Saturday, May 7, 2011

Beijing housing shortage

Typical Danwei-type housing for middle classes


Luxury housing for upper classes





Beijing is one of those boom towns that suffers from a severely constricted housing supply, despite valiant state planning efforts. Whether in a centrally planned economy or an exclusively market-driven economy, though, this is a natural occurrence that comes from rapid economic growth. Rapid growth is hard to plan for, although China has been known to build residential communities in anticipation of growth, sometimes prematurely, such as the Zhengzhou New District.

The Government is encouraging both public and private housing development in an effort to solve the housing shortage. The “which is better, Communist or capitalist housing solutions?” debate was answered a generation ago by Deng Xiaoping, Mao’s second successor and architect of the modern Chinese economic miracle, who quoted a Szechwan proverb that it matters not whether a cat is black or white; if it can catch mice, then it is a good cat. This saying particularly resounds with me, as I have a black and white cat that catches numerous rodents, brings them into the house, and then forgets to kill them. Not a good cat.


"Chairman Meow" - Feline founder of a rodent "catch and release" program -- caught outdoors, then released into the Martin household. In debating communist vs. capitalist solutions to solve housing needs, Deng Xiaoping quoted a Szechuan proverb that it matters not whether a cat is black or white; if it can catch a mouse, it is a good cat. Deng may have been right about many things, but wrong about my cat. Both black and white and catches mice, but fails to kill them. Not "a good cat". Realistically -- is this the face of a mouse-killer?


High housing prices and rents

A joint Wharton/National University of Singapore study found that housing prices increased by 225% in the last 8 years and Beijing land prices increased by 800%.

There are anecdotal reports that Beijing housing prices average 27 times annual household income. Unlike in the Western world, mortgage loans are limited to no more than 50% of value; nevertheless, additional leverage is often obtained from close relatives.

In an American city, housing prices at 27 times annual household income would be a precursor of a bubble waiting to burst, but only because American housing purchases have become highly leveraged investments in which the homeowner can quickly owe more than the house is worth, incentivizing the homeowner to walk away from his home via foreclosure, short sale, or deed in lieu of foreclosure. It’s harder for a Chinese homeowner to walk away from substantial equity or loan obligations to family members.

The Chinese housing model is less dependent upon leverage, while the family residence is considered to be the most secure asset a family can own. This environment also attracts speculators, which the Government continues to try to quell with new policies to curb housing price inflation, most recently tne "Eight National Measures" whose policies include 1) no bank financing for third home purchases, 2) minimum cash down payments of 30% for first home purchases and 60% for second home purchases, and 3) restricting home sales to only "registered residents".

The hukou system classifies citizens by their place of origin, thus limiting their mobility or restricting the right to services in the cities they move to. Preferential treatment is extended to "registered residents". It creates an almost apartheid system pitting rural vs. urban residents. The hukou system of classifying residents limits home purchases in cities with housing shortages to "registered residents" or "migrant residents" who can establish that they have lived and paid taxes in the city for at least 5 years. ("Migrant residents" have become marginalized similarly to illegal aliens in American and British societies.)

The sale of homes held less than 5 years is also taxed. The Central Bank has also raised bank reserve requirements 16 times over the last year and a half to rein in bank lending. Reserves are now required to be 21.5% of deposits.

Residential rental property investments are also priced very high, with sales prices reflecting annual gross rent multipliers exceeding 40 -- even higher than in Singapore or Hong Kong.

The China Daily reports a study by the Chinese Academy of Social Sciences that property prices in Beijing and Shanghai are 30 to 50% above market value. Their definition of market value obviously differs from that of other countries, as "market value" usually represents the price that a property would sell for under ordinary arm's length conditions, a definition commonly used in the U.S. The idea that everything is selling at above market value suggests a different definition of market value than held in the U.S.

With the Beijing housing shortage, the renter is in a particularly difficult position. One computer graphic designer explained to me that he pays about 70% of his monthly income on rent for his Beijing apartment, a rent equivalent to about $1000 USD per month, double what he was paying 5 years ago. He explains that recent college graduates often form groups of 6 or even 8 to rent one apartment, dividing the living room into individual living units.

