UNLOCKING THE VALUE OF REAL ESTATE IN MICRONESIA
Keynote Speech of David B. Cohen,
Deputy Assistant Secretary of
the Interior for Insular Affairs
before the
Fourth Micronesia Real Estate Investment Conference
Guam, U.S.A.
September 28, 2007
[Acknowledgements]
Hafa Adai, ladies and gentlemen. Thank you for inviting me to be here
with you today. I believe that most of you are familiar with the U.S.
Department of the Interior’s role in Micronesia and in other island communities. For
those of you who don’t know, the Secretary of the Interior generally
administers the U.S. Government’s relationship with its territories,
specifically Guam, American Samoa, the U.S. Virgin Islands and the Commonwealth
of the Northern Mariana Islands. He also administers the financial assistance
we provide to the nations in free association with the U.S., namely the Marshall
Islands, the Federated States of Micronesia and Palau, under the Compacts of
Free Association. Those duties are delegated to me and my staff in the
Office of Insular Affairs. OIA has an annual budget of $430 million,
most of which is provided to the Pacific in the form of grants. Five
of the seven jurisdictions that we are responsible for are in Micronesia.
Our top priority for the islands is private sector economic development, and
the showcase event for our efforts in that regard this year will be our fourth
Conference on Business Opportunities in the Islands, which will be held right
here on Guam on October 8 and 9. I hope to see all of you at our Conference,
which will be held at the Hyatt Regency. The Conference will offer an
excellent opportunity to learn about business opportunities throughout the
U.S. insular areas, including but not limited to those related to the Guam
military buildup. It will also offer an excellent opportunity to meet
the people you need to meet, in both government and the private sector, to
pursue those opportunities.
The theme of my talk is “Unlocking the Value of Real Estate in Micronesia”. We’re
all aware of exciting developments here on Guam. I’ll touch on
those, but I also want to talk about the rest of the region. In most
parts of Micronesia, unlocking the value of real estate will require reform
of policies relating to real property. As we will discuss, some of these
policies are deeply rooted in culture, and we must all respect the fact that
it will be for the indigenous people of Micronesia to decide how best to harmonize
their economic aspirations with their respect and reverence for their own culture. We
can point out the economic costs and benefits of those policy choices, but
we must respect that those policy choices are for the people of the Micronesian
region to make.
Let’s start our tour of Micronesia here in Guam. We all know about
the planned relocation of 8,000 U.S. Marines and 9,000 of their dependents
from Okinawa to Guam. The cost of the relocation will exceed $10 billion,
and will include the construction of a new military base. The existing
military facilities on Guam, including Naval Base Guam and Andersen Air Force
Base, will require complementary upgrades that will cost in the billions of
dollars. One of the upshots of all of this is that the total population
of Guam is likely to increase by over 35,000, or more than 20 percent. Some
will come because they were ordered to come, but many will come voluntarily
because of the economic opportunities that will be generated by the buildup. Most
of these new people will be civilians. These people will need places
to live, places to shop, places to dine. They will need utility service,
and places to dispose of all of the solid waste that they will generate. All
of this will have important implications for the real estate market on Guam. Demand
for real property will increase significantly, and the last time I checked,
the supply of real property on Guam has not increased. We can therefore
expect significant upward pressure on real property values, some of which is
likely already reflected in the market in anticipation of events to come.
The other major driver of Guam’s economy is tourism, and much of the
recent real estate activity on Guam has been driven by tourism. Japan’s
Ken Corp., in particular, has been very active, with its recent $73 million
purchase of the Hilton Guam Resort and Spa adding to an impressive stable that
now includes the Hyatt Regency Guam, the Pacific Islands Club, the Sheraton
Laguna Resort, the Santa Fe and the Country Club of the Pacific. All
of these acquisitions have occurred since May 2005. Ken Corp. and/or
its affiliates reportedly now own over 40 percent of the major oceanfront hotel
rooms in Guam. This is a clearly a vote of confidence in Guam’s future,
a display of optimism that may becontagious.
With so much of Guam’s tourism infrastructure under its control, Ken
Corp. now has the ability to significantly redefine Guam’s image in the
eyes of the international traveling public. It has the incentive, and
has shown the inclination, to move Guam’s tourism industry up-market. It
has the ability to market Guam’s new image in Asia, and this should benefit
not only Ken Corp. but its competitors in Guam as well. The pressure
on room rates in Guam is now upward, not downward. Ken Corp. has a network
of well-heeled potential travelers from its properties in Japan, which are
largely high-end residences for ex pats. If Ken Corp. has the ability
to convince a significant number of these ex pats to vacation in Guam, it will
be good for Ken Corp. and good for Guam.
The Northern Mariana Islands, as we all know, is currently suffering through
difficult economic times. The tourism market is still recovering from
the cessation of scheduled service from Japan Airlines in 2005. That
decision was implemented just four months after the visit of the Emperor and
Empress of Japan to Saipan brought the natural beauty of that island to millions
of Japanese television sets, providing what would have been, under other circumstances,
a tremendous marketing boost to Saipan in its efforts to attract Japanese tourists. Instead,
the JAL pullout resulted in a sharp drop in tourism and left the Hotel Nikko,
owned by a JAL affiliate, in a state of limbo. The hotel, which is in
need of renovation, is reportedly offering deep discounts to Japanese tour
operators. This in turn is putting downward pressure on room rates in
Saipan.
