Kauai Newsletter
July  2004

Aloha!

This is a special edition of the Kauai Newsletter to let you know of an important new development, and to take a look at the ramifications it has for the island and its real estate.

Princeville, the North Shore's premier resort community, is getting a new owner. When I say Princeville, I mean not just the hotel, but the whole shebang: hotel, two golf courses, Princeville Shopping Center, the health club and spa, the roads, the utilities, and thousands of acres of undeveloped prime North Shore land. ALL of that is included in the sale of the property from the three Japanese companies that have owned it since 1990 to a consortium of American developers headed by Jeff Stone.

Pretty heady stuff. The new owners are paying about $200 million for the community. "It's like buying a city," Stone said. When you look at all that the sale includes, especially its development potential, they are probably getting a bargain. After existing in rumors swirling about the real estate community for months, the transaction has now been officially announced, and is in a "due diligence" period, with closing expected by the end of the year.

The change in ownership has many important dimensions for anyone involved in or contemplating North Shore real estate. The short version is, the new owners are expected to turn a languishing, underperforming, largely undeveloped property into the Class A internationally-known destination resort that its geography has long cried out for it to be. Property values are likely to go up, AND there will eventually be more inventory to choose from. I'll explain in a bit how these two seemingly contradictory things can be true. But first, a little background.

From Royalty to Sick Cows

Princeville has an interesting and tumultuous history that begins with a footloose and entrepreneurial Scotsman, Robert Crichton Wyllie. After becoming disenchanted with his experiences in far-flung New Zealand, Wyllie set sail for an other exotic location and washed up on Kauai's North Shore, where he got to know King Kamehameha IV. The Hawaiian king took a liking to the brave and -- dare we say it? -- wily Scotsman and made him his foreign affairs minister. In 1855, Wyllie purchased 1,000 acres of what is now Princeville and Hanalei, built a huge sugar mill, and began growing both sugar and coffee. After King Kamehameha and Queen Emma had a son, they brought the young boy, named Prince Albert, to visit Wyllie's plantation. Wyllie, charmed by the visit and the child, decided to name his domain the "Barony of Princeville" in honor of the young prince. But the boy tragically died two years later at the age of four, and his grieving father followed him the next year.

Wyllie's plantation didn't fare well either. Root rot and drought alternately plagued his crops, and he died in debt. New owners of his plantation continued to experience the same problems with sugar and coffee, and some decided to try their hand at cattle ranching instead. But an epidemic of bovine anthrax in 1890 made them destroy the entire herd. Later ranchers tried again, and did OK until another bovine anthrax epidemic hit in 1916. This time, the disease was brought under control with vaccines, but scores of cattle died or had to be slaughtered before it was over. Their burial sites are marked by silver oak trees.

Development Fits and Starts

Nothing much happened in Princeville again until the early 1970s, when a subsidiary of Denver-based Consolidated Oil & Gas Co. built a 27-hole golf course and sold some house lots. Later they added another 18-hole golf course and a 250-room hotel. Consolidated took Princeville Corp. public in 1984, but it was bought three years later by an Australian company, Quintex, which made it private again. Quintex didn't do well, and Princeville was rescued from bankruptcy in 1990 by its current owners, the three Japanese companies, including the beverage giant Suntory Ltd., which now owns 51 percent of the resort. Mitsui and Nippon Shimpan own the rest.

The Japanese economy fell into decline not long after these companies took over Princeville. The Japanese owners did a wonderful job of keeping up the resort, but did almost nothing to develop its full potential. Hurricane Iniki's flattening blow in 1992 didn't help matters. Finally, pressure from Japanese shareholders is forcing these companies out of this resort enterprise to focus their energies on their primary business at home instead. Hence the current sale.

Now What?

What will become of Princeville now? Will it finally move out of its century-and-a-half-long cycle of boom and bust, marked by inappropriate land use and lackluster development, and emerge into a new era of fame and fortune?

To those of us who live here, as we watch the evening sun begin its magnificent descent over Bali Hai and sink slowly into Hanalei Bay, the answer is a resounding YES! We know how special this place is. We know there's no place like it in the world, and that in the proper hands, it can become a truly stunning world-class resort, like no other we have ever seen.

Attracting Bigtime Investment

It won't happen immediately, but early signs indicate that the pieces should start to falling into place. The new consortium includes Morgan Stanley Real Estate Funds, a subsidiary of the world-wide investment banking giant. This venture will mark the bankers' first acquisition in Hawaii. People close to the transaction say they were waiting for the right property to make their move, and Princeville is it.

