Another appraisal in Seoul, Gangnam-style

 

The subject is a 14-story office tower in Seoul, built in 2006, with a height of 182 feet. Gross building area is 70,310 square feet (6532.81 square meters), covering most of the site.

This was yet another valuation assignment done for inheritance purposes as wealthy Korean immigrants to the U.S. pass on valuable real estate assets to their children. This particular building is situated in Gangnam-gu, one of the three major business districts in Seoul, and the most modern one. Most office buildings in Gangnam were built after 1990.

As luck would have it in this very active Seoul office market, two very comparable sales were found to have occurred in the last month within 2 blocks of the subject, and a third comparable sale was found about one mile west, having occurred three months ago. All were very similar office buildings less than 15 stories in height.

The last measured office vacancy rate in Gangnam was 4.2%, office building sales are amazingly active, and Seoul is a surprisingly easy place to appraise office buildings.

A Recent Appraisal in Costa Rica's Zona Maritima

Most of the real estate in Costa Rica consists of "freehold" or "fee simple" interests in real property, or in other words, properties with titles, estimated to cover about 85% of the country.

The remaining 15% is leasehold land known as “concession properties”. Concession properties are considered desirable because they are at the beachfront, where titled land is not available.

All Costa Rican beach properties are located in what is known as the Maritime Zone, a 200 meter strip starting from the average ocean high tide line. The ZMT (Zona Maritima) is divided into a 50 meter strip closest to the shore known as the public zone, which cannot be privately occupied, and the remaining 150 meters can be applied for “concession” in the corresponding Municipality. 

Think of “concession land” as a “concession stand” at a ball park or a fair. All Concession land is leasehold land, with lease payments going to the municipality; it cannot be privately owned, but real estate developers and wealthy homeowners can lease and develop these properties profitably.

The subject property was zoned as a “Hotel and Touristic Zone”, which is a valuable zoning classification to have, and the owners wanted to develop it with a hotel, but the key to maximizing the value of the land is to have an already-approved hotel development plan in place, as it can take years to get a hotel project approved. Otherwise the concession is only worth half as much

PS: Next stop, Greece, or maybe not so, with the Greek nation on Coronavirus lockdown. Non-EU citizens are not allowed to visit until after April 18 and I could not negotiate a later appraisal deadline.

Another Misleading Rental Property Offering From Global Investments Incorporated Through Mondinion (Global Investments)

My name is on many “real-estate-for-suckers” spam lists, and some it comes out of Britain from Mondinion, Global Investments Incorporated, PropertyO, NuBricks or whatever name they change to again. This is a group of British real estate salesmen internationally hawking rental properties in some of America’s most troubled urban residential markets, such as Detroit and St. Louis. The central problem with these cities is depopulation, and in 2017 CBS News declared St. Louis to be the fastest depopulating major city in the nation, with population declining by more than 1% per year.

One may wonder why they would go to such trouble to find and market properties in bad neighborhoods of America’s fastest depopulating major cities. It is because they can claim high initial rates of return on investment (“capitalization rates”) without disclosing such recurring problems as vacancy, low income areas, foreclosures, depopulation and crime in the neighborhood, instead describing these neighborhoods as “stable” and “safe”. These properties can be acquired quite cheaply and be flipped to naïve British pensioners and foreign investors.

High capitalization rates, such as return on investment > 10%, indicate properties with uncertain futures and high risk; thus the investor wants to get his return on investment much sooner before conditions deteriorate. There is also the possibility that the numbers are false.

I commented previously about them in 2017 (https://www.internationalappraiser.com/2017/11/lately-i-have-been-receiving-e-mails.html) when they were selling residences in the Detroit area, which they continue to do. They described the Inkster, Michigan neighborhood as safe although it ranked 93 percentile for crime in the state of Michigan.

This time Global Investments contacted me with a list of 6 homes in St. Louis. I chose to analyze one at random, 5752 Astra Avenue, an 1107 square foot, two bedroom, 1 1/2 bathroom home built in 1927 which they listed for $43,900 (about $45 per square foot) and described as “fantastic” and tenanted at a rental rate of $750 per month.

