455 psf Canadian, with prices ranging from $350,000 to $680,000, in one high density building. The town itself, though, had 21st century homes on their own lots for sale for less than $270,000. Per Landcor, the data service I use in BC, the highest priced home sale in the last year had been at a price of just $225,000, a new log home of 1068 square feet on a conventional-sized city lot.

124 of the 130 acres were a former rail yard previously used by the Canadian National Railway. Railyards are often heavily contaminated through years of washing out tank cars. Rail ties, too, were treated with arsenic to resist rot before being set in place. The photo demonstrates a mostly grey area of dead ground cover, punctuated by young pine trees, a tell-tale sign of contamination.

The properties had been acquired at the peak of the market in 2007, and in my previous valuation assignment in BC, I noticed that the sale of vacation properties began to considerably diminish after 2007. Yet, in this situation, the developer had appraisals done by Canadian appraisers estimating land value several times as high as the acquisition price in 2007. It gives me the impression that the Canadian appraiser profession is less effectively regulated and policed than in the U.S.

Another appraisal assignment in Nayarit, Mexico raises red flags of possible fraud

This was the appraisal of nearly 1000 hectares (over 2000 acres) of beachfront land, my third appraisal in Nayarit. There were many red flags to cause me to be suspicious:

1. The borrowing entity was a company in Cyprus, a country known as a hotbed of offshore shell companies (2267 identified so far by ICIJ). Shell companies are notorious for straw officers and directors and untraceability. Think of Cyprus as another Cayman Islands.

2. The borrowing entity had no history and no web site.

3. The borrowing entity did not own the land but had a JVA (joint venture agreement) with the landowner, a Mexican national.

4. The principal of the Cypriot company consistently misspelled his own name throughout the JVA.

5. All the bank account information of the Cypriot company had the company name misspelled.

6. As with Mexican land scams I’ve uncovered, the borrower’s representatives extolled the development possibilities for the land, but their credentials were not as real estate developers, but as marketing or public relations consultants.

7. No credible development plan was presented, but I was told that there was an agreement with the “Canadian Retirement Association” to build thousands of vacation homes for Canadian retirees. I have been unsuccessful in verifying the existence of the Canadian Retirement Association.

8. The Toronto phone number I was given for the Canadian Retirement Association connected me to a man who seemed to be more fluent in Spanish than in English and who bragged about his 75 “advertising awards”. This is not the talk of someone who would be trusted to manage a Canadian pension fund.

9. Similar to the Mexican land scams I’ve seen, I never got to meet the actual property owner, but I was given a document that assigned the right to mortgage his land to one of the borrower’s representatives. As I learned today at the ACFE Fraud Conference in San Antonio, identity fraud is a growing problem in Mexico as it is here in the USA, so I have to be careful.

10. As with Mexican land scams I’ve seen, my request for a current predial (property tax bill) instead yielded a predial from 2008, raising the possibility that the property has diminished in value since then or even the possibility that there was no affiliation with present owner such that a current predial could be provided.

Having been collecting listing data on this part of Nayarit for the last two and a half years, I noticed that asking prices on beach land in this area have declined up to 60%. Regardless of the suspicions I had about the loan request, the appraised value fell short of what was needed, any way.

Land loans are an ideal conduit for fraud in Mexico, by the way, because the value is so hard to determine, accurate information is so hard to come by, and it is easy to hire a Mexican appraiser to appraise the land for $100 million.

 

Another appraisal in the Bakken area of North Dakota/Canada

Bakken is a subsurface shale formation underneath North Dakota, Montana, South Dakota, Saskatchewan and Manitoba and has become the biggest oil find in North America in the last 40 years (not since Alaska). North Dakota has the most favorable location over the Bakken foundation and has undergone boomtown economic conditions similar to the Alberta Oil Sands near Fort McMurray, Alberta.

In my latest appraisal assignment, I appraised a massive RV (Recreational Vehicle) Park which provides temporary housing for hundreds of new workers in the oil and oil service industries as well as a motel with fully occupied RV spaces behind it.

Being a boomtown economy, there is an extreme shortage of housing for incoming workers. This is a real worry for oil firms and oil service firms desperately in need of manpower; in the last measurement of unemployment in Williams County, home to the largest Bakken-area city of Williston, the last measured unemployment rate was 0.9%, and other Bakken-area counties were at around 1.5%.

RV Parks have been the quickest solution in providing new housing, and the 765 space RV Park I appraised was actually in the business of wholesaling its spaces to housing contractors who then erected temporary housing, either in the form of manufactured housing (as seen in left of above photo) or else recreational vehicles themselves (as seen on right of above photo).

In this case of such an enormous RV park, the gross income multiplier seemed to be the most reliable method of valuing, as the collected rent per pad was much lower than for much smaller RV parks in which the landlord needed no intermediaries to lease RV pads.  Using “price per pad” established by much smaller parks would have overvalued the subject park.