As for head developer Jeff Stone, his track record most recently includes turning the underperforming Ko Olina resort in Oahu into a thriving and beautiful complex. Upscale hotels were wary of moving into the property when he first acquired it in 1998, saying the place needed more of an attraction before they could invest in it. Last year, Stone and his partners managed to convince Governor Lingle and the notoriously anti-business Hawaii state legislature to grant $75 million in tax credits to the Ko Olina project in exchange for the developers' building a state-of-the-art marina and sea mammal research center. Once the marina was approved, major hotels did sign onto the project. It has since attracted $1 billion of investment, including the development of hundreds of homes and timeshares, and has led to the creation of 2,000 new jobs.

Of course, Kauai is not Honolulu (nor does anybody want it to be.) Development here will proceed more slowly, and differently. Stone has met with local and state politicians, and is already exhibiting political savvy, promising to build affordable housing for employees first, then expand the shopping center. Beyond that, he has revealed no specific plans (though he has alluded to the need for another hotel or two in the next decade.) But you can bet that the new owners, Morgan Stanley especially, did not spend $200 million to sit on Princeville's bluff and watch the grass grow. These guys expect a return on their investment, and their plans surely include developing and marketing Princeville as a premier resort. As Stone put it in a recent interview with the Honolulu Advertiser, "We are truly honored to take on the stewardship of Princeville, and to help take this magnificent resort into an exciting new era."

Land, Demand, and Newly Planned

We do not know yet what these developers intend to do. But we do know that Princeville owns some 9,000 acres of land, vast tracts of which remain unzoned, uncultivated, and undeveloped. Original plans for the community called for 4,000 hotel rooms and 7,000 homes. So far, only the 250-room Princeville Hotel and a few hundred homes have been built. Much of the undeveloped land lies east of the current development zone, in an area many people have driven by countless times without ever realizing it is still part of Princeville. It would easily be possible to add hundreds of homes to this area and still have plenty of green space left over. With proper development, the green space itself could become usable -- in the form of hiking trails, horse paths, or even parks -- instead of the impassible jungle it is now. Just a thought.

As most of you know, the massive and increasing demand for homes here dwarfs the existing inventory to a ridiculous extent. That is one reason our prices have risen so precipitously, and continue to do so even as the housing market begins to cool in other areas. Now, what happens if you add to this equation a fresh supply of newly-constructed homes, with some new condos and a couple of new swank hotels thrown into the mix? Will the increased supply drive prices down at last?

Let's look at the three most recent developments in Princeville, all built within the last three years. Villas on the Prince -- sold out preconstruction. Villas of Kamalii -- sold out preconstruction. The Plantation at Princeville -- sold out preconstruction. All three projects have had extremely strong resales and many units are are now selling at prices $100,000 to $200,000 above the original. Why is that? How could increasing the supply of something not reduce demand and price? Isn't that a fundamental law of economics?

Well, yes. But for one thing, the demand for housing here, fueled by Baby Boomers diversifying into real estate and just beginning to buy vacation homes and retirement properties, is so huge that even increasing the supply a thousandfold probably still would not satisfy it. Also, you need to look at exactly what it is that these buyers are demanding.

"Picky, picky, picky," is what, if you are very quiet, you will hear realtors muttering under their breath. They want granite countertops and Stainless appliances like they have back home in California. They want vinyl-sided windows that won't leak and cause mildew. Open kitchens for easier entertaining. Great views without a lot of rooftops in the way. Large bedrooms with large windows, and bigger garages to hold all their stuff. In short, they want ... new construction! (and a little feng shui wouldn't hurt either.) Older house plans just don't cut it with these buyers. The homes and condos originally built in Princeville in the '70s and '80s don't have the features they want, unless their individual owners went to considerable trouble and expense to update them. Even then, they can't change the overall plan. That is why new construction always sells out here, even as older homes (which also eventually sell, as everything here does) sit on the market.

It's All Good

What does this mean for the future of Princeville? If the housing market remains strong, with the increased inventory that the new developers are bound to bring in, property values could rise to a new level as the resort turns its face toward a new and internationally sophisticated clientele. If new construction is built, sells out, and increases in value, it will also bring up the property values of the area as a whole. Not to mention what the vast infusion of marketing dollars and better marketing techniques will do, along with more investment dollars from yet-unknown sources. The demand we see now may pale in comparison to what it may be if the new owners are able to execute their plans.

As you can probably tell, I am excited by this new development. I hope you are too, and I hope you've enjoyed learning a little about Kauai's history.

As always, please feel free to call or email me with any questions you have. I look forward to seeing you!

With warmest aloha,