Assessment of damage to real estate caused by the war

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Assessment of damage to real estate caused by the war

Kulik Andrii

Abstract

Key words: damage and need assessment, mass appraisal, PDNA approach.

Анотація

Оцінка збитків нерухомості, спричинених війною

Кулик А.А.

У зв'язку з війною в Україні, яка призвела до значних людських та матеріальних втрат, по-новому постає питання оцінювання збитків завданих активам та інфраструктурі. У світовій практиці результати такої оцінки використовуються для розробки програми відновлення економіки, яка постраждала від катастрофи. Значна частина завданих збитків припадає на нерухомість, яка власне і є об'єктом дослідження. В статті розглянуто підхід, який застосовуються до оцінювання збитків і потреб відновлення, спричинених соціальними та природними катастрофами. Зокрема, досліджено теоретико-методологічні аспекти підходу PDNA, здійснено порівняльний аналіз застосування методології оцінки збитків на прикладі Сирії, Іраку, Ємену, Гази. На основі аналізу міжнародного досвіду критично проаналізовано поточний підхід щодо оцінки збитків застосовуваний Міністерством економіки та KSE.

Ключові слова: оцінка збитків та потреб, масова оцінка, підхід PDNA.

The large-scale war in Ukraine, started February 24 2022, has already caused tremendous loss of life and massive displacement of people. According to the UNHCR as of April 13, 2022, more than 4.6 million refugees have fled from Ukraine, whereas about 7.1 million people have been displaced internally within the country [1]. Apart from human losses, Ukraine undergone significant destruction of infrastructure facilities. The exact value of such damage is jet to be determined. However, according to the existing preliminary estimates of the Ministry of Economy and KSE, total losses caused to infrastructure facilities constitute USD 84.8b as of April 18, 2022 [2]. About one third of this amount (USD 28.3m) belongs to the destruction in residential real estate.

According to the aforementioned, the reality of recent events dictates the need perform infrastructure and property damage assessment caused by thewar. Such estimationis relevant at least due to the following reasons: determination of preliminary investments needed for the purposedamaged infrastructure reconstruction (1); calculation of approximate amount of compensation claims to aggressor (2) as well as for individual compensation purposes (3).

In this regard, it's worth noting about mass appraisal, which is defined as a process of valuing a group of properties as of a given date, using standard methods, employing common data, and allowing for statistical testing [3]. Moreover, according to the ASA among main purposes such as taxation, mass appraisal techniques can be applied to provide preliminary damage assessment [4]. In particular mass appraisal are applied by state and insurance firms for preliminary estimation of losses in such countries as Lithuania, Slovenia, United States [5]. However, such application is the case for one-time extraordinary events in peacetime.

Another case occurs with the assessment of massive damage and losses to infrastructure caused by the war.Considering the assessment of damages and losses of infrastructure due to disasters (e.g., floods, storms, earthquakes, wars), it's relevant to refer to the post-crises assessment and recovery planning guidelines collectively developed by UN, WB, EU. The framework of

Damage and Needs Assessment (DNA)includesDamage and Loss Assessment (DaLA) [6], PostDisaster Needs Assessments (PNDA) [7] as well as Global RApid post-disaster Damage Estimation (GRADE) [8] methodologies.

This paper aimed to study key underpinnings of the DNA framework and its application on the example of real-life cases in order to provide a comparative overview as well as outline the possibilities of its application on Ukraine. For international overview we use the cases of Syria, Iraq, Yemen, Gaza.

Having incorporated DaLA methodology together with UNDG recommendations with regards to the social analysis, nowadays the PDNA guidelines provide an integrated approach for joint assessment of disaster effects and impacts as well as subsequent recovery planning. It consists of the following milestones: context analysis, assessment of disaster effect and impact, identification of recovery needs and development of a comprehensive recovery strategy (refer to figure 1).

Figure.1. The PDNA Methodology

Source: prepared be the author based on [7]

The context analysis lays the foundations for DNA and precedes the assessment. It involves examination and formulation of pre-disaster baseline conditions. It covers establishment of social, economic, cultural, financial, political data relevant to the affected territories. The nature and extent of pre-disaster risks and vulnerabilities as well as development plans are included into such analysis as well. The aim of collecting such information is to serve as a benchmark to compare with postdisaster conditions as well as to serve as a primary information source for calculating pre-disaster replacement costs.