The motel averaged occupancy of about 90% last year, while for the first third of this year it has been close to 100% and is budgeted to average 93.5% for the year.  Despite the high occupancy, room revenue multipliers in this region were not found to be higher than motels in other states; only the incomes were high.

Numerous motels are also being erected and designed to be extended stay lodging.  At the new Telluride Lodge where I was staying, which advertises itself as "executive housing" to distinguish itself from the other more blue collar housing choices available, I checked in to find no soap or shampoo in the bathroom.  In my trip to the front office to explain these missing items, the incredulous front desk clerk offered me a bottle of dishwashing liquid instead.

"Executive housing" offered at Telluride Lodge south of Watford City

Room revenue multipliers at motels listed for sale started at a remarkably low 2 x revenues.

What accounts for the pessimism of investors?  Perhaps the most obvious reason is the slowdown in employment growth, which was close to 50% per year prior to 2012 but only 6.5% in the last year, which is still good, but is temporary housing and lodging being built too fast to cope with a coming slowdown?

The most labor intensive phase of an oil boom is the exploratory phase.  Extraction requires less personnel and is also a declining number.  Based on these realities the North Dakota state government's Oil and Gas Division and North Dakota State University are both predicting that Bakken-area employment will begin to decline starting in 2020. Maybe this why so many investors want their returns upfront in the form of current returns.  As the need for exploration personnel lessens, too, will the need for temporary housing lessen.

Another Appraisal at Playa Novillero, Mexico

This assignment called for the appraisal of 91 hectares of beachfront land at Playa Novillero very near some land I previously appraised in 2012. Playa Novillero is Mexico's longest beach at 82 kilometers, but is isolated and lacking in visitors. Despite being zoned for tourist development, land uses at the beach reveal abandonment rather than new development.

The beach is ideal for families, having about 50 meters of sand extending inland and shallow depths for a long distance out, but the beach is busy only week per year during a Mexican holiday week.

There are no close international airports. Last time I was here it took 2 hours to get here from the Mazatlan airport, and this time it took me 4 hours to travel from Guadalajara. Decent roads end at the town of Tecuala, which is 22 km inland from the beach, and arriving at the small village (population 249) at the south end of the beach, one has to drive up the beach to access the beach properties. This time our GMC got stuck in the sand and I had to get down on my chest several times to clear the soft sand from around the tires.

Most of the beach homes are abandoned.

As in the last Mexican appraisal assignment, the loan applicants were pledging as collateral a property that they did not own yet, although they did possess a 4-year-old purchase contract and a document conveying "Special Irrevocable Power" for 5 years, with less than a year from the end of the contract. They said they were taking their time executing the purchase contract, but there was no plan to close on the purchase at the time of loan funding, leaving the lender with the prospect of having no collateral for the loan.

Just as in the other beach property assignments, the most consistent indicator of value in this case was the price per lineal meter of beach front.

An Appraisal in Nigeria, Land of Inconvenient Factoids

Ikoyi neighborhood in Lagos

A factoid is defined by Wikipedia as “a questionable or spurious (unverified, false, or fabricated) statement presented as a fact, but without supporting evidence.” A good appraiser learns how to distinguish between facts and factoids. A bad appraiser does not care.  In my latest assignment in Nigeria, I found the nation to be as rich in factoids as it is in oil.

I was initially given 2 weeks’ time to submit a valuation report on an 11-unit luxury apartment building in the prestigious Ikoyi neighborhood of Lagos, Nigeria’s largest city. In contacting the borrower, I stipulated that tenants had to be notified in advance that I would be entering their apartments during my property inspection. The borrower then informed me that this could not be done, because Nigerian Law required that an attorney be hired to provide 21 days’ advance notice to each tenant. Was this law real, or just a factoid? These apartments were labeled as “corporate serviced apartments”, which suggested to me that they received regular maid service of some kind, and how often do maids need a legal writ to clean a room?

The importance of seeing inside the apartments was mainly to verify occupancy, as the subject neighborhood of Ikoyi in Lagos has become seriously oversupplied with new, luxury 3 bedroom 3 bathroom apartments.

Several years ago, prior to the Global Financial Crisis, Ikoyi was known as the most expensive neighborhood on the African continent. Flats were selling for more than a million dollars and renting for $5000 to $7000 per month. The last canvassing of vacant apartments in Ikoyi in late 2012, however, indicated a vacancy rate of 42%.

The subject property was represented as fully leased at individual unit rents of $58,000 to $60,000 per year, or about $5000 per month. Was this real or just a factoid?

