Looking Back At A Period Of Intense Speculation

Looking Back At A Period Of Intense Speculation

Those relatively new to the Commonwealth may not have been exposed to the area’s period of intense land speculation of the late eighties and early nineties when an attitude of carpe diem prevailed. The great boom period in Japan lasted from about 1986 to 1991 and was instrumental in fueling Saipan's economic engine. Throughout the last half of the '80's, Japan registered huge annual trade surpluses, had an ever strengthening currency and one of the lowest interest rates in the industrialized world. Japanese banks overflowed with money, much more than they could accommodate by relending in Japan itself. It was this money that went abroad and around the world to finance a myriad of projects.

Millions were invested in the Northern Marianas to launch the islands on the road to a thriving tourism industry. It is estimated that from 3/4 to one billion dollars in foreign investment flowed into the Commonwealth. At that time many – but not all- Japanese investors and speculators failed to have real estate adequately appraised before its acquisition. Others neglected to support their investment decisions with marketing and feasibility studies. An example in Hawaii provides an interesting case in point. A hotel was constructed at a prorated room construction cost of one half million dollars. An industry rule of thumb would require that nothing less than a room rate $500 dollars per night would provide a sufficient return on the investment. Thus, in the highly competitive Hawaiian market the above hotel’s room rate of $500 per night had to compete in an economic environment where a nearby hotel room was available at $150 per night. The Japanese hotel was later sold at a huge loss. The same thing is true of the Pebble Beach Golf Course and other “trophy “ real estate. As we all know the “bubble” burst in Japan and many foreign assets were placed on the market under “fire sale” conditions. Others simply packed up and walked away from their investment. We have several examples of such abandonment in the Commonwealth. How does one know that the price of real estate, when offered for sale, is indeed valued realistically? An appraisal is needed. In the late ‘80’s and early 90’s the Japanese and others simply paid too much for too little for everything from an ice cream cone to a square meter of land and in so doing distorted the pricing structure of real estate and rendered suspect one of the appraiser’s three principal methods of determining value. The three methods generally applied to determine value are: the “market” method; an estimate of replacement cost, plus land, less accrued depreciation and the capitalization of net income. Only one of these methods is described in a most cursory manner and that method is the "market data approach” or "sales comparison method." This analytical tool primarily refers to the technique of comparing the property under valuation with actual sales of similar property. For each sale comparison, the similarities and dissimilarities, advantages and disadvantages, physical, social and economic limitations (if any) between the property sold or leased and the property under valuation require consideration. But this method may not now be as useful as was previously the case since in a chain of historical financial transactions involving a particular piece of real estate the abnormally high price paid without any realistic basis for establishing a purchase price has distorted the use of this tool in the appraisal process.

Simply put, land prices are not worth today what a lot of people think they should be. Many Japanese who paid unreasonably high prices were not astute and discriminating buyers. What they did do was delude the opinions of a lot of people into thinking that their land is worth a lot more money than it actually is – at least at the present. Appraisal reports are based on the market value as of the date of valuation where the term "value" means the power of one good to command other goods in exchange, thus price is "value" expressed in terms of money. One definition of market value is the highest price which a property will bring if exposed for sale in the open market by a seller who is willing but not obligated to sell, allowing a reasonable time to find a buyer who is willing but not obligated to purchase, and who buys with the knowledge of all the uses to which the property is adapted and for which it is capable of being used. Many appraisers consider the estimate of optimum use (highest and best use) to be one of the most significant parts of an appraisal since usually market values are related to land uses. It is sometimes stated that market value is the present worth of future benefits. Not withstanding the importance of other factors in the appraisal process, the appraiser's conclusions of the foreseeable, highest and best legal use, is the most important exercise of prudent judgment that an appraiser is required to render. Optimum use is usually defined as that land use which is reasonably probable and which will earn the largest net return to the land during a specific time. Between 1986 and 1991 Commonwealth land prices were greatly influenced by the affluence of the Japanese and their comparative prosperity once outside the Japanese domestic economy. Japan, with its exorbitant prices and living costs was, and still is, a very expensive place to live when compared with the Commonwealth and other countries in the world. This results because the internal purchasing power of the yen is less than its foreign exchange value. One of several reasons for Japan's high prices, which in turn have influenced land values in the CNMI, is a result of the following: Expensive land prices in Japan has an influence on almost all of their transactions as this element of overhead must be passed on to the consumer. How this has affected land prices in Saipan is not readily apparent but can be understood by an examination of the economic forces at work within the Japanese economy. According to the Economist Magazine, in 1984, a date just before the great “boom” period – a house in Japan cost about 6 times the average annual salary of a Tokyo resident. By mid 1989, when the “boom” was in full swing, the cost of the same house would be equal to 18 year's annual income of that resident. In the Tokyo area, land prices increased by 24 percent in 1986; 76 percent in 1987 and 44 percent in 1988.

