In This Issue:
1. Activity, Debt and Deals
2. Condemnation
3. Captain’s Real Estate Guam Statistics
4. Guam Politics
5. Book Review
6. Featured Articles
HEADLINES: 2010 Guam Real Estate Activity Steady; Significant Future Gains Projected Housing Prices Commercial Sector Sales Slow; Lending Activity Down Sharply; Military Build-Up Risk Waning; Foreign Investment Expected to Skyrocket.
Guam Real Estate Market Update: Activity, Debt and Deals
Activity Update – Guam’s real estate market held steady during the second quarter of 2010, which is on pace toward an estimated 20 percent improvement over sales activity in 2009. During the 2nd quarter of 2010, total islandwide real estate sales reflected $66.1 million, up slightly from the prior quarter, but up sharply from the first quarter 2009 low of $36.1 million. “The market has been extremely steady with monthly sales volume of around $20 million. That’s the pre-bubble rate of sales activity, so we are expecting sharp gains after the massive military and infrastructure construction projects commence.” noted Nick Captain, President of Captain Real Estate Group. “By mainland standards, a steady market is a healthy market. Although the past few years has witnessed an evaporation of Asian-based foreign investment, it will return”, stated Captain. Private sector foreign investment is already returning, it’s just not the big money from Asia, yet. Investment has been flowing into Guam from Hawaii, Alaska, the mainland and other locations. In the residential sector, single family median pricing has stabilized over the past year in the $210,000 range. Captain Real Estate’s projected 20 percent increase in total single family residences sold this past quarter was reasonably accurate with 160 units closed. In the condominium sector, sales activity showed 20 percent growth but the median price dropped below $120,000. Commercial and industrial sales activity through mid-2010 remains weak, although occupancy and rents are increasing.
Debt Rules – The new game in Guam real estate is debt. Cash is not king, because debt rules and lenders reign. As the key to leverage opportunity (and risk), debt is now the critical component of most deals. As liquidity dried up and speculative property prices declined since 2007, properties acquired during the boom suddenly experienced equity squeezes. Now, foreclosure and debt sales activity dominate the major deal landscape. At the 2009 Micronesia Real Estate Investment Conference (MREIC) at Leopalace Resort on Guam, we said that the future market would be characterized by a “take a banker to lunch” mentality. So as 2010 evolves into the Year of Debt, towering statistics are rolling in. Annualized 2010 Guam real estate lending is down by $192 million, or 36 percent from 2009 (see chart). Among other financial industry fallout, Wells Fargo will exit Guam. Notable 2003 MREIC Investor of the Year Mr. Hee Cho stormed back to life this past quarter by acquiring the first mortgages under Talo Verde Estates and Hemlani’s Marine Drive land from Nara Bank. The Hemlani land sold at $6.2 million at the peak, went through foreclosure and recently sold via auction credit bid at $3.3 million in July, a decline of nearly 50 percent. The Talo Verde note was paid in full at the recent closing, but the $25 million second mortgage holder Kumho, took a beating. In Tumon, the buyer of the first mortgage (sold by FHB at a reasonable discount) secured by the Marriott Guam is working hard to salvage that hotel’s future. And debt owners may prevail at Guam’s latest abandoned (temporarily on hold, shall we say?) project, the four massive towers next to GMH. Debt holders including mostly Korean lenders are further controlling numerous peak 2007 deals including raw land and other abandoned projects. At the same time, off-island lenders are showing optimism in Guam; most notably via a Resona Bank secured nine figure megadeal with the Leopalace Resort owner (no, it’s not for sale), closing the largest real estate mortgage in Guam’s history.
Notable Deals – In an unbeatable combination of debt, equity and connections, Talo Verde Estates luxury residential project has finally fallen into new hands, sold to a group led by Harry Chang. Talo Verde’s projected cost of $35 million compares unfavorably with its $19± million sale price. First Hawaiian Bank proved its leadership in lending again with an $11 million note on the deal. Other major deals this past quarter include 13 additional closings at The Laguna, the high-end lot subdivision at Pago Bay, at prices up to $476,000. In the condominium sector, nearly sold out Harvest Residences has been highly successful with a perfect combination of product and price. Michael Jury and partner acquired nine Pacific Gardens condominium units from the Guzman family at an indicated price of just $38,400 per leasehold unit. During the past quarter, only five condominiums sold at prices above $300,000 and just eight houses sold at prices above $400,000.
Condemnation: Will They or Won’t They?
Condemnation: It’s a subject fraught with controversy and fought over with conviction. The taking of private land by governments anywhere is personal and raw. On Guam, the taking of private land is practically an act of war. It’s political to the max, and its local history is filled with intrigue, familiar faces, lots of emotion and even more money. So will they or won’t they? Will the Feds condemn land on Guam for military expansion purposes? It’s highly likely, but probably only after offering an absurdly high amount of money to landowners.
Naturally, Gov Guam and the Feds differ widely in their land histories and their approaches to condemnation, defined as the government act of taking private land for “public” use benefit, which is now broadly interpreted. The Feds condemnation history on Guam during the 1940s and 50s was marked by remarkable arrogance and hubris that could only be exercised by a growing empire. The Feds treated Guam land as spoils of war – at one time they controlled nearly 70 percent of the island. The US Navy: they came, they conquered, they condemned. They also housed, taught, cleaned, constructed, fed, clothed, and so on, but that’s another story; condemnation is the legacy of the US militarization of Guam following WWII.
