A Steady Course: Jamaica’s Construction Season and the Outlook for Q4 — September 2001

Publication Date: 3 September 2001 | Coverage Period: 3 August–2 September 2001 | Category: Monthly Review

Month in Brief

• Jamaica’s construction sector continues its mid-year activity with reasonable momentum: the dry-season building push that characterises August across the island has delivered solid activity in both the NHT scheme pipeline and the self-build segment.
• The Bank of Jamaica holds its benchmark rate in the 17–19 per cent range through August; commercial mortgage rates at the major financial institutions remain in the 22–26 per cent corridor, with the NHT’s 0–5 per cent product continuing as the sole accessible route to formal homeownership for most Jamaicans.
• The National Housing Trust reports a modest but encouraging rise in new mortgage applications through July and August, reflecting the seasonal uptick in housing market activity that typically accompanies the school-year transition period.
• North coast hotel operators report encouraging forward booking data for the approaching winter season, with October–December reservations running ahead of the comparable period in 2000 for several major properties in Montego Bay and Ocho Rios.
• The Patterson government’s housing programme continues to process subdivisions in St Catherine and St James, with Ministry of Water and Housing officials confirming progress on planning approvals that have been in the pipeline for several months.
• The Jamaica dollar has held broadly stable through August, the BOJ’s management of the exchange rate providing the predictability that importers of construction materials and equipment require for project planning.

Housing Market Overview

August is, by long tradition and the logic of Jamaica’s climate, one of the most active months of the year for construction and for the housing market activity that follows from it. The relative dryness of the mid-year season — the rains that define the spring and the autumn providing a natural boundary on either side — makes August the month in which foundations are poured, roofs are raised and structural work advances on the self-build projects that are so fundamental a feature of Jamaica’s housing supply. The August 2001 picture confirms this pattern: site activity has been brisk by the standards of the current market, and the NHT pipeline has continued to process applications and disburse funds at a pace broadly consistent with the programme targets set at the beginning of the year.

In Kingston and St Andrew, the mid-range market — properties in the J$4 million to J$9 million bracket — has been modestly active through August and September. The school calendar creates a natural driver of family housing decisions in this period, as households that need to be in a particular school catchment area before the new term begins look to complete transactions in the August window. This year, that seasonal dynamic has operated as expected, providing a modest but real boost to transaction volumes in the Kingston metropolitan area during the period under review.

The Portmore corridor in St Catherine remains the most consistently active market on the island for lower-income buyers. The combination of NHT eligibility, relatively affordable land costs, a growing range of townhouse and starter home product, and good road access to Kingston employment centres makes Portmore the first port of call for most working households seeking formal homeownership. Demand here has been steady throughout 2001, and the current period is no exception. Developers with projects in the J$2.5 million to J$4 million range are reporting healthy inquiry levels and reasonable absorption rates.

The north coast residential market — properties in the resort parishes of St James, Trelawny and St Ann — is enjoying a period of relative stability. The summer tourism season, which runs through August, has been performing reasonably well against 2000 comparables, and this economic buoyancy in the hospitality sector tends to translate, with a short lag, into improved sentiment in the adjacent residential market. Villa sales and the secondary market for vacation properties in the Montego Bay and Ocho Rios corridors have been modestly active, and there are a handful of foreign buyer transactions — primarily North American — that reflect continued interest in Jamaica as a resort and second-home destination.

The upper end of Kingston’s residential market — properties above J$12 million in Norbrook, Cherry Gardens and Beverley Hills — remains the quietest segment, as it has been throughout 2001. The combination of high commercial borrowing costs, the limited pool of buyers who can transact at these levels without institutional leverage, and a general caution among the professional and managerial class about making large capital commitments in the current interest rate environment continues to limit activity here. This is a structural feature of the market rather than a sign of distress; these properties continue to hold their values, and there is no shortage of long-term interest in premium Kingston residential real estate.

Government Policy

The Patterson government’s housing programme is in its characteristic mid-year phase: less visible in terms of new announcements than during the pre-budget and budget periods, but continuing to advance through the administrative and planning processes that are necessary for scheme delivery. The Ministry of Water and Housing has confirmed that several subdivision applications in St Catherine and St James are approaching the final stages of the planning approval process, and that commencement of development on these sites is anticipated before the end of the calendar year.