Those who might consider Beijing housing prices to be a bubble, should take note that most bubbles collapse from falling demand or supply increases well in excess of demand, which so far does not seem to be occurring in Beijing. In American housing bubbles, one can observe that the most supply-constricted markets, such as Manhattan or San Francisco, suffer the least depreciation in economic downturns. One thing that prolongs the Chinese Bubble, too, is the lack of property taxes, which makes carrying costs low for real estate speculators. This is starting to change, now, with the cities of Shanghai and Chongqing instituting residential property taxes, with assessment rates ranging from .4% to 1.2%. This could curb speculation, although Chinese investors have few other choices of investments; Chinese stocks are considered riskier investments than housing and are down about 25% this year.

One interesting twist to the Chinese housing market is that all properties are leasehold. The residential land leases from the government are 70 years in length. As is customary with leasehold properties, improvements must be removed by the end of the lease. This creates interesting repercussions for the Chinese housing market. What happens to resale value after a few decades? Will family heirs have considerably diminished hereditary rights to housing? What resale values are possible for older homes nearing the end of their 70-year leases? It will be interesting to watch this grand housing experiment.




An answer to the overpopulation problem? -- from engrish.com









Enhanced by Zemanta

Wednesday, February 23, 2011

Fox Business interviews Vernon Martin about investor "fam tours"

Photo of Riviera Maya beach featured on Pathfinder International fam tour

FoxBusiness.com did a story last Friday entitled "What You Need to Know Before Buying Foreign Property" and interviewed three sources, including me.  The URL link is:


"Fam tours", short for "Familiarization tours", are sponsored, highly discounted travel for select individuals in order to promote interest in the host locations. They are most commonly offered to travel agents. Fam trips are also offered, though, to potential homebuyers and real estate investors, a phenomenon that I see happening worldwide.  

As for fam tours for North American investors, I’ve recently seen the most activity in Costa Rica, Nicaragua, Belize and Mexico’s Riviera Maya south of Playa del Carmen (such as Tulum in the above photo).  New highways and airports are making these regions suddenly more accessible to tourists, allowing residential development in areas previously considered too remote.
  
Vice versa, I have seen fam tours to the U.S. for Chinese investors seeking residential properties, something I discovered in my Asian travels last year.  Unfortunately, some fam tours for Chinese investors seem to be focused on the most overbuilt vacation condo communities in the U.S., particularly the Florida Disney World market.  Many of these condos are described as being “just 3 exits from Disney World”, encompassing thousands of newly built but unsold condos. I haven’t seen a more overbuilt vacation condo market within the U.S.  This makes me skeptical about fam tours in general.

Africa is another place offering a growing number of fam tours for European investors.  Ghana, for instance, is trying to attract European investors, while Gambia has been offering fam tours to Nigerian investors, creating some local controversy, as Gambians perceive Nigerians much the same way North Americans perceive them.

A healthy dose of skepticism needs to be exercised by anyone invited on a fam tour.  In choosing among fam tours, I would suggest making the following choices:

