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Dubai Debt Default, Jones La Salle and RICS Property Valuation Track Record

Housing-Market / Global Debt Crisis Dec 12, 2009 - 07:17 AM GMT

By: Andrew_Butter


Best Financial Markets Analysis ArticleAccording to the Bloomberg the collateral for the $3.5 billion bond issued by the developer Nakheel in Dubai that is widely thought to be about to default, was a lien on a piece of mainly reclaimed land called the “Waterfront” project.

The land had been valued by Jones Lang LaSalle (“strictly” in accordance with the procedures laid down in the “Red Book” issued by the British Royal Institution of Chartered Surveyors (RICS)) at $4.2 billion.

So that’s OK then, the bond will default, the bond-holders will get the land, they will sell it for $4.2 billion and everyone (particularly RBS) will live happily ever after?

Err….I don’t think so.

I used to do valuations in Dubai and the in region around Dubai until about 2000, (mainly as a sub-contractor to the US property advisory firm Cushman & Wakefield), but then I (and they) stopped getting work.

 There were two problems; the first was that I used to do valuations in accordance with International Valuation Standards (IVS), and second, because it was widely considered that I used to come up with what the “players” considered was the “wrong answer”.

My last job was when I was hired by an accounting company that had in turn been hired by the Ministry of Finance in Oman to do a due diligence on a valuation done (strictly in accordance with RICS), of a piece of desert just outside the town of Salalah in Oman. The purpose of the valuation was because the land was being put up as collateral for a low interest loan from the Oman Government.

The valuation was a typical RICS valuation; it contained a copy of the affection plan, a bit of blurb about Salalah that bore a striking resemblance to the blurb in Wikipedia,  and then a conclusion “Our opinion of value is “X””, I seem to recollect “X” was about $150 million.

Based on my analysis I figured that the land was not worth much more than $15 million; I went to see the British “Chartered Surveyor” who had done the valuation, and we had a “chat” over a nice cup of tea. I told him that in my opinion unless he could find “Some Stupid XXXXX” to pay that amount of money that perhaps the valuation should be somewhat more conservative.

I would like to explain that the expression “Some Stupid XXXXX” is a technical term used in the industry for a mythical figure that wanders around with millions of dollars in his pocket paying much too much money for everything.

So far in my twenty years working in the business, I have yet to spot one, but I am reliably informed that’s because I don’t move in the right circles, it’s something to do with the fact that I don’t wear $3,000 suits apparently.

The Chartered Surveyor told me he did indeed have a real-life “Stupid XXXXX” with $150 million in his pocket, who as we spoke was calling him every five minutes begging him to let him buy the land.

I suggested to him, in that case he should advise his client to accept the offer, and to take the money instead of going through all the unnecessary inconvenience and Red Tape of getting a loan from the government, and that’s what I wrote in my report.

I was not popular, but in the event the loan was not approved, and mysteriously the “Stupid XXXXX” did in fact not buy the land (I understand he changed his mind, what a pity). I was in Salalah just a few months ago, and I drove by the land, it’s still there, completely empty, with a couple of camels wandering around over it, all my fault!

These things happen, in real life.

In that particular instance the decision taken by the Oman Ministry of Finance to get a valuation was an after-thought, just some “bureaucrat” ticking boxes, and we almost didn’t get the job because our fee for the due diligence was three times what the RICS version of a valuation cost.

That’s the kicker, if you want to get a lot of work doing valuations, keep your fees low, and keep coming up with the “right answer”, and if you can get an RICS Chartered Surveyor to sign-off well that’s gold, that stamp is worth almost as much as the stamp that says AAA on a toxic asset in USA.

And there’s not much risk, because every valuation has a date. It’s typically an estimate of how much the land or property might have sold for in an arms length transaction between a willing buyer and a willing seller (after “proper” marketing), on that date.

And well, if the next day you can only sell the land for one tenth of what the valuation said you could have sold it for the day before, well that’s just life, you can say “well we had the Stupid XXXXX in our pocket, but a Black Swan came along and frightened him away”.

The reason International Valuation Standards (IVS) is different, is firstly that you have to explain to the client how you did the valuation, so you can’t just puff yourself up and say “I am a Member of the Royal Institution of Chartered Surveyors” (1), “and that’s my opinion”.

Second IVS considers two values for anything “Market Value” and “Other-than-market-value” (OMV). By definition Market Value is equal to OMV when the market is working properly, i.e. when it is not in what IVS and George Soros calls “disequilibrium”,

Under IVS you are supposed to determine whether or not the market is in disequilibrium or not, for example in the run up to the Credit Crunch in USA the market was clearly in disequilibrium (lots of people for example the IMF and Professor Shiller were saying that, it wasn’t a secret). If IVS had been mandated then, there would not have been a credit crunch.

If you determine that the market is in disequilibrium you are supposed to (a) report that to your client, and (b) also tell him what the OMV is, i.e. what price the land or property might reasonably be expected to sell for when the market is in equilibrium, for example in my example, what it might sell for in the unfortunate event that the “Stupid XXXX” changed his mind.

In the case of Nakheel and the Waterfront, the market was in disequilibrium, and also it was being rigged, everyone knew that. I noticed a press report on their website that they had sold $3.5 billion worth of land on the Waterfront.

That part was probably true, sort of, because to “buy” the land typically the “investors” only needed to put down 5%, so out of that $3.5 billion perhaps $170 million was collected. And those guys were all aiming to “pump and dump”, i.e. sell the naked options, for that’s basically what they were (there was no requirement to provide an guarantee to pay the residual 95%), on to what investment bankers call, the “dumber than me” brigade.

The “pump and dump” part relied on keep in the hype going.  Which might explain why in October 2008 Jones Lang LaSalle issued a press release saying that real estate in the MENA region (read Dubai) would be one of the best performing in the world in 2009 (in the small print it said “according to a survey of Real Estate Investors (read “Some Stupid XXXX”)).

Six months later prices of real estate in Dubai had halved.

Credibility is also important for “pump and dump”, Jones Lang LaSalle were awarded the 'Best Real Estate Advisor for 2008' by Euromoney's prestigious Liquid Real Estate Awards.

So the investors who put up $3.5 billion to buy the Nakheel bond are safe enough then? Jones Lang LaSalle valued their collateral at $4.2 billion.

My opinion, if they realise more than $420 million from the collateral that was posted, they will be lucky, that’s of course just based on my experience of the difference between what you can get “Some Stupid XXXX” to pay, and what anyone else is prepared to pay.

Interesting that none of the initiatives to reform the worlds financial systems say anything about improving valuation standards, notably not the recent bill passed by Congress in the USA.

I was looking at the Basel II Guidelines the other day, the word “value” is mentioned 274 times, but nowhere in the document does it explain how to do a valuation, it most certainly does not suggest that the value that really matters if you are working out the capital adequacy of a financial entity, is not what you might have sold the collateral for three years ago to “Some Stupid XXXXX”, it’s what you can sell it for on the day that the bond issuer says “Oh well, here’s the keys”.

Go figure if this sort of nonsense is going to happen again.


(1):  The reason the RICS is called the “Royal Institution” is apparently because King George III was a lunatic and when he signed the decree he wrote “Institution” instead of “Institute”. But there again, perhaps he wasn’t as mad as everyone says he was?

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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