The NHT continues to be the centrepiece of the government’s affordable housing strategy. The Trust’s dual mandate — providing subsidised mortgage finance to contributing workers and managing a portfolio of scheme housing — is being delivered at a pace that, while below what the government had hoped to achieve at the beginning of the year, represents a genuine contribution to the market. The Trust’s forward pipeline of approved applications suggests that disbursements through the fourth quarter should be reasonably steady.

Proposed amendments to the NHT’s contributing eligibility framework, which would expand access to self-employed and informal sector workers, remain under discussion at the policy level. No specific legislative timeline has been announced, but the government is understood to be keen to demonstrate progress on this front before the end of the parliamentary session. Broadening the NHT’s reach into the informal economy would be a substantive policy achievement, though the implementation challenges — contribution collection from workers without payroll arrangements, documentation of variable incomes — are not trivial.

The government has also been working with the Urban Development Corporation on several inner-city housing improvement initiatives in Kingston. These programmes, which focus on the rehabilitation of existing stock rather than new construction, are politically sensitive given the social complexity of inner-city communities, but they address a real and chronic housing deficit in areas where NHT scheme construction is not a practical option.

Construction Sector

Jamaica’s construction sector is in what may be characterised as an active but not exuberant phase. The late 1990s building boom, when hotel expansion, new resort development and private residential construction were all running simultaneously at elevated levels, has modulated into something more measured. The hotel pipeline is not as thick as it was three years ago — several of the major expansion projects that were announced or commenced in 1998–99 are now complete or nearing completion, and the next generation of resort investment has not yet reached the stage of active construction. But neither has activity fallen to levels that would indicate any underlying weakness in the sector’s fundamentals.

Private residential construction is performing adequately. The NHT scheme pipeline is maintaining a baseload of structured construction activity; the self-build sector is busy in August in the way that it always is; and the private developer segment, while not setting records, is bringing a reasonable volume of new product to market in the J$3 million to J$8 million segment that the NHT-eligible and near-eligible market seeks.

Materials availability and costs are broadly stable. Cement prices have been holding at levels that contractors and self-builders can manage; steel costs, which spiked earlier in the year, have stabilised; and the Jamaica dollar’s relative stability has kept the import costs of specialist materials and equipment in a range that project budgets can accommodate. The construction labour market is tight in certain skilled trades — plumbers and electricians are in short supply in the Kingston and St Catherine areas — but not yet at the bottleneck levels that characterised the peak of the late-1990s boom.

The one area of concern that practitioners consistently raise is the planning approval pipeline. The time from application to approval for new residential subdivisions and building permits remains longer than any commercial logic would support, and the practical consequences — projects delayed, financing costs running while approvals are awaited, developers unwilling to acquire land without sight of a realistic approval timeline — represent a real drag on supply delivery that the government acknowledges but has not yet resolved.

Investment Climate

The investment climate for Jamaican real estate through August and into September is characterised by a cautious but not pessimistic stability. The US economy, which had been showing clear signs of slowdown through the first half of 2001, has continued to soften: GDP growth has moderated, technology investment has contracted sharply from the excesses of the late 1990s, and consumer confidence, while not panicked, has registered as subdued in the monthly surveys. For Jamaica, this US economic moderation is a relevant variable — it affects the volume and spending levels of American tourists and the investment confidence of American and diaspora property buyers — but it is not at this stage generating any crisis in the Jamaican market.

The BOJ’s maintenance of high rates — which has been the defining feature of Jamaica’s monetary environment for several years — continues to channel institutional investment toward government paper rather than real estate. This is not new; it is the structural condition of the Jamaican capital market, and property market participants have adapted to operating within it. Foreign investors who are considering Jamaican real estate are doing so on the basis of tourism growth projections and long-term demographic fundamentals, not on the basis of any near-term credit-driven price appreciation story that simply is not available in this interest rate environment.

The pipeline of resort and hotel investment that several north coast operators and international hospitality groups have been developing over the past eighteen months is advancing at the measured pace that characterises large capital projects in the Caribbean. Several of the most promising projects are understood to be in the financing and permitting stages, with construction commencement possible in the 2002 building season if these processes resolve as hoped. The outlook for this pipeline is cautiously positive.