  1. Choose a fam tour organized by the local equivalent of a Realtors Association, as many different properties will be presented, as opposed to a fam tour operated by just one developer’s project.  Nicaragua, for instance, has been offering such comprehensive fam tours in an effort to create awareness of Nicaragua as a viable vacation or retirement destination (as compared to Costa Rica next door). The more sponsors there are, the less your trip will feel like an abduction.
  2. One dirty little secret of marketing vacation residences to foreigners is that many projects have not been built yet.  They cannot get built without financing (which is where I get involved), and they cannot get financing without substantial presales accompanied by substantial cash deposits.  The biggest discounts are offered on the unbuilt properties, but herein lies the greatest risk that the property may not ever get built.  The deposits are often said to be “completely refundable” but may not be, and it is difficult for the foreign investors to negotiate the local legal system to get his or her money back; the “impartial escrow officers” can be the paid stooges of the real estate developers.  One should choose a project that is already close to completion, as this will show the project is viable and that title should be clear.
  3. The market for overseas or retirement residences was much stronger a few years ago, and many landowners have jumped on the bandwagon to offer luxury residences or residential lots for foreigners before they have even developed their land.   Beware of a fam tour for a project that is unbuilt and has nothing more to show than artists’ renderings and a piece of raw land with a view of the ocean.  Only a small fraction of these projects will ever be built, as the potential supply greatly exceeds demand.  There is no shortage of raw land with pretty views in the developing countries of Latin America and the rest of the world.
  4. Investors should choose fam tours that give them enough free time to “comparison shop”.  Some fam tours are overscheduled to the point where the investor cannot get away to find better deals nearby.  The fam tour may be to a destination where there are no rental cars available, but consider that real estate agents in that area may be willing to drive you to other properties, particularly completed properties.  If you are already at a completed project, independent real estate agents can alert you to resale opportunities in the same development which may be available at lower prices. In Latin America, by the way, you can depend upon real estate agents to be fluent in English; many are former Americans.
Some fam tours may offer to reimburse airfare, but the fine print might say that the airfare will only be reimbursed if a real estate purchase is made.  The fam tours I am familiar with, however, just offer a short stay for a discounted price, say $200 to $400 per person for a quality hotel and meals and transportation over a 3 or 4-day period.

For freeloaders who just want a discounted vacation trip, consider the loss of time and freedom while on the fam tour.  Is it worth it?  Have you ever been invited to a free breakfast in Hawaii in exchange for your attention to a 90-minute time-share sales presentation?  Was it worth it?  Only you, the reader, can truthfully answer this question for yourself.

Monday, January 24, 2011

Appraisal of the Leasehold Interest in an Australian Nursing Home


I recently returned to Melbourne, Australia, to appraise yet another “aged care home” in a corporate portfolio of nursing homes and retirement villages seeking financing in the United States. The Australian and New Zealand banks won’t finance such property types any more due to a wave of failures in this industry in 2009.

The main problem with the Australian aged care industry is that it is highly dependent upon government subsidies which have not been increasing as fast as operating costs, the most notable cost being staffing costs. Unlike much of the “Western world”, Australia has escaped recession and suffers from labor shortages in certain industries, particularly the aged care industry, which has been limited in its ability to compete for nursing talent by low operating profit margins and inadequate government reimbursements. In this respect, Australia and the USA have a similar problem.

In this particular assignment, neither the borrower nor the lender informed me that the nursing home was leased rather than owned, a fact that only became evident to me after I ordered a title report on-line from the Victorian government (Melbourne is in the Australian state of Victoria).

There was some confusion due to some slight connotative differences in the definition of “leasehold interest” between Australia and the USA – two great nations separated by a common language (English). The Australians assumed that the US lender would lend on the value of their “going concern”, which in this case was the value of the nursing home business enterprise, the bed licenses, the FF&E (Furniture, Fixtures and Equipment) and the “Accommodation Bonds” collected from incoming residents. The American lender simply thought of the leasehold interest as that interest created by having a favorable (below-market) rental rate on leased premises. This difference in the connotation of “leasehold interest” created a vast gulf between borrower and lender in the perception of what constituted adequate security for a mortgage loan.

The nursing home was “built-to-suit” in 2009 and its rental rate was structured to be close to a market rental rate. The only aspect which created positive leasehold value was that part of the rent included a $900,000 lump sum payment in 2010, leaving less subsequent rent to be paid. At an annual rental rate of $8425 per bed in an industry where most aged care facilities are leased in the range of $10,000 to $13,000 per bed, there is a positive leasehold value. Nevertheless, there remains one more $900,000 lump sum payment that closes most of this leasehold value gap.

