Appraisal and Valuation of Real Estate Located in Disaster Prone Areas

On 2009, Philippines was struck by the tropical storm “Ondoy”, then last year, a killer earthquake flattened parts of Cebu and Bohol, and storm surge “Yolanda” destroyed the Visayas region. Many lives were taken and billions of properties and assets have been washed out and ruined by the disasters.

Typhoon “Ondoy” struck the Philippines lashing Central Luzon, including the national capital of Manila, with the heaviest rainfall ever recorded, at one point covering over 80% in water.

The deadliest disaster the country has experienced last year was storm surge Haiyan or “Yolanda” flattened the Visayas area, destroying houses, uprooting trees, toppling down electrical posts, etc., leaving more than 7,000 people dead and millions of people directly affected.

Possible Technical Assistance of RICS in helping “Yolanda” affected areas of the Philippines

The Royal Institution of Chartered Surveyors (RICS) takes hazard resilience and future proofing of infrastructure for climate change is by promoting capacity building on adaptation and disaster risk resilience amongst its membership, including assisting in the recovery process by providing specialized training and by reviewing construction codes in line with international best practice. Recovery and rehabilitation after a disaster event may take many months or years to implement and special coordination arrangements will need to be put in place and administered, which is something RICS members can assist with through its RICS Disaster Management Commission and its Build Action programme.

RICS Disaster Management Commission

To promote the work of Chartered Surveyors, the Commission has initiated a programme to develop a practical framework for bridging the gap between short-term relief and long-term reconstruction and for integrating resilience considerations into projects located in existing or potential risk areas. This includes developing guidance and providing professional advice and expertise to Governments, humanitarian and development agencies and NGOs throughout the world.

Role of Filipino Experts and Consultants in Identifying Disaster Prone Areas

The Geo-Hazard Mapping and Assessment Program is an on-going priority program of the Department of Science and Technology (DOST), Department of Environment and Natural Resources (DENR), which is being implemented by the Mines and Geosciences Bureau (MGB). Its main objective is to identify areas in the country which are susceptible or vulnerable to various geologic hazards, or geo-hazards. The program also seeks to provide information to various stakeholders in order to lessen or mitigate the impact of these events.

The program comprises three major activities, namely, rapid assessment survey to generate geo-hazard maps that will indicate which areas are prone to natural dangers like landslides, flooding and ground subsidence; printing and reproduction of maps, manuals and information materials for public dissemination; and conduct of seminars and workshops for local government officials and public school teachers to increase their awareness and preparedness on various natural hazards, as well as teach them on the proper use of the geo-hazard maps.

Appraiser/Economist Roque  M. Sorioso, Jr. of the Institute of Philippine Real Estate Appraisers and a professor of the University of the Philippines, shared his insights and important notes in a meeting with the National Institute of NIGS, Project NOAH (Nationwide Operational Assessment of Hazards), IPREA (Institute for Philippine Real Estate Appraisers) and the head of the appraisal department of Land Bank of the Philippines.

The discussion included among others the following:

On Reconstruction Projects affected by natural disasters

Recall that geo-hazard analyses are necessary to identify hazard zones so that proper and relevant land-zoning and infra-planning in master plans can be developed.  Only afterwards, can follow the master plan which limits or augments property rights which are –in turn- valued by appraisers.

Cooperation among NGOs, Public and Private Sectors

The geo-hazards data will be released publicly (free) although detailed ones need to be paid-for (DOST owns the data).  None of the directors are personally available to work on our consortium projects since they have already been hired full-time by Project NOAH and DOST.

Notes:

1.       Project NOAH maps are now the most accurate Philippine maps and they are now the  de-facto map-maker of the country (NAMRIA became redundant when they failed to upgrade).

2.       NOAH is now using a Doppler radar and LIDAR-equipped plane and the accuracy of its measurements are to within less than a millimeter.

3.   Dr. Carlos Arcilla, Department Head of Geological Sciences, University of the Philippines, is one of the most reputable, and prestigious in the field of geo-hazard mapping being a internationally-certified geologist able to measure mineral reserves.