Checking the local Multiple Listing Service I found that the home was still vacant and listed for sale, but a sale was pending, maybe to Global Investments, the company that is marketing these homes. The brochure begins by describing the house as a 3-bedroom house  (not 2 bedrooms as actual) and already tenanted. The brochure itself shows the house to be vacant, with the only furniture being a dining table. They also neglected to disclose that the home is next to a mosque.

These groups have the habit of marketing their properties as rented, but the photos they show are of empty properties. If they do have a tenant waiting, why would a tenant wait when there are other vacant homes ready to move into?

From an appraiser’s point of view I searched for the 3 most proximate sales to the property this year and found two similar but larger homes at 5980 and 5984 Astra which sold for $10,000 and $20,000, respectively. The next closest sale was on a cross street, 5756 Vivian Avenue, a 2504 square foot duplex that sold for $52,000. The prices ranged from $6.86 per square foot to $20.52 per square foot.

As for the neighborhood, the Census Bureau’s information for this census tract as of 2015 was that it had a median annual household income of only $24,519 and a housing vacancy rate of 19.2%. This is about as bad as urban neighborhoods get.

The property was represented as tenanted, although vacant, so it is hard to say whether it would earn $750 per month, but more importantly, neighborhoods like this have poor tenant quality, so the new owner would have to scramble around to rent the home again before too long. When there is depopulation, filling homes can sometimes be like a game of musical chairs. This home is also adjacent to a mosque, which may be considered an adverse influence.

I was later telephoned by Global Investment’s sales director, who also advised me that they also charge a fee of $4000 in addition to the purchase price, to compensate their efforts in turning around the property. Had they actually been to St. Louis?

I have seen other rental home opportunities marketed by Global Investments Incorporated for cities such as Chicago, Cleveland and Memphis. These are all depopulating cities. CBS News, for instance, compiled a list in 2017 of the 12 major U.S. cities fastest losing population:

1. St. Louis

2. Baltimore

3. Milwaukee

4. Buffalo

5. Detroit

6. Cleveland

7. Hartford

8. Rochester

9. Chicago

10. Memphis

Here’s the reason to avoid such investments:  Depopulating cities experience decreasing property values and rents. Investing in older buildings in depopulating areas is a prescription for failure.  The Rust Belt, for instance, has many cities that have lost half their population in the last 50 years, including Detroit, Cleveland, Youngstown and Dayton.  This usually means increasing vacancies, despite gallant leasing efforts.  Rents are so low that only the lowest cost renovations make any sense, too.  Even then, other new space gets built, hastening the demise of the older buildings. 

So beware of rental properties being offered at high returns; these returns might not be long lasting.

Update Dec. 5, 2019:

A list published on AOL today indicated that the 6 fastest depopulating U.S. cities, in absolute numbers, are:

1. Chicago
2. Los Angeles
3. Detroit
4. St. Louis
5. Cleveland
6. Memphis

Tropical American Tree Farms Update, 2019: A Guest Post

One of the new homes being built on former TATF properties

 I encourage guest bloggers offering topical content on issues that concern my readers.  I have received this guest post written by an anonymous source who lives in the vicinity of some of the many teak farms owned by Tropical American Tree Farms. I have received more e-mails and comments from TATF investors than on any other post on this blog. This anonymous writer is telling the story of a sibling in Costa Rica who has witnessed the destruction of Tropical American Tree Farms. For the many of you who write to me on how to tell your IRA administrator that your investment in TATF is a total loss, perhaps this blog post may help.

"My sister lives in Costa Rica and for the last 3 years has been trying to protect the trees and land , of several farms of TATF. In her efforts to stop the illegal invasión and stealing of the land and trees she was viciously assaulted, as a retaliation for seeking legal means through MINAE 

(ministry of Environment), to prevent the environmental damages and unlawful activity.

Cear-cutting of part of the teak farm

 

Squatter home built from TATF timber

"She does not or did not, know the Brunners and cannot speculate if TATF was a fraud. The Brunners certainly did benefit from the money of the investors over the many years. But to her knowledge, the Brunners never received any money from the harvesting of the teak wood. 

The majority of the teak has been harvested- but not by the Brunners. 

The government of Costa Rica has turned a completely blind eye to the illegal invasión and stealing of this wood and land - bought and paid for by foreign investors dollars. Many of the locals, who worked and benefited for years from TATF money are the same ones now stealing the trees and the land. Please be assured that these are not needy people. Sadly the locals are also invading the primary forests and destroying land the Brunners had left in conservation.