The borrower was quite emphatic about the value of more than $6 million in “accommodation bonds” collected so far from incoming residents, but such bonds are not “free money” but are liabilities that must eventually be repaid when the residents leave (either for the afterlife or else another facility). In the US one would naturally ask why such a liability could be considered an asset, but in fairness to the Australians, these bonds serve as interest-free loans in an economy where one can actually earn a decent rate of bank interest (6% +) in the mean time. In the US, bonded indebtedness is more likely to be treated as a shameful secret that only comes to light after I read the title report.

There are good reasons, though, why accommodation bonds can never serve as suitable collateral for a mortgage loan:

1. Aged care homes are allowed to commingle bond funds with their own business operations, as they may be spent immediately for debt reduction or capital improvements,

2. Bond proceeds can be immediately spent, and

3. Individual bondholders (residents) are in superior lien position to mortgagees.

If an aged care home fails, such as we saw in my previous blog about the Bridgewater facility in Roxburgh Park, the bond proceeds may disappear in the failure of the nursing home enterprise. The foreclosing lender has no access to the bonds, and even if the lender did, the money is owed to the residents. The Australian government has a reserve fund to pay back bondholders, but not mortgagees.

There is a value to the operator for the bed licenses, too, but licenses are tied to the operator, not the real estate, and can be withdrawn by the government, too, if the facility repeatedly fails to pass inspections, such as also was the case with the Bridgewater facility in Roxburgh Park. Last summer, for instance, I appraised a facility in Albany, Western Australia, in which the operator had previously stated the intention of moving bed licenses (and therefore patients) to another facility in town, thus potentially impairing the value of the proposed collateral. The lender could have been stuck with an empty, obsolete nursing home building.

During these past six months, I have read many aged care home and retirement village valuation reports from Australian “valuers” (the US equivalent of “appraisers”), and found all reports to be valuations of going concerns. This is appropriate methodology for corporate mergers and acquisitions, of which there have been quite a few in Australia, but inappropriate for lenders, who are left with few assets to take possession of in the event of a loan default. Nevertheless, these valuation reports were labeled as being for “mortgage financing purposes”, a label I find to be dangerous.

I have seen similar types of appraisals in the USA of nursing homes and hospitals, and lender reliance on such appraisals can end up as a huge mistake. Foreclosed hospital real estate, for instance, typically gets sold for about 20% of the original “going concern” value, as by the time the loan defaults, the hospital license is lost and the facility has become vacant, and a lender cannot get a license to run a hospital. In fact, in my work with foreclosed hospitals in California and Michigan, I have never seen one become licensed again. Obsolescence plays a big role in this.

I have witnessed a lot of muddled thinking about the valuation of nursing homes and hospitals in both countries which merits more discussion about the distinctions between real estate valuation methods and going concern valuation methods.
Enhanced by Zemanta

Saturday, January 1, 2011

Title Problems and “Lack of Transparency” in Latin American real estate

Ejido de Llano Largo, Acapulco
One reader commented to me about the lack of real estate market transparency in the Dominican Republic and particularly warned me about title problems. He referred me to his web site www.DominicanWatchdog.org which contains the following warnings about title issues:

"1. Before signing any contracts or paying any money you must use a trusted lawyer to make a "deep" local title search. It's not enough to check if the title is "Clean", the ownership history must also be investigated as there has been and still is a lot of fraud with titles in the Dominican Republic.


2. If you are buying land you must use an independent surveyor to re-measure the land and confirm the position (the lawyers know which one to use in the area). Do NOT buy any land with squatters on it and make sure that no squatters are moving into your land as it's impossible to remove them later on."

The US Department of State has issued its own warning about the DR:

"Real estate investments in the Dominican Republic require a high level of caution, as property rights are irregularly enforced and investors often encounter problems in receiving clear title to land. Consultation with an attorney is recommended before signing documents or closing on any real estate transactions. Real estate investments by U.S. citizens have been the subject of both legal and physical takeover attempts. Absentee landlords and absentee owners of undeveloped land are particularly vulnerable. Investors should seek solid property title and not just a “carta de constancia,” which is often confused by foreigners with a title. An official land registry measurement (also known as 'deslinde' or 'mensura catastral') is also desirable for the cautious overseas investor. Investors should also consider purchasing title insurance. Squatters, sometimes supported by governmental or non-governmental organizations, have invaded properties belonging to U.S. citizens, threatening violence and blocking the owners from entering their property."

