Golding’s Diplomatic Crisis: Coke Extradition Tensions Colour Jamaica’s Investment Climate — May 2010

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

April in Brief

• Coke extradition standoff enters seventh month; Prime Minister Golding signs extradition order on May 2, days after coverage close.
• US diplomatic pressure on Jamaica reaches unprecedented intensity; trade and visa implications discussed.
• Bank of Jamaica signals imminent rate movement; commercial banks prepare to announce base rate reductions.
• Kingston upper-bracket property market softens further; resort markets on hold pending political resolution.
• NHT reports strong loan application volumes; affordable housing demand outstripping supply significantly.
• Construction sector sees earliest signs of new project planning as rate-cut optimism grows.

The Extradition Crisis Reaches a Decisive Moment

Through April 2010, the Christopher Coke extradition crisis has escalated from a simmering diplomatic irritant into the defining political drama of the Golding administration. The United States, which submitted its extradition request in October 2009, has intensified pressure on Kingston through diplomatic channels, and the issue has attracted significant attention in the American press and in the Congressional delegations with large Jamaican-American constituencies. Prime Minister Golding, who had long maintained that the extradition request raised legal concerns around surveillance evidence, has faced mounting criticism from within Jamaica’s business community, civil society and from within sections of his own Jamaica Labour Party.

On the second of May — just at the close of this review’s coverage period — Prime Minister Golding signed the extradition order. This is the most significant political event of the month for Jamaica’s investment and property market, removing the principal source of diplomatic friction between Kingston and Washington. The signing does not immediately resolve the legal proceedings that will follow, but it marks the beginning of the end of a controversy that has weighed on investor sentiment for the better part of a year.

For Jamaica’s real estate and investment sector, the extradition order is unambiguously positive news. International investors who had put decisions on Jamaican property and business interests on hold pending political normalisation have been given a concrete signal that the government is prepared to honour its international legal obligations. Equally, the removal of the US-Jamaica diplomatic friction reduces the risk of any escalatory measures — visa restrictions, trade barriers, correspondent bank withdrawal — that would have had severe knock-on effects for tourism-dependent real estate markets in Montego Bay and Negril.

Interest Rates: The First Move Approaches

The Bank of Jamaica has maintained its policy rate through April but market intelligence suggests that a cut may be imminent. Commercial banks have been quietly reducing their Treasury bill portfolio expectations and recalibrating the yields they require on fresh lending, as the post-JDX bond market settles into its new, lower-rate equilibrium. Several of Jamaica’s larger commercial banks are reported to be in the final stages of internal reviews of their base lending rate structures, with announcements of meaningful reductions anticipated in the coming weeks and months.

The scale of anticipated reductions varies among market participants, but the consensus view is that commercial base lending rates — which have been above 20 percent — could fall by 200 to 300 basis points by the end of 2010. For building societies and mortgage-focused lenders, whose funding structure is more closely tied to retail deposits than to government bond portfolios, the adjustments may come faster. Even a partial rate reduction of this magnitude would materially alter the affordability calculus for would-be homebuyers who are currently priced out of commercial mortgage finance.

Housing Market

April’s housing market continued the tentative improvement in buyer enquiries that was evident in March, with agents in Kingston reporting that serious, qualified buyers are increasingly engaging with property listings. The upper bracket — above J$40 million — remains slow, with sellers who entered the year with 2007-vintage asking prices continuing to adjust. The middle market, particularly the J$10–25 million segment in suburban Kingston and the growing residential communities of Portmore, Waterford and Lauriston, is showing the most animation, reflecting a combination of NHT loan capacity and anticipation of rate improvement.

Montego Bay’s property market remained largely in suspended animation through April, as investors awaited the resolution of the political crisis before committing to resort purchases. Agents in the tourist belt from Ironshore to Rose Hall note that enquiry levels from international buyers have been suppressed since February, when coverage of the extradition crisis in the American media began to intensify. The signing of the extradition order on May 2 is likely to begin reversing this trend in the coming months.