This is in complete violation of environmental laws in Costa Rica."

Appraisal in Quebec: A Lesson on the difference between “Aggregate retail value” and “Market value”

The properties consisted of scattered land parcels of almost 2000 acres zoned for recreation and tourism, including a golf course and a lodge, in a rural part of Quebec in the vicinity of the Ottawa and the Coulonge Rivers. The rivers and lakes provide boating, fishing, and waterfalls that attract a moderate number of tourists, and second homes are sometimes built or bought by urban residents from Ottawa or Gatineau, about 150 km away.

There had been a few lot sales over the last 12 years at prices sometimes exceeding $100,000 (CAD) for the best lakefront lots. The developer had employed a Canadian residential appraiser to appraise a few lots between 2008 and 2012, but never ordered an appraisal of the entirety of the property holdings, which would have required a commercial appraiser. Instead of ordering new appraisals, the developer just had the original appraiser (from Gatineau, 150 km away) send annual letters expressing his opinion that values had not changed. This does not quite meet the standard of a current market value appraisal, though. When lots don’t sell as predicted, an appraiser must always consider that the market may have changed.

More important to understand, though, is the common mistake that laymen make in assuming that market value of the entirety of lots is the sum of the retail lot values, or “aggregate retail value”.  This would only be true if the entirety of the lots could be sold in less than a year. In a slow-moving market like rural Quebec, though, the absorption would take many decades. The American Uniform Standards of Professional Appraisal Practice (USPAP) and U.S. federal banking regulations are clear that “market value” is not aggregate retail value but must be discounted for time and holding costs to be considered “market value” for lending purposes.

From a lender’s point of view, “bulk sale value” is the more acceptable estimate of value. If the lender must foreclose, they want to know how much money they can get back in a reasonable amount of time, usually no more than a year. A lender is not going to wait 36 years for all the lots to sell out. That requires an appraiser to do a lot of discounting for holding costs, marketing costs and expected rates of return on such an investment. For this reason, there are often great disparities between “aggregate retail value” and “market value” for such large properties.

As beautiful as rural Quebec is, I was disappointed in my search for French cuisine. Staying in Bryson, Quebec, I asked the front desk clerk if there was a restaurant in town. She said yes. I asked “So, what’s its name?” She said “Restaurant”. As with the other Quebec restaurants in the area, the menu items were confined to sandwiches, burgers and pizzas. It seemed like any American restaurant, except when the waitress stopped by to ask “C’est bon?” [Is it good?] This question took me by surprise, as the whole order had been taken in English, and being on the border with Ontario, most people in this area spoke to me in English.

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Financial Trouble at Oceanwide Plaza and the Effect of Chinese Capital Controls on Certain North American Real Estate Markets

Oceanwide Plaza, March 18, 2019

Some Hong Kong appraisal firms subcontract North American appraisal work to me. The work is for financial reporting purposes, as the property owners are publicly traded firms, and I have gotten used to the writing reports in compliance with the Hong Kong Institute of Surveyors.

On January 28 I was asked to bid on an appraisal of Oceanwide Plaza being built across from Staples Center, a leading sports and concert venue in Los Angeles.  Oceanwide Plaza had just topped out with three towers of 40 or more stories. This was said to be a $1 billion project.

I was surprised by this request because just the previous week, Lendlease, the Australian general contractor, had rocked the LA real estate world by announcing that it had halted construction on Oceanwide Plaza. The interior remains to be built. There were rumors that the lender had pulled out of the project, but no explanation of why. 

In November 2018 the FBI served a search warrant to China Oceanwide Holdings in an investigation of local public officials and Chinese developers regarding bribery, extortion , money laundering and kickbacks relating to 4 prominent Chinese real estate developers, including China Oceanwide and Greenland Group (developer of the new Metropolis condominium/hotel project nearby). No charges have been filed against China Oceanwide or the others.

A press release from China Oceanwide explained the need for capital restructuring and that construction would resume in February. With my own eyes I saw the project still stalled as of March 18, 2019.

