Category Archives: consultancy

Coping with COVID-19: Crisis and Opportunities

Screen Shot 2020-03-29 at 8.04.37 PMThe impact of the COVID-19 can be measured of its severity with number of affected person in the country. As of March 29,2020, there is a total of 1,418 confirmed cases, with 418 recovered and 71 deaths.  Majority of  confirmed cases are in Metro Manila and nearby provinces. COVID-19 is not as deadly as Ebola, which had a mortality rate of 60%, or SARS and MERS at 30%. But if the risk of death is lower, transmission is much higher.

Staying in business is the biggest challenge brought by the coronavirus. However, as Albert Einstein said, “In the midst of every crisis, lies great opportunity”.

There is a need to explore the economy, business, real estate sector and draw-up a plan to confront the crisis and explore opportunities not only to withstand but to emerge stronger. Businesses that are well-prepared will always recover more quickly.

Pandemic in History

Pandemic is not new in the country. Looking back in history, our country survived several  pandemic already. The nearest comparable pandemic to coronavirus that  impacted the country occurred in 1918-1919, with the Spanish Influenza or locally known as trancazo. It was also the pandemic that infected more than 500,000 of the global population. In the Philippines, the total number of deaths was estimated at 70,513, with the group suffered most were those between 10-29 years in age. This epidemic occurred in waves, beginning in June and the second, which is more severe one begun in October 1918.

Another outbreak , SARS, which has a worldwide impact last for five months, from March to July 2003. The country recorded 14 cases and 2 deaths, the lowest count in 30 countries affected by the disease. This can be attributed to the established guidelines or infrastructure system of the government, and also the characteristics of the virus itself.

On coronavirus, lockdown were implemented in Wuhan, China to contain the spread of the virus. However, it enables the businesses to be innovative and cope up with the situation, in its two-month lockdown. Businesses engage in providing basic essentials were allowed to continue. Digital ordering of food supplies to estate arrangements were encouraged. The implementation of QR Code system in detecting person with infection, provision of supplies and others.

The experiences we can learn from Wuhan and from our own gives us a light of hope on our quest to survive and end coronavirus.

Economic impact

The economic impact is inevitable. Luzon accounts for the 73% of the country’s gross domestic product (GDP), while Visayas and Mindanao have 13% and 15% respectively. The National Economic Development Authority projected already at 0.3 reduction of the GDP if the virus lingers until June, and will further increase to 0.7& if it will last until December.

Among the sectors in the economy that were hit the hardest were services, tourism, trade, and remittances. Real estate being in the service sector is among them.

Based on the estimate, tourism industry alone could lose P22.7 billion in revenues per month due to the corona virus outbreak. The industries such as the export processing zones will be vulnerable to the disruptions in global supply chains after the closure of airports, ports, and factories within the country and abroad. Real estate, which has a gross value added of 2.3 Billion, as of January 2020,  has greatly impacted.

Agriculture sector stand-out in this time of crisis. The role it plays in food sufficiency and  provision of employment to the people cannot be denied. In 2018, it employs 10 Million people in the countryside.

The declaration of “Enhanced Community Quarantine” from Luzon and other provinces signals a new situation in real estate.  It will pave way to a new redistribution of real estate development and type of properties that will be offered in the future.

Opportunities in time of crisis

Under the guidelines on the enhanced community quarantine, only those providing basic necessities and activities will be allowed to operate.

Basic necessities include food and medicine production:

  1. Public markets
  2. Supermarkets
  3. Groceries
  4. Convenience stores
  5. Hospitals
  6. Medical clinics
  7. Pharmacies and drug stores
  8. Food preparation
  9. Delivery services
  10. Water-refilling stations
  11. Manufacturing and processing plants of basic food products and medicines
  12. Banks
  13. Money transfer services
  14. Power
  15. Energy
  16. Water
  17. Telecommunications supplies and facilities.

Business procession outsourcing and export-oriented will continue to operate provided that they will employ social distancing. Other businesses are allowed to operate provided their employees are working at home.

These businesses are opportunities that need to be explored. This crisis require people to think out of the box and be innovative to remain in business. Analyze current business strength and weaknesses, to enable to capture opportunities in the market. Adaptability and collaboration is the key.

Key driver to resilience

In coping with the social and commercial disruption, a key driver is turning out, the digital technology and agriculture. Groceries and food supplies can be purchased online and delivered to the home. In Wuhan, local residents organize themselves for home delivery of essential supplies while in self-quarantine. The combination of consumer digital maturity and digitally supported supply chains has enabled local residents to organize home delivery of essential supplies to people in quarantine.

