Caribbean Property & Investment Review — Hurricane Season 2011 Opens, Above-Normal Forecast & Caribbean Investment Climate | June 2011

Caribbean Property & Investment Review | Edition 182 | Published 3 June 2011 | Coverage period: 3 May – 2 June 2011

Morning Briefing

• The 2011 Atlantic hurricane season formally opened on 1 June, with NOAA and Colorado State University both issuing above-normal forecasts calling for 12–18 named storms, 6–10 hurricanes and 3–6 major hurricanes.
• Caribbean tourism boards are coordinating with insurance markets and hotel associations to ensure adequate disaster-preparedness plans are in place before the peak of the storm season in August and September.
• Oil prices have retreated slightly from the US$120+ highs of April–May 2011 following the announcement of a coordinated release from IEA strategic petroleum reserves, providing modest relief for Caribbean energy importers.
• The Caribbean Development Bank approved a further tranche of post-Tomas reconstruction lending for St Lucia and St Vincent & the Grenadines, supporting ongoing road and infrastructure repairs.
• Jamaica’s fiscal programme with the IMF remains on track following a positive quarterly review, though the government faces pressure from labour unions over the public-sector wage freeze.
• New luxury villa projects are being launched in Barbados’s St James and St Peter parishes, with developers citing improving North American buyer confidence as justification for breaking ground.

The 2011 Hurricane Season: Above-Normal Expectations

The opening of the 2011 Atlantic hurricane season on 1 June brought with it a clutch of sobering forecasts from the world’s leading meteorological centres. NOAA’s Climate Prediction Center, releasing its pre-season outlook in late May, called for a 70% probability of an above-normal season, citing warm sea-surface temperatures across the tropical Atlantic, reduced wind shear relative to La Niña conditions and the historical pattern of active seasons following the kind of above-normal 2010 season that produced Hurricane Tomas. Colorado State University’s Tropical Weather and Climate Research group put similar numbers on the table, forecasting 16 named storms and 9 hurricanes as their best-estimate scenario.

For the Caribbean, these projections are not merely of meteorological interest — they carry direct economic consequence. The region’s property-insurance market remains challenged following the losses of recent active seasons, and reinsurers have tightened terms and raised premiums across the board. Property owners across the Lesser and Greater Antilles are being urged by insurers to review their coverage levels, since significant underinsurance was identified as a problem following Hurricane Tomas’s passage through St Lucia and St Vincent in October 2010. Many rural and coastal property owners had allowed coverage to lapse during the economically difficult years of 2009 and 2010, leaving them exposed when the storm struck.

Caribbean governments are also paying attention to storm-preparedness at the infrastructure level. The Caribbean Disaster Emergency Management Agency (CDEMA) has been working with national emergency offices to update response plans, pre-position supplies and strengthen early-warning communication systems. Several islands upgraded their meteorological infrastructure following Tomas, installing additional weather stations and improving data-sharing arrangements with the regional meteorological services. The improvements are welcome but their adequacy will only be known when the next major storm approaches a populated coastline.

Property Insurance: Navigating a Hardening Market

The Caribbean property-insurance market entered the 2011 hurricane season in a state of transition. Following several years of significant catastrophe losses — including the 2004 and 2005 hurricane seasons, the 2010 Haiti earthquake and Hurricane Tomas — the global reinsurance community has recalibrated its risk appetite for Caribbean exposure. The result has been a progressive tightening of terms: higher deductibles, more restrictive coverage for older buildings and elevated premiums that in some cases have risen by 15–25% over the past two years.

For property investors in the Caribbean, these dynamics have important implications. The cost of adequate hurricane coverage must now be factored more carefully into investment return calculations, since the days of relatively cheap, broad-form catastrophe insurance appear to be behind the region for the foreseeable future. Prospective buyers of resort properties and villas are advised by local real-estate professionals to conduct thorough due diligence on existing insurance arrangements, paying particular attention to whether coverage limits reflect current replacement costs rather than original purchase prices — a common source of underinsurance in markets that have seen significant construction-cost inflation.

Some positive developments are emerging in the market. The Caribbean Catastrophe Risk Insurance Facility (CCRIF), established in 2007 as a parametric insurance pool for Caribbean governments, has expanded its product range and membership. Parametric products — which pay out automatically when a storm of defined intensity passes within a specified distance of an insured territory, without requiring loss adjustment — offer speed of payout that is attractive for governments needing immediate liquidity to fund emergency response. Several Eastern Caribbean states renewed and expanded their CCRIF coverage ahead of the 2011 season, reflecting growing confidence in the parametric model.

Caribbean Investment Climate: Selective Optimism

Against the backdrop of above-normal hurricane forecasts and still-elevated global oil prices, the Caribbean investment climate in mid-2011 is one of selective optimism. Markets and sectors with genuine structural advantages — T&T’s energy complex, the luxury tourism segment in Barbados and the Caymans, Jamaica’s BPO sector — are performing creditably. Markets that depend on volume tourism from recession-hit European source markets, or on commodity exports at compressed prices, are finding conditions considerably harder.