Diaspora Activity

The August period typically sees a diaspora-driven boost to Jamaica’s self-build and property market activity, as Jamaicans abroad make their summer visits and use the occasion to review family building projects, make decisions about land acquisition, and in some cases complete property transactions that have been in preparation for months. This year’s August diaspora activity appears to have delivered the usual dividend: contractors in the rural parishes and in the Portmore-Spanish Town corridor report diaspora-funded work as a significant and consistent component of their August workloads.

The diaspora’s longer-term orientation toward Jamaica property investment remains as strong as it has been in recent years. Jamaicans in North America and the United Kingdom who have accumulated savings and who aspire to eventual return, or to maintaining family property in Jamaica, are a durable and structurally important source of housing demand. Their investment decisions are driven more by life-stage and family planning than by short-term market conditions, which gives this segment of demand a resilience and predictability that the formal investment market lacks.

The NHT’s diaspora contribution programme continues to attract modest but growing participation. Jamaicans abroad who contribute to the Trust become eligible for its mortgage products on return, and the programme’s administrators report steady growth in diaspora contributor numbers. The programme is not yet at the scale that would make it a significant volume driver for the housing market, but it is building the institutional infrastructure for a meaningful diaspora housing product over the medium term.

Affordability

The affordability picture in September 2001 is unchanged from the structural condition that has prevailed throughout the year. Commercial mortgage rates of 22–26 per cent are beyond the reach of the vast majority of formally employed Jamaicans; the NHT’s 0–5 per cent product is the only mechanism through which homeownership is financially accessible for this population. This dual-track system — deeply subsidised public-sector finance sitting alongside effectively inaccessible commercial credit — is a product of Jamaica’s monetary history and will not be resolved in the short term.

Within this constrained environment, the NHT’s reach is the critical variable. The Trust serves approximately 1.3 million contributing workers and their families; it is the housing finance system for the Jamaican working class in a way that has no parallel in the commercial sector. The Trust’s effectiveness is therefore not a niche policy question; it is the central question of housing access in Jamaica. And on that front, the news through August is adequate if not exceptional: applications are being processed, disbursements are being made, and the pipeline of approved schemes is advancing, if more slowly than ideal.

The broader affordability challenge — the gap between what working Jamaicans can afford and what the market delivers — remains substantial. Land costs in and around Kingston have risen steadily over the past decade; construction costs have tracked inflation and import price movements; and the income growth of the formal sector workforce has not kept pace with these pressures. The consequence is a market in which the entry-level product that households aspire to costs more, in real terms, than it did ten years ago, while the financial tools available to purchase it — with the exception of the NHT — have not become more accessible.

Looking Ahead

As Jamaica moves through September and into the final quarter of 2001, the market’s positioning is one of measured stability. The construction season has delivered a reasonable August; the NHT pipeline is broadly on track; north coast tourism bookings for the October–December period are ahead of comparable 2000 levels; and the Jamaica dollar’s relative stability has provided the import cost predictability on which the construction sector depends.

With the winter tourism season approaching and rate expectations stable, the market is positioned for a measured final quarter. The BOJ is not expected to move significantly on rates before year-end; the government’s housing programme is unlikely to deliver any major new supply announcements before the budget cycle; and the construction sector will transition from its August peak into the more selective activity pattern of the October–December period. For investors and market participants, the key indicators through Q4 will be NHT disbursement volumes, tourism arrivals data as the winter season begins to build, and any signals from the government about the housing policy agenda it intends to pursue into 2002.

The picture that emerges from this review is not one of excitement. Jamaica’s housing market in September 2001 is not in the midst of a boom, and it is not in any kind of crisis. It is, rather, in the steady state that characterises a market performing within the constraints of its structural environment — high borrowing costs, NHT as the primary delivery mechanism, tourism as the economic engine that lubricates everything else — and doing so with the resilience and patience that have always been characteristic of property as an asset class in this country. The fundamentals are present; the market is open; and the year, on current indications, should close on a note of quiet adequacy rather than drama.