Situation on the Ground

In Professor Sorioso’s meeting with the Land Bank officers, it was divulged that banks could not wait for the scientific studies to be completed.  They need to release funds for their small and medium scale enterprises in Tacloban and elsewhere in the Visayas.  However, their dilemma is how to discount flood-affected or devastated properties.

Furthermore, most of the businesses they need to extend financial help are located in low-lying areas that are prone to flooding were appraisal and valuation faces certain issues and challenges.  If government urban planners and scientists are to be followed, those properties  will need to be permanently evacuated and designated as parks while the businesses and residents will be re-located further inland.

Most banks read the situation like this:  money needs to circulate.  Government will likely not have the political will to relocate whole towns and cities.  Banks will start lending even if high risk is involve.

Valuation of Flood-Prone Real Property

Literature regarding the Asian experience in how flooding impacts real property prices are scant.  However, there have been several studies conducted in the US and Europe regarding the impact on property prices due to flooding.  A 2012 research paper by Sebastian Kropp, CEM, summarized the more prominent studies regarding the subject from 2001 to 2011.  The following were the findings:

1.       Value discounts ranged only from 3% to 20% depending on location, geography and property economy (US and European data points).

2.         Inland properties that flooded experienced higher discounts, 7% upwards.

3.    Coastal properties were not affected in the medium and long-term since flooding discount was off-set by coastal economic advantages and view premiums (Aceh town in Indonesia was moved inland to avoid future tsunami damage but the beach resorts of Thailand remained in place, albeit with engineering improvements).

4.       For areas that were occasionally flooded (say 1 in 10 years), the discounts applied only in the first three years after flooding.    Pre-flood values were recovered in year 4.

5.       In the US and Europe, flood discounts on properties applied only in the first few years after flooding but disappear as they are eventually neutralized by engineering solutions.

6.       Usually, the flood damage discount was LESS THAN the present value of the insurance premiums.  This possibly reflects the tendency of communities to stay in place (in Tacloban, property owners in the town center have gone on record to declare they will stay regardless of future risks).

7.       In Provident Village, pre-“Ondoy” property values averaged P6, 000 per square meter.  Post-flood values averaged P2, 900 per square meter (about 50% discount) as of 2012.  This information is only based on a few data points from banks’, Vitale and Albano appraisals.  To this day, property owners refuse to leave (and thereby give up the P6, 000 per sqm value) due to lack of capital.  In other countries, they would have been re-located or, in the case of some property owners, applied engineering solutions (houses on stilts).

8.      In 1991, the Pinatubo Volcano eruption and destruction covered and affected Northern Philippines with ash flow, “lahar”, and changed the geographical land formation. The lost of property value and market demand  persistently dropped for 10 years.  However, after ten years, property values increase substantially.

9.       In general, the flood discount was determined by severity (mean flooding height) and frequency (probability of flooding).  The former determine amount of discount while the latter determines the persistency of the discount.

10.   Applied to Tacloban City, Leyte, the discount will probably be 50% (some claim more, 70%) and decrease as engineering solutions are adapted and the culture gets used to the new norm.  A lot depends on how re-development proceeds.  The discount is higher because the property economy is smaller and capital investments for engineering solutions are scarce.

11.   Other appraisal companies are now being consulted by banks regarding valuations of affected properties, but so far, the proper standard and methodology has not been agreed upon. Banks are asking appraisers to retain value as much as possible. However, to my knowledge, none of the Manila-based major appraisers are valuing devastated properties because:

a) they are already too busy with existing work and;

b) they do not want to deal with the technical problems of the valuation and the resulting risks in fee collections.

Valuers in undertaking their appraisal of geo-hazard areas require technical assistance from qualified scientific experts. It is but prudent that Valuers consult experts’ advice and must disclose this and explain the standard and methodology use in the valuation. The obligation for clarity and full disclosure is important when scientific technical and legal issues are involved.

Source:

Royal Institute of Chartered Surveyors

Philippine Valuation Standards (Adoption IVSC Valuation Standards under Philippine Setting)

The Institute of Philippine Real Estate Appraisers (IPREA) Journal,

Professor Roque M. Sorioso, Jr., Economist

Professor Carlos “Caloy” Arcilla, PhD, Geologist

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