Tohoku’s Ripple: How Japan’s Disaster Resets Jamaica’s Construction Cost Outlook — April 2011

Publication Date: 3 April 2011 | Coverage Period: 3 March – 2 April 2011 | Category: Monthly Review

Month in Brief

• The Great East Japan Earthquake — magnitude 9.0 — strikes the Tohoku coast on 11 March, triggering a catastrophic tsunami and the Fukushima Daiichi nuclear crisis; global supply chains for steel, electronics and industrial components are severely disrupted.
• Japan accounts for roughly 6–7 per cent of global crude steel output; fears of reduced Japanese scrap and semi-finished steel exports ripple through Asian and Latin American construction markets, including the Caribbean.
• Brent crude remains elevated at US$113–117 per barrel through March as Libya’s civil war continues with no early resolution in sight, sustaining the construction cost pressures identified last month.
• Bank of Jamaica data show Jamaica’s GDP growth for 2010 at approximately 1 per cent — a fragile recovery that leaves the housing sector with minimal macroeconomic tailwind heading into the new fiscal year.
• Jamaica’s fiscal year ended 31 March 2011; budget preparation for 2011/12 is under way, with NHT contribution receipts and disbursement targets a focal point for affordable housing advocates.
• Commercial mortgage lending rates at Jamaica’s major banks remain in the 11–14 per cent range, with only marginal movement since the Jamaica Debt Exchange of February 2010 began compressing the sovereign yield curve.

Housing Market Conditions

March 2011 will be remembered in housing markets around the world primarily through the lens of what happened to Japan. For Jamaica’s residential property sector, the Tohoku earthquake and tsunami is not a humanitarian story alone — it is a supply-chain event with direct construction cost implications that will unfold over coming months. Understanding that transmission mechanism is the central task of this edition.

Domestically, the Kingston residential market continued through March in the familiar pattern of thin transaction volumes, stable nominal asking prices and frustrated buyers who cannot bridge the gap between NHT loan ceilings and market-clearing construction costs. Activity in the upper segments — New Kingston, Norbrook, Cherry Gardens, the hills above Liguanea — remained dominated by the diaspora and by the small cohort of high-income Jamaican households whose incomes are partially or fully US dollar-denominated, providing a natural hedge against currency depreciation.

In secondary markets, Montego Bay’s residential fringe and the emerging developments in Trelawny continue to attract modest institutional interest, partly on the back of the Falmouth cruise pier which opened to Royal Caribbean traffic earlier this year. The expectation of increased tourist throughput in the western parishes has encouraged at least two developers to advance serviced lot schemes, though construction financing at prevailing commercial rates remains challenging.

Government Policy: Budget Season and NHT Priorities

The close of Jamaica’s fiscal year on 31 March marks the opening of budget season. The Ministry of Finance’s presentation for 2011/12 will be closely scrutinised for signals on capital allocation, NHT contribution rates, and any adjustments to the affordable housing framework. Under the IMF programme, the fiscal space for increased public expenditure on housing infrastructure — serviced land, road access, water and sanitation connections — is constrained.

The National Housing Trust remains the government’s primary vehicle for affordable housing delivery. In the fiscal year just ended, the NHT is understood to have disbursed in the region of J$12–15 billion in mortgage loans — a significant but still insufficient volume relative to the estimated 30,000-plus qualified applicants on its waiting list. Contribution receipts are a function of formal sector employment, which has grown only modestly since the 2008–2009 global recession. The demographic pipeline of first-time buyer NHT contributors is large, but many contributors are employed in the tourism and retail sectors at wage levels that limit their effective borrowing capacity even at NHT’s concessionary rates.

The Housing Agency of Jamaica has signalled its intention to release additional serviced lots in St. Catherine and Clarendon parishes during the 2011/12 fiscal year. These releases will be watched closely: lot allocation processes have historically been criticised for opacity, and demand substantially exceeds available supply in any given release.

Construction Sector: Tohoku and the Caribbean Materials Pipeline

The Great East Japan Earthquake of 11 March has introduced a new layer of uncertainty into global construction materials markets that Caribbean contractors and developers cannot afford to ignore. Japan is the world’s second-largest producer of crude steel (after China), with production capacity concentrated in coastal prefectures that include areas affected by the tsunami. While preliminary assessments suggest that the core steelmaking facilities at Nippon Steel and JFE Steel were not catastrophically damaged, the logistics disruption — port damage, road closures, power outages at industrial facilities — will reduce Japanese steel export capacity for weeks to months.

For Jamaica, the direct steel import channel from Japan is limited; the island sources most of its reinforcing bar from regional producers in Trinidad, Mexico and the United States, and from Asian mills via general trading houses. The Tohoku impact is more likely to manifest through second-order price effects: as Japanese steel output contracts, demand pressure on non-Japanese producers increases, supporting international rebar prices that were already elevated by the China demand cycle and energy cost inflation.

The nuclear dimension adds a longer-term variable. Fukushima Daiichi’s loss of cooling has prompted Japan to shut down significant nuclear generating capacity, forcing substitution with imported liquefied natural gas, oil and coal. Japan is the world’s largest LNG importer; a sustained increase in its LNG demand will tighten global gas markets, with secondary implications for industrial energy costs worldwide. For Jamaica, which imports petroleum for virtually all its electricity generation, higher global energy prices — whether from Libya or from Japan’s nuclear crisis — reinforce the same upward cost pressure on construction activity.