Here are some hypothetical explanations for the continued shutdown:

1.       Chinese capital controls, instituted two years ago, are preventing the necessary funds from leaving China. The purpose of the new regulations was to reduce “irrational outbound investment and to improve the development of China’s overseas investment.” China has been attempting to crack down on capital flight resulting from a slowing economy and downward pressures on the exchange rate. These same controls have caused other Chinese developers to place their North American assets for sale. Greenland, developer of a similar project called Metropolis, a few blocks north of Oceanwide Plaza, has placed one of their three residential towers plus their Indigo hotel for sale. There seems to be a pattern here of Chinese developers now placing their properties for sale, as Dalian Wanda sold its unbuilt One Beverly Hills project (valued at $444 million) last November, and Oceanwide itself placing its unbuilt 80 South Street project in Manhattan for sale for $300 million after buying it for $390 million 3 years ago. Meanwhile, the Chinese government has seized the insolvent Anbang Insurance Goup and will be selling off its U.S. hotel assets, acquired for $7.45 billion during 2014 to 2016, which includes the Waldorf Astoria Hotel in New York, which itself cost $1.95 billion.

2.       Lack of buyers. As local realtors speak of the residential sales slowdown at the Metropolis, the same forces may be working against Oceanwide Plaza. One realtor said that 60% of the residential sales at the Metropolis were to Chinese buyers who did not intend to occupy their units. A Chinese-American bank even asked me to appraise one of the units as a rental property, and I told them that if 60% of the units are placed for rent at the same time, there is no way of estimating how far market rent would fall. Downtown Los Angeles already has a 17% residential vacancy rate, the highest vacancy rate since the 1990s. Capital controls could be affecting these Chinese buyers, too. Some say their main reason for purchase was to remove capital from China, either because they do not trust their own government or perhaps to place ill-gotten gains away from capture.

More news came out in February about $62.5 million in mechanic’s liens on Oceanwide Plaza, but more intriguing was some private correspondence from general contractor Lendlease to some of its subcontractors, stating that Oceanwide “had failed to maintain the minimum contractually required payments for both your and our work”, yet Lendlease, with an $814 million construction contract, had not filed any mechanic’s lien yet.

Looking at the bigger picture, the Chinese capital controls law passed two years ago will be starting to affect certain North American real estate markets, such as Los Angeles, San Francisco, Vancouver and New York, which have been highly boosted by Chinese investment. The Chinese government measures net capital flow to the United States, which has been profoundly positive for a few years, but in the last quarter of 2018, the net capital flow was a huge $54.6 billion outflow of capital back to China. Forbes Magazine estimates that China has lost $3.8 trillion to capital flight during the last decade. They want their money back. One expert estimated that the ratio of outbound Chinese capital (back to China) to inbound capital is about 10 to 1.

As for the outcome of Oceanwide Plaza, there are various scenarios:

1.       A white knight lender from outside China will provide necessary funds to finish this well-located project,

2.       The property will need to be auctioned off to a more solvent owner,

3.       Or in the worst case, if building and safety laws were allowed to be violated, Oceanwide Plaza could end up being 3 decaying 40+ story hulks sullying the downtown L.A. skyline.

I told the Hong Kong appraisal firm that they should ask to be paid in advance, which is not the custom in this type of financial reporting work. They replied, "Noted, with thanks".

Revisiting Jinbao Place and Beijing's Luxury Retail District

Jinbao Street is a premier luxury shopping street in Beijing, like Rodeo Drive in Beverly Hills. In its two-block stretch there are three 4 or 5-star hotels and Bentley, Ferrari, Maserati and Mercedes dealerships. In my return this time, I found an Aston-Martin dealership in the lobby of my hotel, The Regent.

Jinbao (translated as “golden treasure”) Street is the best-known destination for Beijing’s wealthiest shoppers.

Seven years ago, I reported on a struggling three-year-old, 40,000 square meter (430,000 square foot) luxury mall known as Jinbao Place which stood largely vacant on this otherwise busy street. Above the second floor in this seven-stories-above-grade mall, almost all the space was vacant. The seventh floor, the restaurant floor, had only a roast duck restaurant.

At that time, I thought the problem was that most luxury retailers had already saturated the Dongdan district that contains Jinbao Street and the famed Wangfujing pedestrian mall, anchored by the newly renovated Beijing APM mall, formerly known as the Sun Dong An plaza. There seemed to be an Omega watch store on almost every block.