We see, however, some parties making significant real estate bets on the CNMI’s
future. At least one of these parties has the ability to influence whether
its bet will pay off, and that’s good news for the CNMI. KUMHO
Asiana is seeking a 40-year lease so that it can operate the Lao Lao Bay Golf
Resort on Saipan, and reportedly plans to develop a resort next to the golf
course. This investment cannot succeed without a steady flow of tourists
to the CNMI. Fortunately for KUMHO Asiana, it owns an airline. Its
airline, Asiana Airlines, has recently stepped up service between Korea and
Saipan. The Saipan World Resort is also now in Korean hands, and recently
underwent a major renovation that included the addition of a large water park. The
Korean bet on Saipan, backed up with the ability to bring more tourists there,
is an important source of hope for the CNMI’s future.
There is a great deal of hope in Palau. Tomorrow, I travel to Palau
to dedicate the Compact Road, which was funded by my office for approximately
$150 million. The road will open up Babeldaob, which is Palau’s
largest island the second largest island in Micronesia after Guam, to significant
economic development for the first time. Palau recently moved its capital
to Babeldaob. The new capital complex in Melekeok sits high atop a hill
overlooking the ocean. Even with the new Compact Road, it is a significant
commute from the population center in Koror. It is clear that they are
going to have to develop a new community near the new capital complex. Everything
I just said about the expected new residents of Guam applies equally to the
people who will need to live near the new capital of Palau. They’re
going to need places to live. They’re going to need places to shop. They’re
going to need places to dine. They’re going to need utilities. The
Compact Road will also open up tourism development opportunities that never
existed before.
In fact, the entire region has something to look forward to as Guam prepares
to welcome tens of thousands of new residents. As beautiful as Guam is,
these new residents are likely going to want to get off the island every now
and then. As Guam becomes more fast-paced and urban, places like Yap,
Chuuk, Pohnpei, Kosrae and the Marshall Islands could provide Guam’s
new residents with an opportunity to relax in an environment of pristine natural
beauty. Since Guam serves as the air transportation hub for the region,
all of these places, in addition to Palau and the CNMI, are readily accessible
from Guam. There is now a greater potential for resort development in
these areas.
That’s pretty much the backdrop. But before you go rushing out
to make real estate investments throughout Micronesia, you might want to listen
to the rest of my speech. I don’t intend to discourage anyone from
investing in Micronesia; quite the contrary. But it is important for
investors to have a strong idea of the issues that must be addressed in order
to invest successfully in the region.
The first thing you need to know about investing in land in Micronesia is
that there isn’t much of it. The name “Micronesia”,
as many of you know, is derived from the Greek words for “small islands”. If
you add up all of the land area of Guam, the CNMI, Palau, the Marshall Islands
and all four states of the Federated States of Micronesia, you end up with
a grand total of 910 square miles. That’s significantly smaller
than Rhode Island, the smallest State in the Union, which weighs in at a relatively
hefty 1214 square miles. We’re standing on the largest piece of
real estate in all of Micronesia, the island of Guam.
The second thing you need to know about investing in real estate in Micronesia
is that there is a strong cultural underpinning to all matters affecting
land. Land is sacred throughout Micronesia, as it is throughout the
Pacific islands. In Micronesia, one’s identity is deeply tied
to one’s land. With its ability to produce food and medicine,
land is seen as a source of life. This is why the idea of losing one’s
land carries a deep sense of emotional loss that is akin to the loss of life. Micronesian
culture, like other island cultures, emphasizes sharing. Land is therefore
generally held communally, passed down from generation to generation by blood
ties and administered by traditional leaders in accordance with the culture.
Generally, in Micronesian cultures, the concept of alienating one’s
land to aliens is, well, alien. In most places outside of Guam, it is
not possible for non-indigenous people to own real property. In the Northern
Mariana Islands, for example, Article 12 of the CNMI Constitution restricts
the acquisition of permanent and long-term interests in real property in the
Commonwealth to persons of Northern Marianas descent. In 2011, persons
of Northern Marianas descent—that is, the indigenous Chamorros and Carolinians
of the CNMI—will have the opportunity to vote on whether this policy
should be retained, abolished or perhaps modified. In the meantime,
non-locals can acquire leasehold interests in real property for terms of up
to 55 years.
Throughout Micronesia, with the exception of Guam, real estate investment
by off-islanders is generally done through long-term leasehold arrangements. The
basic limit on lease terms varies from jurisdiction to jurisdiction. In
general, however, to state the obvious, restrictions on alienation affect the
risk profiles and economics of real estate transactions throughout Micronesia. Restrictions
on alienation tend to discourage investment by limiting the time horizon in
which the investor can get a proper return on an investment, by limiting options
for financing and by limiting exit strategy options. Restrictions on
alienation also reduce the ability of indigenous landowners to realize the
full economic value of their real property, by limiting the market in which
a landowner can sell real property interests and reducing demand of outsiders
for real estate investment. This is not to say that alienation restrictions
are bad policy, particularly in light of the cultural reasons for having them. This
is merely to point out that alienation restrictions have an economic cost and
tend to dampen—not eliminate, but dampen—real estate investment
activity. Real estate investors understand that no environment is perfect,
and are adept at figuring out how to make an investment worthwhile notwithstanding
particular challenges that may exist in any particular jurisdiction.