There are companies that provide virtual trainings and online seminars to its people and learnings about real estate salesmanship skills, market analysis, business matching, and other useful skills to personal development such as leadership and speaker’s training.

Agriculture plays a great role in the sustenance of food supplies and stable prices in the market. Farming and fishing activities were permitted during the period of quarantine. The government also ensure  the continues movement and unhampered flow of farm products to the cities.

Uncertainty still dominates the situation. Nobody knows what next week or months could bring. Preparation and planning is the key to overcome. Businesses should conduct scenario planning, the best and worst case scenarios, and the capability of the business to cope. There should be short and long term plan on the financial, organisational and operational  capability. Access to financial assistance and relief should be demanded from different government agencies.

Filipino people had been proven to be resilient amid calamities and crisis. Covid-19 is a wakeup call for us which both need to accelerate the digital transformation of our economy — ahead of the next pandemic.

 

 

 

A Closer Look at Cost Approach Valuation

Cost approach is one of the valuation approach that is commonly used in valuing man-made improvements and machinery. In the Philippine context, cost approach is being used to value improvements separate from the valuation of land. This method can be trace back to our long history of housing assessment in the Philippines. It is revered yet poorly understood.

In a nutshell, cost approach is a breakdown of what it would cost to reconstruct the property, as if it were destroyed less depreciation. Cost approach is highly reliable if the property subject for appraisal is new, and might have little or no depreciation at all.

But it’s not a walk in the park approach. There are a lot of misconception and need to polish. In cost approach method, an appraiser should master the building construction estimation, the difference between the reproduction and replacement method, types of depreciation, its application and whether it is curable and incurable, and the supply and demand that shape the economic situation.

Economic obsolescence is seldom used by practitioners. Analyzing the location of the property and its role in the supply and demand is at the core of this type. Example, an older warehouse that is not suited to containerized freight and as such not as valuable as the other one. Another example is a building designed for processing of local agricultural products which through the period of time, the community no longer produces these products. These buildings substantially depreciated due to economic obsolescence.

The crucial portion in the cost approach is the determination of the cost new and depreciation of the property subject for appraisal and breaking down the building cost into direct and indirect cost. It’s not just a list of materials and labor needed to construct a building, but should also include the developer’s and entrepreneurs’ profit. This is a reward for the role they played in ensuring the completion of the project and bring it to the consumers.

Defining the different part of depreciation is also an important one. The economic life of the improvement has bearing on its contribution to the market value of the property. However, there are confusion on the interrelation of remaining economic life, effective age and actual age. The economic life of a building can be as short as thirty five years, or its effective age is longer than the actual life. Thus the maintenance, renovation and repair plays an important role in prolonging the remaining economic life of the property.

Here is an example of how to solve the problem  on actual age versus effective age:

  Years Percentage Contribution    
Portion of the House with 10 years old 20 70% 20 x 70% 14
Portion of the House with 5 years old 5 30 % 5 x 30% 1.5
Effective Age of Building 15.5 years

The house appraised which has a portion undergone renovation (30%) while others remain in its normal course of wear and tear and utility. The result will show that the effective age of the building is 15.5 years even if the actual life of the building is 20 years.

Simplistic analysis of cost approach will open the appraisal process and value conclusion to scrutiny and questions. At the end of the day, the appraiser’s experience and knowledge will play crucial in making sound judgment.#

 

 

 

 

Big turnout at Complex property valuation seminar in Cebu

Appraiser Agosto, lectures on Complex Property Valuation-Valuation Masterclass II. The seminar workshop, held in Castlepeak Hotel in Cebu City,  was organized by PAREB Cebu Real Estate Board.

The seminar participants reached to more than 80 real estate practitioners, including real estate appraiser and brokers not only from Cebu but also from Negros, Cagayan de Oro and Leyte.”I was stunned by the turnout of participants”, Gus told the organizers of the seminar. “It just showed that practitioners values the seminar”.

In the 2-day lecture, participants learned from different case studies actual application of solving appraisal problems using discounted cash flow method, opportunity cost, replacement value and market studies on township development.

“Thank you for sharing your expertise on us”, one of the participant shared in the lecture room. “Very knowledgeable in the topics discussed”, another participant shared.

The valuation masterclass is a project of PAREB Academy for its members. Its objective is to raise the level of PAREB Appraiser-members professional practice through seminars, workshop and provide linkages through appraiser’s directory.