What a difference seven years makes, though. I found the Jinbao Place mall to be at stabilized occupancy. I counted three vacancies and a good number of shoppers. This time I dined at a Japanese restaurant, noticing that their lobster dinner was priced at 2500 yuan (about $350).

The famed Wangfujing pedestrian mall, a few blocks west, was at full occupancy, as was the APM mall. This location seems to be at the epicenter of Beijing wealth. The only thing I can witness in several visits to Beijing is its continuing prosperity.

So I was wrong about this one in 2011.

Update on the Eminent Domain Case in Seoul

https://www.internationalappraiser.com/2017/05/another-appraisal-in-seoul-eminent.htmlMy previous post on this matter spoke of a naturalized U.S. citizen who was having her home seized by the Seoul Municipal Government for a private development project. She was one of a few holdouts who insisted that she was not being properly compensated for her home in downtown Seoul. Both the U.S. and Republic of Korea constitutions and a treaty between the two nations guarantee “just compensation” for citizens who have their properties condemned for beneficial public projects, such as highways and public railways, in a system commonly known as “eminent domain”.

This particular case is reminiscent of a famous eminent domain case in the U.S. known as Kelo vs. City of New London, in which the city of New London, Connecticut was attempting urban renewal through the use of eminent domain for a private real estate developer. Mrs. Kelo was the lead plaintiff. The Kelo case went all the way to the U.S. Supreme Court, who decided in 2005 in favor of the city of New London and defended the concept of private takings. The project ultimately failed, returning New London back to its blighted state and costing taxpayers $78 million. 

The system of reimbursing displaced real estate owners changed in South Korea prior to 1990 due to the rapid appreciation of land prices and values.  Rather than compensating property owners according to “market value”, which is the fundamental concept of “just compensation”, the government moved to an “announced price” system that some other governments use to accomplish price controls which effectively avoid paying full market value for expropriated property. The city of San Jose in Costa Rica is an example. This announced price system is known in Korea as the “Officially Announced Land Price” (OALP).  

The Seoul Municipal Government’s OALP operates from a CAMA (Computer-Aided Mass Appraisal) system, based on statistical algorithms, much like many cities in the world do. At the Pan Pacific Congress of Appraisers, Valuers and Counselors in Seoul in 2008, which I attended, the OALP algorithm for Seoul at that time was presented in English as follows:

The dependent variable that the valuation algorithm solves for is the price per square meter of land area, not building area, because land in Seoul is worth far more than most buildings on it due to the shortage of land.

Notice that almost every input variable is a dummy variable. Dummy variables are binary variables with the value of 1 or 0, depending upon the presence or absence of a particular condition, such as being “adjacent to a narrow road”.

There are only two quantifiable input variables in this model: the land area and the distance to railways or highway. Missing from this model are so many quantifiable variables such as distance to subway stations, distance to shopping, distance to schools, quality of schools, floor area ratio (ratio of building area to land area), and land slope.

Since the Ministry of Land, Infrastructure and Transportation is the same Korean ministry that exercises the powers of eminent domain and licensing and discipline of appraisers, there is also an inherent conflict of interest. Per scholar Byungkoo Cho, “when MOLIT perceives a certain compensation amount to have been calculated as excessively high, the appraisers may receive disciplinary actions such as suspension of business or revocation of licenses.”Byungkoo Cho, “Just Compensation in Eminent Domain in Korea: From the Perspective of Fairness,” Eminent Domain: A Comparative Perspective (2017, Cambridge University Press).

Nevertheless, MOLIT does measure the disparity between its announced prices and market-based sales transactions, and most recently disclosed that average OALP was only 63.3% of actual sales prices in year 2014, and considerable land price inflation has occurred since then. By my calculation, OALP in 2016 for this neighborhood averaged only 27.5% of sales prices, with the highest reading being 41.5%.

Public assessment agencies often conduct their own internal assessment/sales ratio studies (or sometimes sales price/assessment ratio studies) to calibrate their systems.  Some masterful studies have been published by the states of Washington and Virginia in the U.S.

The Korean client’s lawsuit against the private taking ultimately lost in Korean courts, but the treaty between the U.S. and the Republic of Korea mandates an international arbitration for a U.S. citizen.  We expect to be heard at the International Arbitration Centre in Hong Kong.

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