As can be found from comparative overview of Syria, Iraq, Yemen, Gaza cases the damage assessment is based on the pricing information prevailing just before the conflicts appear or escalation. For these cases it is common that the nature, duration and complexity of the conflicts puts a significant limitation on data availability applied for valuation purposes. Input data inaccuracy and fragmentation effects data collection process. It is common to use a hybrid two-tier methodology for data collection that combines ground-based and remote-based data, including satellite imagery and other satellite-derived data, supported by social media analytics, ground spot checks, regional and local publicly available reporting, international humanitarian reporting.

Joint assessment is conducted in order to estimate the damage, economic loss, effect and impact of the disaster as well as identify recovery needs across number of sectors. The assessment of disaster effect involves the following key elements:

— calculation of physical damage to infrastructure and assets across the number of sectors;

— determination of effects on supply and production chains, access to goods and services, including availability or lack of basic supplies and commodities in markets;

— identification of effects on governance and decision-making processes, including disruptions of community and government functions, cultural and community life;

— assessment of vulnerabilities and risks that increased or newly emerged due to the disaster.

Typically, description of mentioned effects is analyzed quantitative and qualitative and covers a set of productive, social and infrastructure sectors, with further breakdown to main subsectors, such as housing, education, transport, energy, water and sanitation, etc.

Additionally, the assessment analyses macroeconomic, human impact and identifies cross-cutting concerns (e.g., governance, environment, gender). After describing the effects, the damage to assets and infrastructure is determined both in physical terms (e.g., in terms of area, quantity) and monetary value. Physical damage estimation is based on the following elements:

• the pre-conflict replacement cost per asset;

• number of assets damaged in each category assessed within the sector;

• physical status of the damaged assets.

Application of prices existing prior to the disasterimplies replacement cost measurements are backward-looking. From international; overview of latest conflicts it is noticeable that damage estimates vary greatly, namely from USD 121 m to USD 972 m per month of conflict.

However, despite a wide range the housing sector account for a major portion of total damages (41-63%). Damage estimates largely depend on nature, duration of conflict on the one hand, as well as regions and sectors covered on the other hand. Syria case [9] provides the lowest damage estimate (USD 121m per month) in the sample, which is likely due to the limited regions (only 3 cities) and sectors (6) scope.

Following similar logic, DNA study on Iraq case [10] provides the largest estimate (USD 972 m per month) and covers an exhausting list of regions (both cities and governorates) and sectors (19).

Table 1. Comparative overview of DNAstudies for cases in Syria, Iraq, Yemen, Gaza

Source: prepared be the author based on the DNA Studies performed by World Bank

To determine the physical damage status against baseline information considered DNA studies apply the following classification: no damage; partial damage (less than 40% of the asset is damaged); complete destruction (40% of the asset is damaged or the damage is structured).

Facility to facility damage information as well as a percentage-based approach are adopted to divide the assets into the one of the above categories. Additionally in cases when status of an identified asset could not be verified, an unknown damage level is assigned based on the actual level for similar facilities with confirmed physical status; proxy indicators, such as the intensity and extent of conflict around the facility.

Measurement of economic losses aims to capture the effects of the conflict beyond the immediate damage and destruction of physical assets.Economic losses imply fall in economic flows due to disaster that continue until achievement of full economic recovery (e.g., decrease in output caused by damage to assets, lower revenues associated with fall in demand).

Due to the ongoing nature of the conflicts in Syria [9] and Yemen [11] noeconomic losses estimation is provided. However, from the DNA studies in Iraq [10] and Gaza [12], we can observe that losses measured in current value may reach a significant amount or even outpace physical damage (e.g., refer to the Iraq case).

The recovery planning aims to mobilize resources based on identified recovery needs and lay the foundations in the development of a comprehensive recovery strategy. Recovery and reconstruction needs assessment combines estimation of physical damages and qualitative impacts by each sector with specification of recovery needs and suggested sequenced priority. It incorporated the reconstruction cost of destroyed assets, provision of services, improved specifications, and risk reduction measures.