Property values doubled or tripled in Tokyo during this short period. Two markets evolved: the rich, because of their high business profits, and the poor, who gave up trying to save for a house and, instead, went on a spending spree. By 1989 the average Japanese household had assets of savings, bonds, stocks (more on this below) and insurance of about $135,000. At that time an average single Japanese women earned approximately $20,000 per year plus bonuses and had about $1,000 per month in disposable discretionary income to spend. Considering the prosperity of both groups, coupled with their experiences associated with the difficulties of acquiring land at home compared with prices they found on Saipan, partially explains their great interest in Commonwealth land a few years ago as well as their ability to pay high prices at that time. With Japan's huge trade surplus with the United States and America's corresponding trade deficit, the Japanese had to find investment opportunities for the dollars they had earned and, since their trade restrictions allegedly made it difficult to export U. S. products to Japan to earn the dollars back, the Japanese used their American currency and credits to invest in the Commonwealth and elsewhere in the United States, often in the form of real estate. All this happened during the last half of the eighties. On Saipan, land which had been leased for $30 per square meter in 1986 increased in value to $300 per sq. meter or more by 1989 -’90 with beach front hotel sites ranging from $150 to $500 per square meter. In 1980 there were 1,294 land transactions recorded. By 1989 there was a total of 4,424 with the peak in 1991 of 6,500 dropping to 3,698 in ‘92 and 2,664 by November ‘97. Since it is unlikely that a person of CNMI propinquity would lease private land in the Commonwealth when they can own it in fee simple it can be assumed that the majority of all transactions involving leased land also involved persons of non-CNMI descent, usually a foreign investor and in some cases other non indigenous U. S. citizens as well. The decade of the nineties witnessed a drastic change in Japanese investment abroad. By the first quarter of 1990, the Japanese economy started to cool, partly as a result of a decline in the Japanese stock market; rising interest rates and an unexpected drop in the value of the yen against the dollar. Japan's economic difficulties worsened as stock prices continued to decline sharply resulting in a slowdown in investment in the Commonwealth. The nation's wealth in the eighties had been largely tied to grossly inflated paper values on the Tokyo Stock Exchange and, as values tumbled, stock prices fell dangerously low. The Nikkei Stock Averages (the equivalent of Wall Street's Dow Jones Industrial Averages), lost sixty percent of its value – falling from 40,000 in the fall of 1989 to below 15,000 by mid 1992 and increasing only to 15,427 by November 1997. Many Japanese firms had used the value of their stock as collateral to secure bank financing. As stock prices fell – so did their ability to borrow funds from banking institutions or raise additional capital from the sale of stock. Major Japanese banks with large stock portfolios lost hundreds of millions in value and many previous loans became worthless. Just recently the 100 year old Yamaichi Securities, 4th largest brokerage in Japan went broke. Japanese banks stopped lending, particularly on the international scene, as they strived for more liquidity. Japanese investment interest in the Commonwealth all but dried up. Several previously planned hotel projects were postponed or delayed. Japanese construction activity in the Northern Marianas slowed considerably but was partially replaced by Korean and Chinese investment. The Japanese visitor became more prudent in his spending habits purchasing less expensive gift items and dining in less costly restaurants. Indeed, many of today’s visitors appear to me to be far less affluent than those that shopped Garapan boutiques a few years ago. Now the region has the problems of Korea and several southeast Asian nations all of which are in dire financial condition.

