Published Thursday 19th June, 2008

Last week this column took the time to distinguish between public schemes, infrastructure and commercial schemes. That is important since there are different criteria for conceiving and selecting projects of different types.

Our society has an apparently insatiable appetite for melodrama and conspiracy, but we are not going to indulge that. We are asking: what are we building and why?

This week we examine: who knew what and when. Those are important questions since they can guide us through this complicated situation. Let us start with what we do know and work from those facts.

What do we know?

1. Prime office rents

The best six buildings in our capital command rents in the $15 per sq ft range. These were listed in the September 20 column in this series. We recently had reports that a new building in the St Clair area has just been leased at $20 per sq ft but those remain unconfirmed.

2. State rents

The State rents a variety of offices, generally speaking, of a lower standard than the best buildings. Our view is that those rentals are at an average (mean) of $8 to $9 a sq ft and in arriving at this one is excluding the six floors of Nicholas Tower rented by the Ministry of Trade and Industry last year.

3. Break-even rents

Objective analysis of the new first-class buildings being put up in our capital would show that the cost of putting these up—land, construction, professional fees and finance—requires a break-even rent in the $30 a sq ft range. Please note that that figure does not provide for profit or maintenance.

Some financial implications of the new office buildings in the capital would include:

l        Cost of occupation: the State’s cost of occupying office space will increase tremendously. In our estimation that increase would be in the order of a tripling in those costs. Given State commitments to some 2.6 million sq ft of these offices, we are talking about a monthly cost in the region of $80 million. Yes, that’s right, an annual bill of almost a billion dollars. This does not include maintenance. That represents a colossal increase in recurrent expenditure which will start just as we are at peak energy output and prices.

l        Private rental market: the private rental market will be forced to adjust to the State’s withdrawal from its accustomed role as tenant. In the absence of new tenants for the vacant offices resulting from this change – estimated to be about two million sq ft—landlords will need to lower their rents if they want tenants.

l        Greater collateral development challenges

          The shift in the capital’s commercial “centre of gravity” resulting from these projects is         cause for other concerns. Another of this government’s ambitious proposals is the complete       redevelopment of East Port-of-Spain; those proposals have been called Eastbridge.

Present estimates of the cost of Eastbridge are in the region of $1.6 billion. Those proposals include 300,000 sq ft of commercial space and that would appear to raise questions as to limits to growth.

Given the character and pace of ongoing state-sponsored office developments at the edges of the traditional downtown area, one is bound to ask: to what extent, if any, are those projects compatible with the Eastbridge vision?

More to the point: how do these proposals fit in with the existing downtown area?

This seems to be an instance of strategic mis-match, to put it plainly, in that major office projects which could revitalise an area in economic terms are being located away from the area one wishes to revitalise. But we will be dealing thoroughly with Eastbridge and its implications in a subsequent issue of this series.

What did the State know?

At this point, the real question is what did the State know and when? Our Cabinet is not a rubberstamp and ought properly to be soberly scrutinising the various proposals which come before it.

On May 13, the Prime Minister addressed the Senate on the Udecott allegations and that speech, being a prepared one, deserves our most careful attention. It sets out a preliminary defence to various allegations which concluded by proposing that a Joint Select Committee investigate those allegations.

Our interest is in the description of Cabinet’s oversight into Udecott’s operations. Manning stated that “…2) a Finance Committee of Cabinet was established to review the financial implications of projects.” We were not told more, but one has to ask what that committee told the Cabinet.

When one considers the various points set out so far in this series and in this article, one has to wonder at the quality of the advice given to Cabinet on these critical issues.

We are awaiting publication of Udecott’s 2007 annual report to carry out a proper analysis of that aspect of their operations. But some preliminary points need to be made here.

Udecott’s accounts—as a property development company—are arranged so as to show the value of land and work in progress separately. Development lands are valued according to the advice of an independent valuator. The work in progress is stated at the lower of cost or net realisable value. These figures are set out in the Notes to the Consolidated Accounts and we have no reason to doubt their accuracy.

The figures are amalgamated and that presents a challenge since we are seeking to establish the viability of these office projects.

There is another widely-employed and professionally-accepted approach to the valuation of projects under construction which assumes that the works are completed according to plan and a current value is put on the project assuming today’s other factors applied: rents, interest rates, demand and supply.

It would be very interesting to see such a valuation carried out on one of the flagship office projects and compare that with the cost of building it.

Afra Raymond is a director of Raymond & Pierre Limited. Feedback can be directed to afra@raymondandpierre.com.