The Government of Guam on the other hand, naturally learned to fear government condemnation, and falls short of a rationalapproach to the subject. If Gov Guam had not ignored, but instead condemned Marbo and Pagat caves and perhaps a score of other sites, and turned them into well groomed parks – we’d have not only proud natural attractions that promote local culture and tourism, but a much stronger negotiating position with the Feds now. If Gov Guam took a mass condemnation of fractional lots in Agana, they could have solved a 60 year old problem that continues to inhibit growth and development in our capital. If Gov Guam condemned lands historically crossed for access, we would have improved traffic patterns (think Hamburger Road, Harmon flea market, Happy Landing Road and your neighbor’s driveway). If Gov Guam condemned Hemlani’s Merizo Apartments and converted the slum into low cost housing, it would remove blight and dangerous living conditions from Guam’s most beautiful village while assisting our most needy residents.
Will they or won’t they? Of course they will, and we won’t, but they shouldn’t and we should.
Guam Politics
It’s political season on Guam and we feel obligated to express our opinions on matters affecting real estate. While the privatized GTA now wins national telecommunications Indy Awards, the government operated Guam Waterworks Authority (“GWA”) continues to flounder under political whims and poor leadership. US EPA now doubts GWA’s ability to comply with the Clean Water Act and Safe Drinking Water Act. EPA alleges that GWA violates national effluent limits for waste water treatment plants. GWA acknowledges that when it rains in Agat, they allow for direct discharge of raw sewage into the Pacific Ocean. Nice. When it rains in Agat, GWA pumps raw sewage into the ocean. GWA reportedly can account for only about half of the water it produces, struggles to accurately charge consumers, regularly backbills for historic errors, and installed thousands of defective meters. This might be tolerated if GWA did not intentionally damage Guam’s image as a destination for foreign investment via it’s infamous 2008 Moratorium on Development. The Moratorium damaged the real estate industry on Guam while effectively granting a major project monopoly to the developer of the four presently abandoned towers next to GMH. GWA has also implemented a user fee strategy that equates to a five percent tax on every new house completed on Guam (based on median price) which discourages homeownership and new construction at the worst possible time.
Let’s face it, Guam Waterworks Authority needs new leadership or federal receivership. We don’t have the political will to privatize it and we don’t have the resources to run it properly. With $1.0 billion in required upgrades, leaving this work up to the folks behind the Moratorium on Development would be a tragic waste and failure. The many fine employees of GWA and the public deserve better. We’ve proved we can’t manage Guam’s water and sewer systems, so it would be fine if the Feds moved in. Like the landfill, they would fix it.
After the political evisceration of former Senator Matt Rector, it’s nice to see that some of our elected leaders still have guts. Senator BJ Cruz, ignoring possible political suicide, blatantly, openly and thoughtfully criticized the Catholic Church for its stance on clergy sexual abuse and same-sex marriage. And Senator Rory Respicio showed his backbone by challenging the mainstream electorate with a bill to allow medical marijuana, which has been legal in California for over a decade and should be passed into law on Guam. Will anyone else in the Legislature step up and propose something both controversial and meaningful? Don’t count on it.
Book Reviews and Free Book Offer
It was an awful quarter for the stock market, global risk and fear, but a great quarter for books. Franz Kafka’s The Metamorphosis is a staple of American education, but somehow I missed it until recently. Even though the Bantam Classic edition I picked up at Greenbelt seemed like a reasonable length – a couple hundred pages – I was pleasantly surprised to see that the actual story was only 50 pages! Sweet. My version starts with an Introduction that’s nearly half as long as the novel. And then there’s Explanatory Notes to the Text (41 pages), letters by Kafka (6 pages – dude had issues), and Critical Essays (punishing at 70 pages). Kafka’s bizarre human cockroach classic is dominated by long paragraphs. One paragraph runs over the better part of three pages. I’d say the medium length of a paragraph in Kafka’s The Metamorphosis, is one page. If the next translator could add lots of paragraphs, the story might be as long as the Critical Essays section of the book.
My version of Dante’s The Decent Into Hell (Penguin Epics) didn’t include a long Introduction, Explanatory Notes, Letters from Dante (scary thought), or Critical Essays, thank Satan. Taken from Inferno, Book One of The Divine Comedy trilogy, this poetic journey dates back to the early 14th century. That means it’s going to be a hard read. But considering it was written in Italian, it’s cool that the rhymes still pretty much work out. And the progressively graphic gore pulls you in like a bloody chainsaw. The worst part of The Decent into Hell is that Dante’s guide is Virgil. Now you need to read Virgil.
Also recommended: novels The Survivor by Chuck Palanhiuk, Let the Great World Spin by Colum McCann, The Final Solution by Michael Chabon and Murakami’s Wild Sheep Chase. A friend read The Survivor and didn’t remember it. I’ll never forget it. It’s a wild story that twists intense religious, modern pop culture, white slavery and domestic management issues through dark comedy and satire. The McCann novel is a great Match Point-type read and you can share Chabon’s detective story (big print and pictures) with your teens, but it will test your ineradicable memory. Chabon is one of those overachievers that overachieve the people we think are overachievers. Murakami’s Wild Sheep Chase, is like, well it’s like Murakami.
Free Book Offer
 Donate $50 to Guam Public Radio and receive a free copy of Steve Bergsman’s Passport to Exotic Real Estate ($25 value). The chapter on Guam features Nick Captain, Liz Duenas, Anthony Godwin and other local real estate market participants. Limited to first five donations. |
Featured Articles: Russian Real Estate
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Thank you for taking the time to read the Captain Real Estate Newsletter.
Sincerely,
Nick Captain
President
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