In 1991, the Hawaii State Legislature adopted House Concurrent Resolution No. 327, House Draft No. 1, requesting the State Auditor to conduct a study of the resale of leasehold properties converted to fee simple ownership under the Hawaii Land Reform Act of 1967.
We contracted with the firm of Locations, Inc. to conduct the study. As requested in the resolution, the firm was asked to determine the extent of leasehold to fee conversions that have occurred, the extent and nature of resale activity that has taken place, and the extent to which speculators and foreign interests have participated in and benefited from the resale of leasehold properties that have been converted to fee simple ownership.
The Resale of Leasehold Properties Converted to Fee Simple Ownership Under the Hawaii Land Reform Act of 1967 Study was developed to provide the Legislature with objective information on the resales of residential house lots in Hawaii that have been converted from leasehold to fee simple ownership as a result of the Hawaii Land Reform Act of 1967. An additional objective of the study was to provide an assessment of the relationship of these resales to general residential real estate market conditions in Hawaii and the possible impact such resales may have on housing prices here.
The Legislature specifically requested information regarding the following leasehold to fee simple conversion topics:
A total of 23,754 single family leased fee conversions were identified in Hawaii. Most of these conversions occurred during two time periods - 1979 - 1982 and 1986-1990. All but 295 of these leased fee conversions have been on Oahu.
The five largest sellers of leased fee interests have been: Bishop Estate with 13,616 (57.3%), Castle Estate with 3,996 (16.8%), Robinson Estate with 2,256 (9.5%), Campbell Estate with 1,583 (6.7%), and Queen's Hospital with 834 (3.5%).
The percentage of leasehold to fee simple converted homes which resold at least once was 18.5%. The highest resale percentages are found in the Waialae/Kahala area at 23.8% while the lowest are found in the Upper Windward to North Shore area at 11.7%. Conversely, the percentage of leasehold to fee simple converted homes on Oahu still owned by the original leased fee purchasers is 81.5%.
In terms of multiple fee simple resales, 3.4% of all leasehold to fee simple converted properties resold two times, with 0.1% reselling three times.
Leasehold single family resales as a percentage of all Oahu resales have declined sharply since the late 1970's. At that time leasehold properties comprised approximately 50% of all resales. Since 1990, leasehold properties have comprised less than 10% of all resales. Based upon Locations' proprietary databases of real property, there are approximately 4,600 (just under 4.0% of an estimated 120,000 total single family homes) leasehold single family homes remaining on Oahu.
Leasehold to fee simple conversions do not appear to stimulate subsequent fee simple resale activity. Resales in most converted neighborhoods followed the overall Oahu market trend. Of the 78 neighborhoods surveyed, the turnover rate (ratio of resales to total single family homes converted) within the first year was 5.6%. Of the major neighborhood areas with resales, the highest first year turnover rates were in Laulima, Koko Kai/Portlock, Blackpoint, and Aikahi Park, (over 10%) while the lowest first year turnover rates were in Halawa. Hills, Waialae Gardens, and Alii Shores (under 2%). Thereafter, resales fell off with each succeeding year.
Of the homes which resold within the first year after conversion, the average time of ownership (from leasehold purchase to fee simple sale) was 65 months. The highest average holding periods (from leasehold purchase to fee simple resale) were found in Waialae/Kahala at 74 months and Kailua at 73 months. The lowest average holding periods were found in both Kaneohe and Leeward Oahu at 50 months.
Leasehold to fee simple conversions do not appear to stimulate resale prices of converted homes. In nearly every neighborhood analyzed, fee simple converted resale prices closely followed the trends of Oahu's traditional fee simple neighborhoods (Kaimuki, Manoa, Mililani, Nuuanu, and Waipahu Triangle to name a few). Thus, if conversions occurred while overall Oahu prices were stable, fee simple converted resale prices remained stable. Similarly, if conversions occurred while overall fee simple prices were rising, fee simple converted resale prices rose.
Fee simple and leasehold single family resale prices within individual neighborhoods have generally moved in tandem over the years. The result is the ratio of median leasehold to median fee simple single family resale prices has ranged from approximately 70% to 90%. The lowest ratios have been in Waialae/Kahala while the highest ratios have been in Kailua. Up until the past several months, there had been a moderate decline in this ratio in recent years. However, recent moves to dramatically increase single family leased fee asking prices have had the predictable effect of depressing leasehold values much further in the associated neighborhoods.
Over the years, leased fee conversion price trends have followed those of the overall Oahu single family market price trends. In particular, leased fee conversion prices were relatively flat during the early to mid-1980's. Thereafter (between 1987 and 1991) leased fee conversion prices increased sharply along with the overall Oahu marketplace.
Median leased fee conversion prices in individual neighborhoods as a percentage of fee simple resale prices have ranged from approximately 15% to 30%. The lowest numbers have been in Leeward Oahu while the highest numbers "nave been in Waialae/Kahala.
The most important factor affecting year-to-year sales activity and sales prices is the condition of the overall real estate market. Trends in the overall market are driven by such factors as basic supply and demand (i.e. - new construction versus employment, population and household income growth), as well as external variables such as interest rates exchange rates, tax laws, and the attractiveness of alternative investments.
Two approaches were taken to analyze speculation associated with leasehold to fee simple conversions. Because there was no way of knowing the intentions of the participants involved, our analysis of speculation focused on the holding periods between purchase and resale of individual properties. The assumption is that speculative behavior is characterized by short holding periods.