Arrival at Lagos Airport

The Nigerian embassy in Washington had provided my visa and told me that no immunization certificates were needed for entry into Nigeria when traveling from USA or northern Europe. When I was exiting customs at Lagos Airport, however, a customs agent asked for my proof of Yellow Fever immunization (which I had left at home). I told her what the embassy had told me, but she told me that all persons entering the country had to show the card. Was this the truth or just a factoid?

Without my Yellow Fever card, she said that I would be sent back home [having wasted more than $10,000 on a plane ticket]….unless….I could pay a fine. “How much is the fine?” I asked. “How much can you pay me?” she responded. “$50,” I said. She said “No, $100.” When I tried to hand her the $100, though, she cautioned me to not display the money, instead instructing me to go to the men’s room and then place the $100 in my passport, which she took out of my folded passport as I exited Customs. As this was the first of other attempted extortions to come, I learned one useful thing – Nigerian civil servants do not like to be witnessed taking bribes.

Back home from Nigeria, I read the current issue of The Economist, which had an article entitled "Big Country, Thin Skin", stating that Nigerian "corruption is so endemic that many visitors pay their first bribe before they have even left the airport."

Research in Ikoyi

Since the crisis, demand for luxury apartments has weakened, and some major oil companies such as Shell, Exxon and Schlumberger have constructed their own employee housing. Meanwhile, construction of new luxury 3 bedroom apartments continues unabated.

In driving through Ikoyi at 9 pm, it was eerie to see so many dark, empty residential towers. I wanted to see the subject property at night (one way to estimate occupancy), but the borrower told me that he had no permission to enter the subject’s gated Parkview Estate community during the night.

He couldn’t get permission to visit his company’s property? Either this was another factoid or neither he nor his company really owned the building. Neither he nor his company was named on the Certificate of Occupancy, the Nigerian version of title.

The inspection

I was actually shown only one apartment the following day, and the functionality of the building was not impressive, with long narrow apartments, no elevators, minimal fenestration, and no power on during my inspection, despite the presence of two back-up generators.

Center hallway inside unit

Typical bedroom

Kitchen

In the U.S., when an appraiser inspects a building represented as fully occupied and finds the power turned off, this is an instant red flag, but there are many power blackouts per day in Lagos, which has one of the world's least reliable electrical infrastructures. That is why many buildings there have back-up electrical generators, and the subject property had two of them to guarantee 24 hours-a-day electrical service.

Most new apartments in the U.S. have separate electrical meters for each apartment, so I asked to see the meters just in case only one meter was turned off. There was only one meter for this whole property, though, and I noticed that common area electricity was turned off, too. For the period of time I was at the property, about 45 minutes, the power was off the whole time, which would be a situation unacceptable to real occupants as food perishes in dark refrigerators and freezers, and fussy executives don’t want to come home to walk up three flights of stairs in the tropical heat to a warm apartment.

There were no signs of other tenants during my 11 am weekday inspection, although there is the possibility that all tenants would be at work. Nevertheless, there were no personal effects or plants in windows or on balconies to indicate that anyone lived there. The two cars in the parking lot belonged to staff only.

On that basis I had to conclude that the property was vacant. I don’t give loan applicants “benefit of the doubt” in face of evidence to the contrary. Moreover, an examination of documents further made their claims of rent and occupancy to be absurd.

The documents

Despite repeatedly requesting operating statements for 2012 and 2013 prepared by a property manager or accountant, I instead received an Excel spreadsheet for 2013 indicating that 12 units out of 11 had been occupied at rents of $58,000 to $60,000 per unit per year (representing 109% occupancy) at rents well above asking rents in the neighborhood, with relatively few expense items listed, all in very round numbers (not typical of an accountant’s report or professional management report), and not including usual line items such as building insurance, water, sewer or property management. The report appeared to have been hastily prepared and not consistent with standard worldwide real estate accounting procedures.

I did find 10 of the subject property’s apartments listed as available for rent on the Internet for the dollar equivalent of $36,810 per year each, or about 40% less than what the borrower had represented as being rented for at the time, which was November 2012.

On that basis I dismissed the operating statement and rent roll as factoids and not facts.

Leaving Lagos

The passenger screeners were greedy. I normally travel with both a laptop and an I-Pad, but did not take the I-Pad out of my luggage. The first passenger screener informed me that failing to take out the I-Pad was a violation and I would need to pay a fine. I asked “How much?” and she said “Just drop it into the luggage tray” without specifying an amount. I took out Nigerian currency from my wallet and hurriedly dropped a 100 naira note into the luggage tray, failing to compute that my bribe amounted to the equivalent of only 60 U.S. cents. She just looked at it, irritated, and said “Take it back”.

I stuffed my remaining Nigerian currency into my right pocket and was then greeted by a personal screener (frisker). He detected the wad of cash in my pocket and asked to see it. He then asked how much I could give him, and I just responded with a loud “How much do you want?” That seemed to embarrass him and he hurriedly let me pass.