To derive reconstruction cost within required to recovery needs estimation, replacement cost is adjusted to post-disaster price inflation and improvements associated with DRR and BBB concepts. Recovery and reconstruction needsassessment is subsequently included in the recovery strategy. The latter provides a vision for national and sector-specific recovery, specifying steps and interventions, costs, potential actors and timelines.

Considering implementation of international practice in DNA in Ukraine, lets provide a critical analysis of current approach applied by the of the Ministry of Economy and KSE methodology applied in Syria, Iraq, Yemen, Gaza. In particular, it is relevant compare techniques applied to collect input information, choice of assessment basis, identification of physical status of the damaged asset.

Firstly, it should be noted the Ministry of Economy and KSE assessment provides preliminary results which is expected to be updated on a regular basis as well as finally reconciled after the war end.

Data collection is based on a sample of public notifications from Ukrainian citizens (gathered through RUSSIA WILL PAY resource [13]), state authorities' information and other public sources. This is in line with PDNA approach.

However, no indication was found that confirms application of satellite-derived data in the assessment. Due to this asset's identification and determination of physical status of the damage is significantly limited. In particular, the Ministry of Economy and KSE methodology assumes that all subject assets are completely destroyed. Replacement cost of Ukrainians assets and infrastructure is yet to be determined, so that cost assumptions are quite notional and are limited to the following: economy social war ukraine loss revival

• for companies that possess identifiable assets, the net book values as of 2021 beginning was applied as a referent value estimate;

• for residential real estate a notional cost of 500 USD per sq.m. was applied;

• for objects for which the market / net book value can be established, the available public data on the average value of similar objects were taken into account;

• for assets for which there is no information on market value, state authorities'estimates were used.

Additionally, the Ministry of Economy and KSE methodology contains a set of limitations about data accuracy and damaged data relevance (e.g., exclusion of damage to natural resources, animal husbandry, stocks of companies, etc.). Such limitations are typical when conducting damage assessment according to PDNA methodology.

Further research will be aimed at a detailed study of elements of the PDNA methodology, international experience of PDNA application and specifics of its implementation in Ukraine.

Список використаних джерел

1. UNHCR The UN Refugee Agency. Ukraine situation flash update [Electronic resource]. - Access mode: https://data2.unhcr.org/en/documents/details/92011.

2. Kyiv School of Economics: The project of collecting, evaluating, analyzing, and documenting information on direct losses to civilian infrastructure in connection with Russian aggression. [Electronic resource]. - Access mode: https://kse.ua/russia-will-pay/.

3. IAAO Standard on Mass Appraisal of Real Property (2012). Kansas City, Missouri, USA. [Electronic resource]. - Access mode: https://www.iaao.org/.

4. Roberts P. D., ASA, Lohmeier M. R., FASA, Sieloff K. M., ASA (2013). Overview of the Ad Valorem/Mass Appraisal Specialty Designation Program [Electronic resource]. - Access mode: https://commercialappraiser.typepad.com/files/asa ad valorem mass appraisal designation presentation.pdf.

5. Baranska A. D. Real Estate Mass Appraisal in Selected Countries - Functioning Systems and

Proposed Solutions [Electronic resource] / A. D. Baranska // AGH University of Science and Technology in Krakow. - 2013.- Access mode: https://www.researchgate.net/publication/270266759 Real Estate Mass Appraisal in Selected Countries - Functioning Systems and Proposed Solutions.

6. Damage, loss and needs assessment - tools and methodology. UN-ECLAC, GFDRR, 2010 [Electronic resource]. - Access mode: https://www.gfdrr.org/en/damage-loss-and-needs- assessment-tools-and-methodology.

7. Post-Disaster Needs Assessment Guidelines, Volume A. World Bank, theEuropean Commission, United Nations Development Group, the Global Facility for Disaster Reduction and Recovery, 2013 [Electronic resource]. - Access mode: https://www.preventionweb.net/publication/post-disaster-needs-assessment-guidelines-volume.