The first approach (Speculation I) counted all properties where the leasehold purchase occurred within the two year period prior to conversion and the subsequent fee simple resale occurred within the two year period after conversion. This encompassed a four year time frame and should provide a very liberal count of potentially speculative purchases of leasehold to fee simple converted properties. Of the 23,459 converted properties which were analyzed on Oahu, 1.9% (approximately 445) had leasehold purchases and fee simple resales within two years of leased fee conversion.
Of the 445 properties satisfying the Speculation I definition, the highest percentages were found in Laulima (19.5%), Anchorage (11.4%), and Queen's Gate (9.2%), while the lowest percentages were found in Harbor View/Robinson Heights (0.1%), Crown Terrace (0.3%), and Niu Valley (0.4%).
The second approach (Speculation II) counted the number of leasehold to fee simple converted homes which experienced two or more fee simple resales within 18 months of one another. All properties were counted regardless of how much time had passed since the leased fee conversion. This should correspond to a more general definition of speculation - that is, one attributable to overall market conditions rather than leased fee conversions, specifically. Of the 23,459 converted properties, 1.5% (approximately 350) experienced two or more fee simple resales within 18 months of one another.
Of the 350 properties satisfying the Speculation 11 definition, the highest percentages were found in Blackpoint (7.1%), Old Kahala (6.4%), and Niu Peninsula and Beach (5.8%) while the lowest percentages were found in Koko Head Terrace (0.2%), Halawa Hills Estates (0.3%), and Crown Terrace (0.3%).
To determine the sensitivity of Speculation I and Speculation II the time period analyzed was reduced to 12 months instead of plus or minus 24 months for Speculation I and 18 months for Speculation II. The reduction in the time period analyzed dramatically reduced Speculation I from 1.9% to 0.6% of all converted homes. Speculation II was reduced far less from 1.5% to 1.1% of all converted homes.
Two approaches were taken to analyze whether extraordinary investment returns could be attributed to leasehold to fee simple conversions.
The first was to calculate on a year-by-year basis by neighborhood the difference between two numbers - (1) the sum of the median leasehold home price and the median leased fee conversion price and, (2) the median fee simple resale price. This corresponds to an investor buying a leasehold home and its leased fee interest and, in the same year, reselling the home in fee simple. For nearly all the neighborhoods surveyed, the difference in any one year averaged between plus or minus 10%. This indicates that the potential for excess gains by purchasing the leasehold and leased fee interest and reselling in fee simple all within the same year was quite small.
The second approach analyzed the year-by-year investment returns on leasehold purchases in the years up to conversion and fee simple resales in the years subsequent to conversion. The results were presented in both nominal (percentage return realized on actual purchase prices) and excess or market-adjusted terms (which factors in overall Oahu single family market price increases). For homes which were purchased in leasehold during the late 1970's or early 1980's and held in fee simple until 1989-91, typical nominal returns ranged between 250% and 350%. When these returns were adjusted for the price increases of the overall market, however, the so-called "excess returns" typically ranged from plus or minus 5% on an annualized basis. The largest annualized excess gains were in areas such as Old Kahala and Koko Kai/Portlock at 5 to 10%, and Olomana and Alii Shores at 2 to 3%.
Foreign investors presently own approximately 3.6% of all converted properties. The percentages by neighborhood range from 0.0% in many Windward and Leeward Oahu areas to 25.0% in Blackpoint, 24.4% in Waialae Golf Course, 21.9% Koko Kai/Portlock, and 18.3% in Old Kahala.
It was found that foreigners (primarily from Japan) were sellers of 1.5% (Speculation I) or 7.3% (Speculation II) of the transactions which were identified as potentially speculative.
One perception regarding foreigners is that their speculative activity was the primary factor in driving up local real estate prices. Prior research at Locations, Inc. has shown that in the 1987 - 1988 period, the Japanese paid higher prices for homes in the Waialae/Kahala area than local or other offshore buyers. However, the fact that they paid higher prices, which clearly put added pressures on the neighborhoods involved, does not necessarily mean that they were speculators. Rather, many now fall under the definition of longer-term investors.
Analysis at Locations, Inc. suggests that the most important driving force behind movements in a particular sector of the market is the trend in sales activity and prices in the overall Oahu real estate market. A finding of this study is that the trend of the overall market is also the primary force behind sales price and sales activity trends of leasehold and fee simple converted properties.
In each of the fee simple converted neighborhoods, resale activity after the majority of conversions occurred closely tracked resale trends in the overall Oahu single family market. If the fee simple conversion had led to a surge in resale activity, the ratio of resales in a particular neighborhood to that of all Oahu would have shown a distinct peak around that time. No such peak was apparent in any of the neighborhoods analyzed.
A comparison of median sale prices for leasehold to fee simple converted neighborhoods and the overall traditional Oahu fee simple market yielded similar results. After conversion, fee simple converted resale prices paralleled prices in Oahu's traditional fee simple single family market quite closely. If overall Oahu prices were stable at the time of conversion of a particular neighborhood, then subsequent fee simple resale prices in that neighborhood remained stable. Similarly, if overall prices were rising at the time of conversion, then subsequent fee simple resale prices in that neighborhood also rose.
Broad economic or financial factors are the driving force behind major trends in the overall Oahu real estate market. These then filter down to individual neighborhoods as they, in turn, reflect what is occurring in the overall marketplace.
There needs to be a standard method established for identifying foreign owners.
A follow-up study should be performed to identify the long-term trend of resale activity and price trends for the conversions which occurred since 1987. This would allow for a more definitive analysis of trends over the longer term.