|
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.