Appraiser Gus Agosto has conducted lectures already in different areas of the country. Hosted by different local board, he traveled Iloilo City, Dipolog City, Cagayan de Oro, Pasig, Caloocan, Lucena, Puerto Princesa, Baguio, and other areas.

 

This slideshow requires JavaScript.

Due Diligence In Real Estate Transactions

811-Due-Diligence-When-Buying-Real-EstateReal estate transactions involve a significant amount of money and rights of individual. The due diligence process minimizes the risks and provides safeguards against determinable issues that may affect  real estate transaction.

Making the right decision in real estate transactions can be a challenge without complete and accurate information. A traditional legal maxim  “caveat emptor” or “buyer beware” gives more emphasis on the importance of the conduct of due diligence. This is from the traditional rulings that courts would make the buyer stuck with whatever he or she purchased and would have limited recourse. Due to this likely result, buyer had to be extra cautious when making buying decisions.

Due diligence provides  a thorough investigation in a transaction. It helps the buyer have a better understanding about the property, the documents, environment and operational fundamentals of the transaction. This process help in avoiding surprises after the transaction and when the remedies may be limited.

The actual scope of the due diligence process depends on the buyer’s needs and the transaction itself. If the buyer is a developer, he or she may have very different needs than the buyer in purchasing the property for lease or investment. There are individuals who have a pending court case and interested in knowing the property to determine the site and use as evidence in court.

The due diligence process begins by determining the expected use of the property and make this information as a framework. Due diligence seek to address a number of issues and identify important information for buyers. This information includes determining the property’s owners, boundary lines, the rights that come with the sale, the expected future use of the property and highest and best use as development options. The process should identify any issues related to the property title, easements, encumbrances, liens or other hurdles to complete ownership. Additionally, the due diligence process can reveal if there are any restrictions that might affect the use of the property or its development, such as environmental issues, zoning restrictions or legal compliance matters such as abiding by Agrarian Reform Law, NIPAS Act, Agriculture and fisheries Act, road right of way act, government programs and more.

The due diligence process can also reveal information as it is uncovered. For example, the technical description plotting cannot be close may pop up after the document analysis is conducted. Additionally, it is important to determine the real estate market and demographic data to predict the future demands in the area.  Site inspection will determine the actual topography, terrain, shape, boundaries, neighbourhood and existence of any occupants or informal settlers in the property.

Last but not the least is the environmental assessment, to uncover any daunting environmental hazards or issues of the property such as gas leak, wet lands, or use of the property as manufacturing in the past.

Due diligence process is very important. Adequate time must be reserved for this process for thorough and careful study. Party in a transaction should be encouraged to provide specified documents and information to ease the transaction. Be aware of all interests, liabilities, expenses and possible uses for the property.

Due diligence will give parties in transactions to arrive in an informed decision.

Using drone in appraisal

S-048395x2000Thinking outside the box is essential in the valuation profession. It only makes sense that drones would come to be in the hands of appraisers.

In recent appraisal assignments, appraisers’ uses drone in site inspections. Drones provide unique perspectives on properties, giving appraisers more information to use for a credible appraisal report.

“It allows us to get up higher, get a better view of the roof and rotate 360 degrees above the property to provide a view of the surrounding properties,” Appraiser Gus said. “We could not provide that footage without using a drone.”

There are many advantages in using  drone for appraisal. One is the ability to access hard-to-reach places. Areas considered previously unobservable such as roofings, gutters, easements and more, can now be seen using the correct equipment. Not only can these items be observed, but areas of interest can be identified for additional inspection.

Drones can be specifically useful in commercial properties,  large tracts of land where easements and prior improvements can be shown via photographs or video. This allows appraisers to observe and document a property in real-time on the date of inspection and will undoubtedly change the way many properties are viewed going forward.

These developments show that valuation profession is not afraid to innovate with new technology.  It elevated the practice of profession to a new and higher level.

” Drones provide appraisers more information to use for a credible appraisal report.”

 

Importance of macroeconomic analysis  in real estate practice

Having a view on the macroeconomic trends is critical when analyzing the real estate market. Real estate does not operate in a vacuum. Thus, it is essential for a real estate practitioner to grasp the role of the industry and knows the current events and how macroeconomic affect the real estate market, both in the aggregate supply and demand and the expectation of the buying public.

Real estate plays an important role in the economy. Residential real estate provides housing for families. It is the greatest source of wealth and savings for many families. Commercial real estate, which includes apartment buildings, create jobs and spaces for retail, offices and manufacturing. Real estate business and investment provide a source of revenue for millions.