8. Methodology Note on the Global RApid post-disaster Damage Estimation (GRADE)approach. GFDRR, World Bank GSURR, D-RAS KSB, 2018 [Electronic resource]. - Access mode: https://www.gfdrr.org/en/publication/methodology-note-global-rapid-post-

disaster-damage-estimation-grade-approach.

9. Syria Damage Assessmentof selected citiesAleppo, Hama, Idlib: Phase III (2017). World Bank Group.Retrieved from: https://www.humanitarianlibrary.org/resource/syria-damage- assessment-selected-cities-aleppo-hama-idlib.

10. 1Iraq Reconstruction and Investment Damage and Needs Assessment of Affected Governorates: Part 2. 2018. World Bank Group [Electronic resource]. - Access mode: https://openknowledge.worldbank.org/handle/10986/29438.

11. Yemen Dynamic Needs Assessment: Phase 3. 2020. World Bank Group [Electronic resource]. - Access mode: https://openknowledge.worldbank.org/handle/10986/34991.

12. Gaza Rapid Damage and Needs Assessment. 2021. World Bank Group [Electronic resource]. - Access mode: https://www.worldbank.org/en/country/westbankandgaza/publication/the- gaza-2021 -rapid-damage-and-needs-assessment-june-2021.

13. Росія заплатить: Проект KSE Institute спільно з Офісом Президента України, Міністерством економіки [Електронний ресурс]. - Режим доступу: https://damaged.in.ua/.

References

1. UNHCR The UN Refugee Agency. Ukraine situationflash update #8, 13April 2022. https://data2.unhcr.org/en/documents/details/92011.

2. Kyiv School of Economics: The project of collecting, evaluating, analyzing, and documenting information on direct losses to civilian infrastructure in connection with Russian aggression. https://kse.ua/russia-will-pay/.

3. IAAO Standard on Mass Appraisal of Real Property. 2012. Kansas City, Missouri, USA. https://www.iaao.org/.

4. Roberts, P. D., ASA, Lohmeier, M. R., FASA, and Sieloff, K. M., ASA. 2013. Overview of the Ad Valorem / Mass Appraisal Specialty Designation Program. https://commercialappraiser.typepad.com/files/asa ad valorem mass appraisal designation presentation.pdf.

5. Baranska, A. D. 2013. Real Estate Mass Appraisal in Selected Countries - Functioning Systems and Proposed Solutions. AGH University of Science and Technology in Krakow. https://www.researchgate.net/publication/270266759 Real Estate Mass Appraisal in Selected Countries - Functioning Systems and Proposed Solutions.

6. Damage, loss and needs assessment - tools and methodology. UN-ECLAC, GFDRR. 2010. https://www.gfdrr.org/en/damage-loss-and-needs-assessment-tools-and-methodology.

7. Post-Disaster Needs Assessment Guidelines, Volume A. World Bank, theEuropean Commission, United Nations Development Group, the Global Facility for Disaster Reduction and Recovery. 2013. https://www.preventionweb.net/publication/post-disaster- needs-assessment-guidelines-volume.

8. Methodology Note on the Global RApid post-disaster Damage Estimation (GRADE) approach. GFDRR, World Bank GSURR, D-RAS KSB. 2018. https://www.gfdrr.org/en/publication/methodology-note-global-rapid-post-disaster-damage- estimation-grade-approach.

9. Syria Damage Assessmentof selected citiesAleppo, Hama, Idlib:Phase III. 2017. World Bank Group. https://www.humanitarianlibrary.org/resource/syria-damage-assessment-selected- cities-aleppo-hama-idlib.

10. IraqReconstruction and Investment Damage and Needs Assessment of Affected Governorates: Part 2. 2018. World Bank Group. https://openknowledge.worldbank.org/handle/10986/29438.

11. Yemen Dynamic Needs Assessment: Phase 3. 2020. World Bank Group. https://openknowledge.worldbank.org/handle/10986/34991.

12. Gaza Rapid Damage and Needs Assessment. 2021. World Bank Group. https://www.worldbank.org/en/country/westbankandgaza/publication/the-gaza-2021-rapid- damage-and-needs-assessment-june-2021.

13. Russia will pay: KSE Institute project together with the Office of the President of Ukraine, Ministry of Economy. https://damaged.in.ua/.

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