NHT Activity

The National Housing Trust reports continued strong demand for its housing products and loan facilities across all parishes. The completion of NHT-financed units in Portmore, St Catherine, and in the early phases of Clarendon schemes has provided urgently needed supply to a market where affordably priced housing consistently finds immediate buyers. The NHT’s loan ceiling of J$3.5 million, while still insufficient to cover the full cost of a new unit in Kingston proper, is adequate for properties in the outer communities where the majority of NHT-linked development is occurring.

The government has signalled that it intends to increase the NHT’s housing output in the 2010–2011 fiscal year, reflecting both the persistent demand signal and the political imperative of demonstrating housing progress to a population that has endured two years of economic difficulty. Whether the output targets can be achieved within the fiscal constraints of the IMF programme will be a critical test of the government’s delivery capacity in the housing sector.

Construction Sector

The anticipation of lower interest rates has produced the earliest visible signs of pre-construction activity in the private sector since before the 2008 global financial crisis. Several major developers in the Kingston and St Andrew markets are reported to have submitted or are preparing planning applications for residential schemes that had been in abeyance since 2008. Developers are making forward assumptions about the rate environment that will prevail when their units reach the market in 2011–2012, and the improving rate outlook is shifting those assumptions in a more optimistic direction.

Construction input costs remain manageable. Cement, steel and other building materials continue to trade below their 2008 peak levels, maintaining project viability for developers who can access construction finance. The shortage of skilled construction labour — a chronic feature of Jamaica’s building industry that was temporarily alleviated by the sector’s 2009 contraction — is beginning to re-emerge as a constraint as the industry begins to anticipate recovery.

Tourism and Resort Property

Tourism metrics for April confirm that the 2010 recovery from 2009’s severe downturn is real and continuing. Hotel occupancy rates are tracking significantly above year-ago levels in Montego Bay, Ocho Rios and Negril, and airlines have been expanding capacity on key North American routes to Jamaica in anticipation of sustained demand. This is the foundation on which resort real estate recovery will be built — though the construction of investor confidence after the political turbulence of the past year will take time and will benefit most from the political resolution signalled by the May 2 extradition order signing.

Infrastructure

Infrastructure development has continued to progress in the corridors most critical to housing expansion: the Portmore causeway environs, the main road network serving south St Catherine, and the utility extension programmes that underpin new residential development in the peri-urban fringe of Kingston. These investments, while modest relative to the scale of demand, provide the enabling conditions without which private-sector housing development cannot occur at scale.

Diaspora

Remittance flows have continued their recovery, with year-on-year increases of approximately 10 percent sustained into the second quarter. For diaspora households considering housing investment in Jamaica, the combination of improving remittance capacity and the anticipated rate-easing cycle creates the most constructive environment for decision-making in more than two years. Those who have been monitoring Jamaica property values through the 2009 correction may find that the second half of 2010 represents an attractive entry point, assuming the political environment continues to normalise.

Looking Ahead

May and June 2010 may look, with the benefit of hindsight, like the pivot point at which Jamaica’s housing market turned. The extradition order signed on May 2 removes the most acute political risk that has overhung the investment climate since October 2009. The rate-easing cycle, now widely anticipated by commercial bankers, will reduce the cost of mortgage finance for the first time in years. And the remittance recovery, if sustained, will restore the diaspora capital that underpins a significant share of Jamaica’s housing activity.

These are necessary conditions for improvement — but they operate with lags, and their full effect will not be felt in the second quarter. For Jamaica’s housing deficit, which remains at more than 100,000 units and which has not materially reduced during two years of recession and fiscal constraint, improvement in the financing and political environment is the precondition for supply growth, not its immediate cause. The hard work of building homes, reforming planning systems, improving infrastructure and mobilising capital toward affordable housing supply lies ahead, in a political and economic environment that is, at last, beginning to improve.