Real Estate - Property Matters by Afra Raymond
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CAPITAL CONCERNS
Part IV

Published Thursday 20th September, 2007

No public process of Planning

Using last week’s assumptions, the range of break-even rents is:

Interest Rate                               Monthly break-even rent per sq ft

8%                                            $23.29

9%                                            $24.88

10%                                          $26.47

Last week’s column contained an error with a big impact on the analysis being advanced. Happily, or sadly, the correction only strengthens the case being advanced. As shown in the sidebar, we can see that the true break-even rents are between $23 and $28 a sq ft. A critical and expensive element of the property development process is the long time lag between the idea for a project and its completion, even with the best team and a share of good luck.

Just to give two examples: Udecott’s Port-of-Spain International Waterfront project and HCL’s One Woodbrook Place were conceived about a decade ago. The rapid increase in development activity has put our regulatory agencies under strain with consequent increases in the time frame for obtaining approvals. The market rewards those who can bring their ideas to fruition more rapidly and this is the soil in which corruption of public officials can grow—yet another expense.

What is the rationale for the massive expansion in new offices being built in our capital? An organisation has to decide between renting and owning its offices. In a rising real estate market, that choice can be crucial as there may be limited options in terms of the buildings for sale, which has the effect of forcing the organisation to consider building its own office.

For example, suitable offices might be available at a rent of, say, $10 a sq ft, but a building can be built and owned at a break-even rent of, say, $12 a sq ft. In that case, one could make the more expensive choice of building and owning since at the end of the day the property belongs to the organisation.

In a rising real estate market, the 20 per cent additional cost could be justified since it would give the organisation a fixed location and pride of ownership, not to mention the benefits of capital growth which would otherwise have accrued to a landlord.

In a steeply rising market, it would be possible to justify additional costs above the 20 per cent given in the example, since capital growth would be the ultimate benefit. That is the general rationale which informs the decision of organisations to build and own in preference to renting.

As a sketch of the decision-making process of single organisations, this is adequate. Where we begin to experience doubts is when we try to fit the model to the recent actions of the State which is the developer of most of the new buildings in our capital.

The individual decision-making process might be sound but the combined effects of many rational, individual decisions can be adverse with disappointing returns for investors. As we outlined last week, there have been steep increases in the price of land and cost of construction. The effect of these will be inevitable increases in the break-even rent which needs to be charged to make a project feasible.

The missing ingredient is planning. We are aware that all these projects were planned, in that financial, technical and legal aspects had to be harmonised in order for them to proceed. We are aspiring to developed country status. The sobering reality is that those harmonised ingredients are truly necessary but they are not, and will never be, sufficient to realise those aspirations. Necessary, but not sufficient.

What is missing is the public process of planning which demands an explicit commitment to transparency, genuine prior consultation and positive feedback. Those have been absent here for a long time so we will all pay a heavy price for that in terms of misallocated capital. Immense sums of money are being invested in schemes of dubious viability. Using the data on new offices set out in Property Matters of September 6 and the cost estimates set out in last week’s, we can estimate $5 billion as the level of new investment in this sector.

Here, the difference between the State and its private sector counterparts is that they are sponsoring the vast majority of the new office buildings. They knew the quantity and timing of these projects. As we saw earlier, due to the lengthy delays there are no sudden schemes in the development field.

We also know that there has been no priority given to consulting with the public on the redevelopment of our capital. We are aware that detailed plans and concepts are being developed at taxpayers’ expense, without the inconvenience of the public gaze, far less our voices. It has the hallmark of a bad marriage, one in which the wife is the last to know or is that the husband?

The burning question is whether there was any organised process to rationalise all these public projects. Either it took place or it did not. It is my impression that it did not and next week my reasons will be given. If it did not, we are contemplating a disturbing level of irresponsibility. If such a process did take place, we can first question:why the secrecy?

The next question would have to be: what were the results of the study? It is extremely doubtful whether such a process could have recommended the present course of action.

The average rent paid by the State for offices in Port-of-Spain is about $8 a sq ft, yet we are now well on the way to replacing those with a wave of new buildings with break-even rents in the $25 a sq ft range. A virtual tripling of the State’s recurrent obligations for office space and please remember that this takes no account of the cost of maintaining these new, first-class offices.

Our capital’s new offices are being built at costs which require break-even rents at unprecedented levels, significantly above those now being charged for first-class offices.

One could say that the new buildings will be setting a new standard and therefore command a higher rent than those now existing, but that view has to be balanced against the sheer volume of supply which is about to enter the market.

Next week, we discuss the planning deficit and its costs to us all.

Afra Raymond is a director of Raymond & Pierre Ltd. Feedback can be sent to: afra@raymondandpierre.com.

Afra Raymond - Property Matters

What is the rationale for the massive expansion in new offices being built in our capital? An organisation has to decide between renting and owning its offices. In a rising real estate market, that choice can be crucial as there may be limited options in terms of the buildings for sale, which has the effect of forcing the organisation to consider building its own office.

Prime PoS Office Rentals September 2007

Building                                                                      Location                                                                     Current rent per sq ft

BHP-Billiton Building Behind Marriott Hotel,            Audrey Jeffers Highway                                   $13

Albion Plaza                                                    Victoria Avenue/Albion/Dere/Streets                  $14

SAGICOR Building                                            Queen’s Park West $12,          $20 for 3,700 sf suite on 2nd floor

UTC Building                                                   Corner Independence Square/Richmond Street     $10

Briar House                                                    Sweet Briar Road/Alexandra Street                     $15

TATIL                                                            Building Maraval Road                                      $11