Rerb

Real estate, renting, business and construction are both measured by, and contributes to Gross Domestic Product (GDP). As shown in the graph, its growth continues. In 2016, it contributed P1.8 trillion,  13 percent of the country’s gross domestic product. It exceeded its 2000 record of P3.5 trillion. At that time, real estate, renting and business was a hefty 9 percent component of GDP.

Private construction, which is mostly done by property developers and individuals, contributed P1.2 trillion in the gross domestic product. It is one of the contributor in  providing employment and help in lowering  unemployment rate.

Beside GDP, real estate market in the country is fueled by increasing foreign direct investment. Since 2007, the accumulated foreign direct investment totalled to P 2.1 Trillion. Meanwhile, the overseas Filipino workers remittances increases by 17% . From 22 Million in 2013 to $ 26.8 Million in 2016.

fdi

 

Understanding key real estate relationships has a strategic implication on real estate decision making and portfolio management. The changing real estate environment can be linked to the macro-economy. Knowing the relationship between macroeconomic variables and real estate performance , and knowing whether these links are consistent or changing overtime ca provide a useful tool in leveling up our service to our clients and to our daily real estate practice.

Tips in Litigation Appraisal

downloadI attended a court hearing recently, and when the presiding judge read the facts of the case and the lawyer’s motion to nominate an Appraisal Commissioner, his (Judge) immediate response is “What is the qualification of Mr. Appraiser ?”

An appraiser play an integral role in every part of today’s civil litigation. Litigation appraisal involves taxation, estate planning, expropriation, litigation support, property settlement and others. That is why when selecting a real estate appraiser, a lawyer always perform comprehensive conflict-of-interest checks  on background and qualification before hiring or accepting appraisers.

This conflict of interest check is vital in cases where a lawyer is dealing with large business that offers myriad services and types of clients. While in checking the qualification of an appraiser, a lawyer does it in a profound way through the following attributes such us technical acumen, experience in appraisal, educator and communicator and readiness to appear and have demeanor in court.

Experience in Appraisal – An appraiser should have broad experience in appraisal of different types of properties such us office, retail, warehouse, industrial, apartments, hotels, memorial. Have knowledge in different type of appraisal like fee simple, leasehold or lease fee interest, insurable, retrospective, raw land development method and prospective appraisal.

Technical acumen – associated with professional experience, organizational experience for broader real estate and economic counselling skills capability to solve complex problems requires a greater depth of skills sets. Technical skills are key to an accurate and comprehensive expert report, thoughtful review and critique of the opposing expert report, depositions, and testimony.

Educator and communicator – an appraiser should be ready to explain and discuss  the report in the commissioners meeting or in an open court. A lawyer should pursue in selecting an appraiser’s prior publications and writings. The reasons for examining the expert’s writing are two-fold. First, this type of examination can help a lawyer to further determine the appraiser’s qualifications. Second, how an appraiser presented their arguments and the manner of reasoning and  arrived at their opinion. Is their analysis persuasive? Does the report and opinion make a sense to a lay person?  Have they presented their report in an easy to read and logical manner?

Appearance and demeanor – Lawyer have confidence that the expert will come across as professional and knowledgeable.  At trial or deposition, the appraiser knows the importance of establishing and maintaining credibility, presenting an appropriate appearance and demeanor, remaining composed, considering posed questions carefully, providing a simple and direct answer, giving opinions based on facts, following the standards of generally accepted appraisal practice, being impartial and not advocating for the client, and always telling the truth.

The above characteristics are interrelated. The expert’s qualifications should  matched to the demands of the case as it relates to areas such as property type, experience, or technical requirements. The expert’s ability to articulate his or her position will allow him to better convey his or her skills and qualifications to fellow commissioners, judge, lawyers and other officers of the court. Any aspiring appraiser to be part of this challenging job should muster the above attributes and be of help in our justice system.

See you in court.

Subdivision Development Method

12Land valuation is the most common appraisal assignment. An appraiser uses different method of valuation taking in consideration the purpose of the appraisal. But land differs in sizes, shapes and probable uses that an appraiser should look up to. Land which is large enough has different characteristics that warrants equal if not special attention. Besides, large tract of land requires more data and sets of comparable in using sales comparison method to arrive in a reliable and defensible market value.

An appraisal technique seldom used by appraisers in determining value of large tracts of land is the subdivision or development approach. This technique determines market value by subtracting the costs of developing a potential subdivision from its anticipated proceeds, and discounts the remainder to arrive at present value as of the date of the appraisal.