Caribbean Cement Company’s operations at Rockfort in Kingston remain the critical node in Jamaica’s cement supply chain. Clinker imports for Caribbean Cement typically originate from sources including Mexico and Colombia; these are unlikely to be directly disrupted by Tohoku. However, the broader global freight market — under pressure from elevated bunker fuel costs — continues to inflate the landed cost of all bulk imports. Contractors pricing projects in the coming months would be prudent to build in a materials cost escalation provision of at least 8–10 per cent above current rates.

Investment Climate

The Tohoku disaster has, perversely, generated some interest from international capital seeking Caribbean safe-haven real estate opportunities. Inquiries to Kingston and Montego Bay estate agents from US-based investors reportedly ticked upward in the weeks after 11 March — a reflection of anxiety about Pacific Rim geopolitical risk rather than any fundamental reassessment of Jamaican property fundamentals. Whether such inquiries translate into closed transactions is another matter; the friction costs of Jamaican property acquisition for foreign buyers — stamp duty, transfer tax, legal fees and currency conversion costs — remain substantial.

Longer-term, the Tohoku disaster raises a question that is relevant to the entire Caribbean: what is the value of geographic and geological resilience in an island real estate portfolio? Jamaica sits in a seismically active zone, and its own earthquake history — most recently the 2010 Haitian earthquake that devastated the nearest neighbouring country — is a reminder that Caribbean real estate is not immune to the category of risk that just devastated north-eastern Japan. The comparison is stark but instructive for sophisticated investors building Caribbean exposure.

For the domestic investor, the more pressing calculus remains unchanged: commercial mortgage rates of 11–14 per cent versus rental yields in the 6–10 per cent range in most Kingston submarkets produce negative leverage on a pure income basis. The investment case for residential property in Jamaica remains primarily a hedge against currency depreciation and an inflation store of value, with capital appreciation as the primary return driver over a multi-year hold.

Diaspora Dimension

For the Jamaican diaspora, the Japan earthquake has an indirect but real relevance. The US economy, which hosts the largest single concentration of overseas Jamaicans, continues its post-recession recovery; employment conditions for the Jamaican diaspora community in New York, Florida, Connecticut and New Jersey have improved relative to the 2009 nadir. However, rising petrol prices at the US pump — a direct consequence of the Libyan disruption and of global crude oil markets — are eroding the real wages of the blue-collar and service sector workers who form the majority of the remitting diaspora.

The UK diaspora, concentrated in London and the Midlands, faces a sharper squeeze: UK petrol prices above 130 pence per litre are a direct household budget item, and the Bank of England’s stubborn inflation problem — CPI at 4.4 per cent in February — is eroding real earnings across the board. For families splitting modest incomes between London living costs and Jamaican housing project contributions, the arithmetic is increasingly strained.

Nevertheless, the structural commitment of the Jamaican diaspora to home-country property investment persists. Annual remittance volumes, while marginally below the pre-crisis peak of around US$2 billion, remain resilient. The pipeline of diaspora-funded self-build projects in Manchester, St. Elizabeth and the rural parishes continues; it is the pace of completions that slows when material costs rise, not the underlying intent.

Affordability: The Cost-Income Gap Widens

The combination of elevated fuel costs, rising materials prices and persistently high commercial mortgage rates is widening the gap between what it costs to build a modest formal-sector home in Jamaica and what the typical formal-sector household can afford to pay for it. This gap — which underpins the 100,000-unit housing deficit — is not new, but the trajectory in early 2011 is worsening.

The NHT’s concessionary rate structure provides a partial offset for qualified contributors, but the NHT loan ceiling — understood to be in the range of J$4.5–5.5 million for most borrower categories — has not kept pace with construction cost inflation. A modest two-bedroom concrete-block unit in Kingston’s outer suburbs now costs an estimated J$6–8 million to construct to a marketable standard, excluding land. The gap between NHT ceiling and all-in cost must be met from savings, top-up commercial borrowing at 11–14 per cent, or diaspora support. For households with none of these supplementary resources, formal homeownership remains inaccessible.

The informal sector — squatter settlements, unplanned subdivisions, extended family plots — continues to absorb the demand that the formal market cannot serve. It is estimated that upwards of 40 per cent of Jamaica’s urban housing stock exists in some form of informal tenure, a proportion that has changed little over two decades of policy effort.

Looking Ahead: April–May 2011

The most important near-term signal will come from Jamaica’s budget presentation, expected in mid-April. Any adjustment to NHT contribution rates, loan ceilings or approved cost limits for new schemes would directly affect the affordable housing market. Housing advocates will also be watching for any capital allocation to the Serviced Land Programme, which has historically been the most efficient mechanism for expanding formal housing supply at the lower-income end of the market.

On the global side, the Tohoku situation’s impact on steel and materials markets will become clearer over the next six to eight weeks as Japanese steelmakers publish revised production guidance and as the nuclear power supply picture clarifies. Contractors tendering projects through May and June should treat current materials prices as a floor, not a ceiling.

The Bank of Jamaica’s monetary policy stance — holding rates steady while watching inflation — is unlikely to change materially in April absent a sharp deterioration in the inflation outlook. The gradual easing of commercial lending rates that post-JDX monetary conditions are supposed to deliver has been slow to materialise in practice; the spread between BOJ rates and commercial mortgage rates remains wide by regional standards.

For Jamaica’s housing sector, April 2011 begins a new fiscal year under conditions of external uncertainty and domestic constraint that are unlikely to resolve quickly. Resilience — the same quality that has sustained the Jamaican property market through decades of economic turbulence — will again be the defining characteristic of those who invest and build through this period.