A recent article in the Economist Magazine observed, “convinced that rapid economic growth would forever rescue them from bad lending judgments, bankers failed to examine the financial risks they were undertaking: a lunch or round of golf would do more to inform their credit decisions than spreadsheets of financial data.” This “Asian way” of evaluating borrowers and their projects has proved costly indeed to many Asian investors. Korea alone may require an International Monetary Fund “bailout” of $50 to $60 billion. Part of the problem appears to be that government authorities with various “pet projects” pressured banks into financing projects of dubious viability. Now, investors in many Asian nations are experiencing a lack of confidence as they observe their stock prices falling and many are selling at a loss. They are transferring their assets to the United States, long a safe haven for capital. Enormous amounts are flowing to American banking institutions with the result that the interest paid on such savings will drop. The banks will soon be awash with money and since they must re-lend these funds in order to earn back the interest they have paid out to those with funds on deposit – plus their profit – interest rates on borrowed money will fall as banks rush to meet the competition from each other. People are beginning to borrow money at competitive low interest rates, already 2 to 2.5 percent lower than just few weeks ago. This borrowed capital will go to purchase homes, automobiles, etc., with the result that a real stimulus to economic growth in the United States is expected to take place. “Peering Into The Crystal Ball And Learning To Eat Ground Glass” Turing from the serious to a little levity many theories have been advanced as to why stock markets fluctuate. These have ranged from sun spot activity, weather phenomena and reading tea leaves in an empty cup.The burning question of the moment is: why are the stock markets in Asia in decline? In seeking a ray of humor in an otherwise distressing Asian situation, my theory is that many Asian religions such as: Shintoists, Confucians, Buddhists,Hindus, etc., each have a calendar very different from the Gregorian calendar commonly used in the west.

For example, 1997 in the Buddhists calendar is the year of the “Ox 2053.”(1) As more and more financial markets became electronically linked with one another a common calendar was necessary. The Gregorian calendar, (the one we use), was adopted since this was the one used by financial markets in New York, London, Paris and elsewhere in the western Hemisphere. As societies became more dependent upon computers and the programs that ran them, the western calendar was adopted along with the electronic computer marvels such as the internet, etc. To understand what happened we must step back to a time when computers first began appearing on the scene in many private businesses, stock exchanges and banks. In those days data was coded and key punched on IBM cards. In order to save space on the card thereby permitting more data to be placed on a single card the number signifying years was reduced to two digits, thus, the year 1950 became “50.”The problem that only came to everyone’s attention several years ago was that there was a terrifying and almost diabolical “melt down” programmed within computer memories.Unless corrected in time – at midnight on December 31, 1999 (the end of the 20th century) – all the computers will revert to “00”, (double nothing) rather than display the year 2000. Havoc will reign throughout financial records buried with the electronic mind of computers unless corrected in time. It has been estimated that billions of dollars are required to correct the problem to keep records from rolling back 100 years to the year 1900, a date that began this century. Returning to my postulate as to the reasons for the dreadful situation many Asian economies are now in with stock prices falling, I believe Asian fortune tellers have replaced economists and brokers and are now advising their clients that the situation with computer clocks can’t be remedied in time before the new 21st century arrives and therefore they should SELL. The resulting stock market “tumbles” over recent weeks throughout Asia might lend some credence to this theory.

I discussed this with my friend in West Virginia, Kermit Snell, and while he has never been in a stock exchange and can only count to twenty with his shoes off – he agrees with me completely. As Julian Huxley once said, “We all know how the size of sums of money appears to vary in a remarkable way accordingly as they are being paid in or paid out.” (1) Author’s note: You no doubt have heard the expression, “it is a bull market”, the ox and the bull are both bovine animals. A “bull market” occurs when the value of securities is expected to rise. This is the opposite of a “bear market.” A bear is a Ursidae Carnivora – I don’t know the meaning of the word except that the animal is a meat eater. The term “bear” is applied when securities are sold in expectation of a price decline. Many Asian markets are currently bear markets since people are selling their stock at prices lower than the purchase price.