In using this technique, an appraiser should prepare a subdivision lay-out to determine the number, size and shape of lots. Through research estimate prices of lot; rental rate per square meters if improved with buildings; the development cost and developers profit and the income stream discounted to the present and arrive in its market value.

Often, land value estimates emanating from the subdivision or development approach are significantly lower than those correspondingly derived from the sales comparison approach with a lower lot sizes and different uses. In theory, if both the development method and sales comparison approach were applied correctly, the value estimates should be similar. Nonetheless, the process of reconciliation of different approaches, the appraiser should give weight to the method which is more reliable and justifiable than the other.

In the whole process of the development method of appraisal, the experience, skill and judgment of the appraiser will play with paramount of importance. There are number of methods and techniques available for the appraisers to explore and gain expertise in the practice of profession. Through our innovative effort as an appraiser, we can make an important contribution in popularizing and practicing the subdivision or development approach, in the service of our clientele and to the society.

Cavite Appraisal

 

I appraised properties in Cavite recently. My client, which is an expat living in the US, instructed me to deliver the report within three (3) days for court submission. He gave me only the exact address of the property, the rest will be produced through research.

Early in the morning I travel to Noveleta, Cavite for my first assignment, through the Manila-Cavite Expressway or Cavitex. I arrived in the municipal hall and paid a courtesy call with the Municipal Assessor, then proceed to the site for actual site inspection and research.

Then I went to Trece Martirez City to conduct due diligence for a property under dispute. I visited the site and afterwards went to the City Hall to conduct research and investigation.

I finished the assignment in three days and submitted it. My clients were happy after reading the appraisal report I sent to them.”Thank you for excellent job.”

A commendation that makes an appraiser happy.

Let us now tour Cavite.

Cavite is a province in the Philippines located on the southern shores of Manila Bay in the Calabarzon region on Luzon island. It is bounded on the north by Manila Bay and Metro Manila, on the east by Laguna, on the west by the South China Sea, and on the south by Batangas. It is composed of 7 Cities and 26 Municipalities. With a population of 3,090,691 in 2010, it is the most populated province in the country.

You can reach Cavite from Metro Manila through Aguinaldo Highway and Manila-Cavite Expressway or Cavitex .Situated just 21 kilometers south of the capital, it is one of the most industrialized and fastest growing province because of its close proximity to Metro Manila. Many companies, such as Intel, have established manufacturing plants in numerous industrial parks in the province. As of 2012, there are 382 actively operating companies in Cavite Export Processing Zone.

Major historic events happened in Cavite that shaped Philippines today, if you want to know more about Philippine History, you can visit Cavite and it will be like seeing the history itself not just reading them from Philippine History books.

21

34

5

 

 

Mixed use development appraisal

11221862_1062426540442254_1175843060924474763_oReal estate valuation is the process of developing an opinion of value. It can be used in determining the value of property whether single use or mixed use development.

So far we have discussed more on the single use appraisal, now let me share and discuss the appraisal of mixed use development.

In valuing property, the first and foremost we should have to know is the intended use or the purpose of the appraisal. It will serve as a guide in appraising the mixed use property.

Mixed-use development is—in a broad sense—any single building, that blends a combination of residential, commercial, institutional, or industrial uses, where those functions are physically and functionally integrated. It may also a site or a building, complex of buildings, or district of a town or city that is developed for mixed-use by a private developer, government agency, or a combination.

In a nutshell, there are benefits in mixed use developments. For example, it reduces distances between housing and workplace, retail business and other. It is now common to have developments which align to the concept of live, work and play.

It is a great challenge to an appraiser in coming out of an opinion of value that reflects the actual use and the highest and best use of the mixed use property. An appraiser can use the different approaches in valuation such as sales comparison, cost and income approach. And since it is a mixed use, you have to use different comparable, and methods. An appraiser has to dig more data and information from the knowledgeable persons in the neighborhood, government officials and industry leaders where the property is located.

In analyzing data, we have to consider the zoning, allowable use, predominant use, conforming use, legal and illegal non-conforming use, the highest and best use, neighborhood analysis, market trends not only of the city but the region as well.

Nothing beats the importance of conducting actual inspection of the property and the neighborhood. It will give concrete data and visualization of the property. The trend of development in the locality and region, will broaden your perspective and analysis.

Valuing mixed use properties will force the appraiser to be more analytical and creative in solving problem –to determine the market value that is reliable and defensible.