HUA ZHU HOTELS GROUP AND CHINA’S MIDSCALE HOTEL MARKET

Beijing's Wangfujing Night Market, a popular tourist spot.  One of the closest stalls in the photo sells barbecued scorpions.

In traveling throughout China, I have been constantly surprised to find most hotels to be independently owned and managed and unaffiliated with known franchises. The higher end hotels (such as Peninsula, Swissotel, Raffles, Hyatt) are an exception, as they are particularly suited to serving Western travelers, but at this stage in China’s march towards prosperity, with its burgeoning middle class, the time seems ripe for major hotel companies to consolidate the remainder of the Chinese lodging industry, just as was done during the 1960s and 1970s in American history, when hotel names such as Hilton and Holiday Inn became commonplace.

China has now reached a threshold in which leisure travel is taking off, presenting opportunities for mid-priced and economy hotel chains to gain market share. Meanwhile, the new Chinese leader, Xi Jinping, has spent the last year cracking down on wasteful spending by government workers, such as stays at 5-star hotels, and local governments have enacted similar restrictions, so far as to cause 56 5-star hotels to request that they be re-labeled as 4-star hotels. This should redirect much government and business travel into midscale hotels.

Entrepreneurial forces have already been put to work to consolidate the midscale hotel market, as several Chinese companies have been building midscale hotel chains (in the 2 to 4 star range), achieving economies of scale, brand awareness and customer loyalty. These hotel chains are relatively new; none existed as a franchise before year 2003. The creation of a strong hotel brand adds great value to each such branded hotel because of central reservation systems and guest loyalty rewards programs (although the Internet has slightly eroded this value).

The most noticeable Chinese franchises are 7 Days Inns, a limited service chain similar to Super 8 (which is also common in China), Jinjiang Inns, a state-owned hotel company that covers the higher end of “midscale”, and Hua Zhu Hotels Group, an assemblage of several different brands such as Starway, Hi Inn and Hanting.

Hanting Beijing Wangfujing Hotel, with nightly rates starting at $46

Hua Zhu has particularly attracted attention recently because of its very rapid growth, surpassing Jinjiang Inns before 2010 to become China’s largest hotel chain. Hua Zhu Hotels Group had its IPO on NASDAQ in 2010 (as China Lodging Group) and has expanded its reach from 413 hotels at the time of its IPO to 1425 hotels today, with 152,879 rooms in all. China Lodging Group stock (symbol HTHT) opened on NASDAQ in 2010 at $13.50 per share and is now trading at $26.60 per share. There have been two days this month in which HTHT was listed on Yahoo Finance’s top 5 stocks “gaining on unusual volume”.

Hua Zhu Hotels Group has existed since 2005, and its revenues expanded 60-fold in 6 years, as follows:

Year Revenues (RMB) Earnings (RMB)           # of hotels
2006 54,031,000
2007 235,306.000        -111,623,000
2008 764,249,000        -136,162,000                 167
2009 1,260,191,000        42,545,000                 236
2010 1,738,493,000      215,751,000                 438
2011 2,249,597,000      114,832,000                 639
2012 3,224,527,000      174,887,000               1035
2013* 4,153,000,000*    221,000,000 **           1425
*projected
**first 3 quarters

As of the 3rd quarter of 2013, average daily occupancy was 94%, average daily rate was 186 RMB ($30.74) and REVPAR (revenue per available room) was 175 RMB ($28.93). While these numbers are lower than those of 2010, Hua Zhu explains it is because they are shifting towards lower-tier cities in their expansion. Meanwhile, their frequent guest program is reported to have more than 13 million members, constituting 80% of room nights sold.

Because the Hua Zhu brand is now so well established, Hua Zhu can now move from a business model in which most of their hotels were once leased and operated to a business model emphasizing managing and franchising, enabling Hua Zhu to expand its reach with much less capital and operations risk, much like the other most successful hotel franchises. 60% of their hotels are now managed and franchised vs. owned as leasehold.

The recent dip in share price to $26.60 would indicate a price/earnings ratio of 28 for the trailing 12 months, but the first two quarters reported minimal earnings (mainly due to depreciation expense) despite strongly positive cash flows from operations, whereas the last two quarters had respective earnings of 39 cents per share and 50 cents per share, suggesting a much lower PE ratio based on forward earnings. The recent dip in price seems to be caused by a general overreaction to the most recently reported  dip in PMI (from 50.5 to 49.6) in China.  Even the Chinese internet stocks such as QIHU (down 10% after the report) and YY (down 7.4%) are behaving in similar fashion despite being unrelated to the manufacturing sector.

Disclosure: I own this stock.

Shanghai's Xujiahui District and Starway Xujiahui Royal Garden Hotel, with rack rates starting at $76