In addition to the maximum term of the lease, there are a number of other
things that an outside investor would want to know before making a real estate
investment in most parts of Micronesia: What happens to the improvements
after the lease expires? Are there reliable ways of ensuring that the
lessor has clear title to the property? Are there strong regulatory and
judicial institutions that can be relied upon enforce rights to the property,
if necessary? Can financing be obtained on the security of a leasehold
interest in real property? Are there procedures in place that would give
lenders the comfort they need to provide financing, including the ability to
foreclose upon and alienate real property interests in an event of default? Are
there reliable institutions to enforce the rights of lenders? Are there
foreign investment laws or other laws that impact what types of investment
that outsiders can make, and how they should to structure those investments? Can
outsiders do business directly, or do they need local partners? How
do real estate restrictions affect the range of exit strategies?
The answers to these important questions vary from jurisdiction to jurisdiction. Indeed,
in addition to differences among the CNMI, Palau, the Marshall Islands and
FSM on matters of real property law, each of the four states of the FSM—Pohnpei,
Chuuk, Yap and Kosrae—establishes its own real property laws and there
is significant variance from state to state. I won’t attempt to
answer all of these questions for each jurisdiction now, but you can obtain
helpful information from our website (www.doi.gov/oia),
from the Asian Development Bank and from the jurisdictions themselves. The
most important form of due diligence, however, is to consult with banks, attorneys
and other professionals who are actually operating in these jurisdictions. They
are the ones that can give you the best idea of how the legal and institutional
framework really works in practice, and whether there are tried and tested
workarounds that can be used to address particular challenges.
Throughout Micronesia, policymakers are taking a fresh look at real property
laws. A parade of consultants, including some funded by my office, has
advised them on the economic costs of their current policies, and suggested
ways in which Micronesian societies might better unlock the economic value
of their precious land in ways that are consistent with their culture. Thus,
throughout Micronesia, legislators have recently considered and in many cases
adopted proposals to increase maximum lease terms, to establish or strengthen
land registration systems, to expand the ability of outsiders to invest in
land and to strengthen the institutional framework in ways that would encourage
financing and investment. For many of these policymakers, land issues
trigger deep-seated concerns that are difficult for outsiders to fully understand.
One of the concerns that we hear expressed over and over again is that “We
don’t want to become another Waikiki.” The first reaction
of some outsiders might be to laugh and respond that “There’s no
danger that you will ever become another Waikiki.” But if one takes
the time to understand what a Pacific Islander means when he says this, one
can appreciate and respect the concern. When people throughout the Pacific
say that they don’t want their island to become another Waikiki, they’re
not necessarily suggesting that their island is about to be overrun by several
million tourists from around the world each year. Pacific Islanders look
at the Waikiki experience through the perspective of the Native Hawaiians,
and see it as a symbol—rightly or wrongly—of the loss of one’s
land, the loss of one’s culture, the loss of one’s language, the
loss of one’s identity; of making outsiders rich at the expense of the
indigenous people. Reasonable people can debate whether this is best
way to interpret the history of Waikiki’s development, but it is certainly
an impression that is widely held and deeply felt throughout the Pacific. Outside
investors should be respectful of these concerns and the culture that underlies
them, and should be prepared to address these concerns.
Policies affecting real estate investment in Micronesia are in a period of
flux. Some places in Micronesia have policies and environments that are
less than ideal for real estate investors, but that would not necessarily preclude
a successful venture if one goes in with a full knowledge of the circumstances
and a clear sense of how to work around imperfections in the system. Could
policy reform relating to land issues bring more prosperity to Micronesia,
and more opportunity for outside investors? Undoubtedly, but it is up
to each society and each culture to strike the balance that it chooses to strike
between culture and prosperity, or to find the best way to harmonize the two.
Micronesians understand that change is necessary. No culture is cast
in stone. Christianity, for example, was alien to the Pacific until the
19th Century; today, it is a fundamental part of most Pacific cultures. We
should always remember, however, that a culture exists to serve the needs of
the people, not the other way around. A culture that does not adapt
to the changing needs of the people becomes irrelevant over time, leaving the
people with the choice of abandoning their culture or following it into irrelevance. People
therefore do tend to adapt and evolve their cultures over time, but at a pace
and in a manner of their own choosing. How much of the value of real
estate in Micronesia will be unlocked in the foreseeable future will be determined
by Micronesians themselves, and that is as it should be. Even today, there
are plenty of excellent real estate opportunities in Micronesia beyond Guam. Even
though the value of real estate in Micronesia is not, to again follow the theme
of my remarks, completely unlocked, astute investors can still find ways to
open the door in ways that will benefit themselves and benefit Micronesia.
Si Yu’us Ma’ase.
|