Golding’s Diplomatic Crisis Colours the Market: Jamaica Housing & Investment Review — April 2010

Publication Date: 3 April 2010 | Coverage Period: 3 March – 2 April 2010 | Category: Monthly Review

March in Brief

• Coke extradition controversy escalates; Prime Minister Golding faces mounting domestic and diplomatic pressure.
• US-Jamaica diplomatic tensions weigh on investor sentiment and international real estate buyer interest.
• BOJ holds policy rate steady; market awaits first easing move as post-JDX conditions mature.
• Housing market sees modest uptick in enquiries; buyers remain cautious ahead of rate signal.
• Tourism sector reports improved visitor arrivals as global travel recovers from 2009 lows.
• NHT scheme completions in Portmore and St Catherine provide new affordable units to market.

The Coke Controversy: A Gathering Political Storm

The United States government’s October 2009 extradition request for Christopher “Dudus” Coke — alleged to be the leader of the Shower Posse and one of the most significant drug trafficking figures in the Western hemisphere — has now gone unaddressed for more than five months. Prime Minister Bruce Golding’s continued resistance to signing the extradition order has evolved from a manageable political controversy into what business associations and investors are beginning to describe as a threat to Jamaica’s international relationships and its standing as a destination for foreign capital.

The extradition request is, on its surface, a legal and diplomatic matter. Its implications for Jamaica’s housing and property market, however, are neither trivial nor speculative. The United States is Jamaica’s largest trading partner, the source of the largest share of its tourist arrivals, and the home of the Jamaican-American diaspora communities that underpin a significant fraction of residential investment on the island. Any sustained deterioration in the US-Jamaica bilateral relationship carries direct consequences for the real estate sector: fewer American investors considering Jamaican resort properties, tighter scrutiny of Jamaican financial institutions by US correspondent banks, and reduced confidence among diaspora buyers considering commitments to purchase or build in Jamaica.

For now, these effects remain in the realm of concern rather than confirmed data. Real estate agents and investment advisers contacted for this review note that the extradition issue has not yet generated measurable transaction cancellations or enquiry declines, but that it is consistently raised in conversations with international clients as a question mark about the governance environment. The longer the situation remains unresolved, the more traction such concerns are likely to gain.

Interest Rate Outlook: Watching and Waiting

The Bank of Jamaica has maintained its policy rate through the March period, consistent with market expectations that the first move in the easing cycle will come no earlier than the second quarter of 2010. The post-JDX yield compression on government securities has proceeded broadly as designed, with 15-year bond yields settling significantly below their 2008 highs. Commercial banks are absorbing the implications of lower government bond returns for their own funding and profit models, and several institutions are understood to be engaged in internal reviews of their lending rate structures.

The consensus among banking sector observers in Kingston is that base lending rates — currently above 20 percent for most commercial banks — will begin to move lower in the second half of 2010, with the most optimistic scenarios positing reductions of 200 to 300 basis points by year-end. For the mortgage market specifically, this would represent the first meaningful improvement in commercial lending costs in several years. Building societies, which have historically offered lower mortgage rates than commercial banks and which are more directly exposed to residential lending, may move earlier in the easing cycle.

Housing Market

The Kingston metropolitan area’s residential property market has shown a degree of animation in March that was largely absent through the second half of 2009. Agents in New Kingston, Barbican, Norbrook and the hillside communities above Half Way Tree report a discernible increase in viewings and in the seriousness with which prospective buyers are engaging with available properties. In the more affordable communities of Portmore, Gregory Park and Waterford, NHT-connected buyers are competing actively for the limited number of completed units that come available.

Montego Bay’s property market tells a more nuanced story. The resort corridor has benefited from the early recovery in tourist arrivals — the Jamaica Tourist Board has reported improving occupancy in the first quarter of 2010 compared with the same period in 2009 — but this has not yet translated into a significant recovery in resort real estate transactions. International buyers, primarily American and Canadian, remain cautious about committing to Jamaican vacation properties in an environment that combines improving tourism fundamentals with lingering political uncertainty around the Coke extradition issue.

Tourism and the Real Estate Spillover

The structural relationship between Jamaica’s tourism performance and its resort real estate market is well-established. Hotel occupancy and visitor spending create the demand signal to which villa and condominium developers respond; a sustained recovery in arrivals, if maintained, would be expected to revive investor interest in the hotel-adjacent residential product that was so active in 2005–2007. The early signs from the 2010 winter season are cautiously encouraging: arrivals are up modestly, spending per visitor is recovering, and at least two resort hotel projects that were mothballed in 2009 are reported to be under review for resumption.

Any comprehensive tourism recovery, however, will require resolution of the political issues that are creating headline risk for Jamaica in its key US and European source markets. The extradition controversy, while not yet making front-page news in the United States, is well-known in the Jamaica-focused media of the Jamaican-American community and in the travel trade circles that shape operator decisions about destination investment and promotion.

NHT and Social Housing

The NHT’s scheme programme in St Catherine has delivered a tranche of completed units in the Portmore area during March, providing what agents describe as immediate take-up from buyers on the NHT’s waiting lists. The Trust has also been advancing preparatory work on schemes in Clarendon and St James, responding to demand pressure that is acute in those parishes. With NHT loan rates at zero to five percent and property prices in the target affordability range, demand for NHT-linked housing significantly exceeds current supply capacity.

Construction Activity

Private construction remains cautious. The first-quarter pattern of pre-development work — planning submissions, site surveys, utility negotiations — ahead of decisions on project launches is evident among the larger development companies active in the Kingston and Montego Bay markets. The cost environment is relatively favourable: cement and steel prices remain below their 2008 peaks, skilled labour is available, and construction financing, though expensive at commercial rates, is at least in principle accessible for well-capitalised developers.

Infrastructure

The government’s infrastructure programme, though constrained by the fiscal adjustment requirements of the IMF Stand-By Arrangement, has continued to advance priority road and utility projects in the housing corridors south and west of Kingston. The improvement of the road network in the Portmore area — a critical prerequisite for further residential development in what is already the island’s largest planned community — remains an active programme, with funding sourced partly from development bank facilities.

Diaspora

Remittance recovery has continued into the first quarter of 2010, with flows running ahead of the corresponding period in 2009. For the housing sector, this translates into modestly improved capacity for the home improvement and self-build activity that accounts for a significant share of Jamaica’s total housing production outside the formal NHT and developer sectors. In rural parishes — St Elizabeth, Westmoreland, Trelawny — diaspora-funded construction of owner-built homes continued through the first quarter, providing a floor of activity in markets that have no formal development pipeline.

Looking Ahead

The second quarter of 2010 will be shaped by two overriding uncertainties: whether the Bank of Jamaica takes the first step in its rate-easing cycle, and whether the Coke extradition controversy finds resolution. A BOJ rate cut, even a modest one, would be a powerful psychological catalyst for the property market, signalling that the long-awaited normalisation of financing conditions is underway. Resolution of the extradition issue — through the signing of the extradition order and its transmission to the courts — would remove a cloud from Jamaica’s political climate that has been accumulating for six months.

Neither development is certain in the near term. The Golding government has shown no inclination to move quickly on the extradition matter, and the BOJ is likely to proceed cautiously, gathering evidence that the post-JDX rate environment is stable before committing to the easing cycle. For the housing sector, the second quarter is therefore likely to be another period of watchful positioning rather than decisive action — with investors, developers and buyers all awaiting the signal that conditions have shifted sufficiently to justify commitment.