Market transparency

A transparent market is a market where relevant information is fully and freely available to the public. Jones Lang LaSalle, a major international brokerage (and former employer), published a Global Real Estate Transparency Index 2010 ranking countries according to the transparency of their real estate markets. Canada (no. 2) and the United States (no. 6, impaired by numerous “nondisclosure states”) ranked high in transparency and led the western hemisphere, while the Dominican Republic ranked 77th out of 81 countries and ranked last in the western hemisphere. (This list is not necessarily comprehensive; I once had to turn down a valuation assignment in Liberia, Africa, which is not ranked and seems to suffer from title anarchy.)

Squatters and "land reform"

In countries like Peru and Brazil there are vast shantytowns (AKA “pueblos jovenes” in Peru and “favelas” in Brazil) that are illegally erected on private land and extraction of squatters can also be legally difficult, as it is in the Dominican Republic and Mexico. The DR has also recently had a problem with an influx of Haitian refugee squatters after the earthquake in 2010. As Latin America has finally shaken off fascist governments, the new reality is that democratically elected governments are often more sympathetic to squatters and their alleged rights.

The government of Mexico, in carrying out land reform after the Mexican Revolution, re-instituted an Aztec agrarian communal system of ownership called the “ejido” in which campesinos share ownership of a large tract of land, land which is usually expropriated from the previous owner. A resident of an ejido is known as an ejidatario. Ejido parcels in Mexico cannot be sold, mortgaged or rented. The Mexican Constitution of 1917 promised to restore ejidos, and the expropriation of land for ejidos began in 1934 and continued until 1991, when President Carlos Salinas abolished the practice in order to ratify NAFTA, as American companies did not want to build plants on land that could conceivably be expropriated.

Llano Largo, Acapulco

As an example of the title issues inherent in the ejido system, I once appraised a parcel of land within the city of Acapulco, a few hundred meters north of the Boulevard de las Naciones which bounds the prestigious Zona Diamante section of town. The evening before I was to meet the landowner, I hired three Mexican real estate agents, including one appraiser, to accompany me to the property and share their opinions. While present on site, we were soon approached by several peasants from a neighboring shantytown. They politely asked what our interest in the land was and then claimed that the land belonged to them as part of an “ejido” granted to them. That introduced the possibility of a title problem. What was further perplexing was that the government had placed a sign on the property declaring it to be a “Reserva Ecologica” (ecological preserve).

The next morning the landowner/loan applicant drove me to a parking lot on the Boulevard de las Naciones and then pointed to his property across a grassy field. “Why can’t we go to it?” I asked. He reluctantly drove me to the western edge of the property, the only accessible edge, and when we disembarked, we were immediately approached by ejidatarios. Instead of talking to them, the landowner immediately summoned me back into his truck and we drove off. He called the ejidatarios “squatters who will be removed soon.”

The landowner further damaged his credibility when he presented me with an “Uso de Suelo” (a document certifying the permitted land use) for another parcel instead, a parcel described as being right on the Boulevard de las Naciones.

The need to use attorneys and title insurers

It is essential to use an honest, local attorney that has been carefully vetted. Several years ago, for instance, a Venezuelan friend of mine sold his business in Houston in order to retire in Costa Rica. He selected a house/restaurant on a cliff and was guided through his purchase by a local Costa Rican attorney. Unfortunately, he did not buy title insurance and the attorney he hired was in league with the swindler who claimed to own the property. My friend lost his life savings and ended up having to sleep on other people’s couches.

Two American title companies, Stewart Title and First American, now offer title insurance in Latin America. Be sure to specifically ask for coverage against squatters, too, or you may face years of litigation in a foreign land.

Enhanced by Zemanta

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.
Enhanced by Zemanta

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.