One of the priorities of the country is now investment in infrastructure to make its economy work better. Massive investment is planned for spending on highways, bridges, tunnels, airports, water systems, sewage treatment, transport systems and other public infrastructure. This activity will create significant demand for real estate appraisal work – from the land to be used in the projects, to the new value added as a result of the improved facilities. This article is to alert appraisers about this new source of work and describes how this activity may increase business for appraisers.
Sources of Demand for Appraisal
The investment in Russia’s infrastructure will be made by the federal government, using the excess revenues coming from the high prices for oil in the world. Although plans are not complete, the investment will likely be made through a combination of federal level departments, and regional administrations. It will be important for appraisers to be alert for which agency in their area will receive this money for distribution, and what appraisal opportunities may result. The appraiser who is able to make the right connections, at the right time, will have an advantage in providing the appraisal estimates that will be needed.
Some of the funds will be invested direct in government sponsored projects. Other projects will be offered for participation by the private sector in what is known as a “public-private partnership”, or PPP. The projects conducted strictly by the state will likely produce less appraisal work directly, but may generate more appraisals indirectly from nearby property owners whose real estate is affected by the new infrastructure development. Appraisers should be alert to both opportunities by seeking contacts with the property owners in the area, as well as the contacts for the applicable government agency.
The projects in partnership with private investors often involve an exchange of the benefits of the new project for the money provided by the investor. These benefits may be direct revenue from the project (such as revenue from a toll road.) The value of this type benefit will likely be estimated by specialized consultants – assessing the business value of the revenue stream. However, some of the benefits to be exchanged may be rights to the use of commercial real estate, and this is the job for real estate appraisers. A simple example might be the use of retail spaces awarded to a private investor in a new airport terminal. The value of this should be measured as a part of the total investment return the investor may expect to receive from participation in the project.
Infrastructure Project Examples
The following table outlines some limited examples of the types of projects that may be expected, and the appraisal opportunities that may result. As plans become more developed, there may be many more types of examples available.
Any one of the appraisal examples shown above may be part of an exchange agreement between the public authority creating the project, and the private investor who provides money and receives some rights to use some of the real estate associated with the improved infrastructure. The appraiser’s independent and objective value opinion will be useful for the parties in making a fair exchange agreement.
Clients for this work may be the public authority – or the private company, as both parties will want to be sure the value of the real estate involved in the exchange is properly valued. Other clients for appraisal may be landowners nearby the infrastructure project whose land value may be affected – and which will cause them to seek an appraisal. If their land value is considered to be decreased, they may want to claim damages from the appropriate authority.
If their property value is increased, they may want to seek new financing, or create a new development project of their own for which they will need an appraisal.
Other Public-Use Infrastructure
Besides the public-private infrastructure projects, there will also be many more projects to increase infrastructure of the large monopolies of the country; the railroad system, the electrical transmission grid, and the gas distribution network. These projects will need appraisals for any land to be acquired for direct use in the project, and the completed development may also change the value of nearby properties which will be of interest to those landowners.
Appraisal Methods and Approaches
The basic appraisal approaches used to estimate value for property involved in infrastructure improvement projects do not change from those used in other situations. Changes that may take place could involve different value definitions – such as public use value – or different data sources required for inputs to the capitalization techniques. These are things appraisers should define and agree with the client involved for any assignment. Certain studies of appraisal literature specialized in infrastructure and public-use projects may be necessary by appraisers who want to participate in this type of work.
Appraisers may find that the cost approach is a much bigger factor in estimating values for infrastructure assignments, as there can be specialized structures involved for which there is no practical income producing equivalent. The actual cost of certain improvements may be an important negotiating element in the investment agreements and an appraiser’s opinion can help to verify this.
Because of the amount of appraisal work expected to come from infrastructure projects, some appraisers may find an advantage in specializing in this type of work. In other countries there are well-developed groups of appraisers who specialize in work for public agencies and the projects they are associated with. Such specialization can provide important experience credentials for appraisers as this type of appraisal work is used for more purposes in the transactions associated with public-private partnerships.