Foreign direct investment data for the first quarter of 2011, compiled by the UN Economic Commission for Latin America and the Caribbean, showed a modest recovery in Caribbean FDI inflows relative to the depths of 2009–2010, though total volumes remained well below the pre-crisis peak. The recovery was concentrated in a handful of markets — T&T, Barbados, the Dominican Republic and the Cayman Islands — while smaller Eastern Caribbean economies continued to struggle to attract significant investment flows. UNCTAD analysts attribute this bifurcation to differences in institutional quality, market size and the availability of investment-grade infrastructure.

The Cayman Islands continues to assert its position as the Caribbean’s leading financial services centre, with the jurisdiction reporting solid asset-management and fund-administration flows despite continued scrutiny from the OECD and its Financial Action Task Force. The Caymans’ success in maintaining a well-regulated, transparent financial environment while preserving its competitive tax position has attracted both institutional fund administrators and high-net-worth individuals seeking robust legal frameworks for wealth management and real-estate holding structures.

Barbados: Luxury Market Momentum

Barbados continues to outperform most Caribbean peers in the luxury property segment. A clutch of new villa and fractional-ownership projects along the island’s Gold and Platinum coasts are drawing interest from North American and Latin American buyers who see Barbados’s combination of political stability, established legal system, high-quality amenities and Caribbean climate as a compelling value proposition relative to competing luxury markets.

Several developers active in the Barbados market have reported that enquiry-to-viewing ratios have improved compared with 2009 and 2010, suggesting that the psychological hesitancy that followed the global financial crisis is gradually lifting among high-net-worth buyers. Transaction volumes for properties above US$2 million remain below the 2006–2007 peak, but the trend is improving, and several high-profile sales completed in the first half of 2011 have helped to establish new price benchmarks that support valuation confidence across the premium segment.

The Barbados government, under PM Freundel Stuart, has been careful to maintain the predictable regulatory and tax environment that underpins investor confidence. Stamp duty arrangements, land-transfer taxes and the treatment of rental income from vacation properties are all areas where potential changes could materially affect investment economics, and the government has signalled no intention to alter the existing framework during the current parliamentary term. This policy continuity is welcomed by developers and agents as an important element of market confidence.

Caribbean Leaders This Month

Kamla Persad-Bissessar, Prime Minister of Trinidad & Tobago, marked her first full year in office at the end of May 2011 with a review of her People’s Partnership government’s achievements. Key milestones cited included increased social-housing starts, progress on the Point Fortin highway project and improved enrolment figures in early-childhood education. Critics noted that crime reduction — one of the central pledges of the 2010 election campaign — had proved more elusive, with homicide rates remaining elevated.

Bruce Golding, Prime Minister of Jamaica, navigated a delicate period in labour relations as public-sector unions pushed back against the government’s wage-freeze policy. The IMF programme requires restraint in public expenditure, but union leaders argued that workers’ real wages had been eroded by inflation and that the freeze was socially unsustainable. The government sought to hold the line while offering some concessions on non-wage benefits.

Freundel Stuart, Prime Minister of Barbados, oversaw the launch of a new national hurricane-preparedness campaign as the 2011 season opened, emphasising community readiness and encouraging property owners to review their insurance coverage. The government also announced modest increases in the capital budget for coastal protection works, recognising that sea-level rise and increased storm intensity represent long-term threats to the island’s tourism-dependent coastline.

Denzil Douglas, Prime Minister of St Kitts and Nevis, achieved a significant milestone as the island’s debt-restructuring negotiations moved closer to conclusion. A successful haircut and maturity extension on a substantial portion of the public debt, if completed, would reduce the debt-to-GDP ratio toward a more sustainable level and potentially unlock improved credit terms on future borrowing. Regional and international creditors were understood to be broadly supportive of the outline terms.

Ralph Gonsalves, Prime Minister of St Vincent and the Grenadines, focused on post-Tomas reconstruction as the anniversary of the storm’s October 2010 passage approached. Several communities in the Windward side of St Vincent had not yet had full road connectivity restored, and the PM acknowledged at a constituency meeting that the pace of reconstruction had been slower than hoped, partly due to procurement delays in the sourcing of construction materials and equipment.

Stephenson King, Prime Minister of St Lucia, similarly continued to manage the aftermath of Hurricane Tomas, which caused severe flooding and landslide damage across the island. St Lucia’s recovery had been complicated by the difficult fiscal position inherited from pre-crisis spending, and the government was balancing reconstruction needs against the imperative of maintaining donor and investor confidence in the island’s macroeconomic management.

Perry Christie, Leader of the Opposition in the Bahamas, made headlines during the coverage period with a series of economic policy speeches ahead of what was expected to be a general election within the next year. Christie’s Progressive Liberal Party advocated greater diversification of the Bahamian economy beyond tourism and financial services, including increased investment in creative industries and technology sectors.

Patrick Manning, former Prime Minister of Trinidad & Tobago and leader of the opposition People’s National Movement, remained a prominent voice in T&T political discourse, criticising the Persad-Bissessar government’s management of energy revenues and its approach to the national security crisis. Manning’s PNM continued to position itself for a return to government at the next election cycle.

Looking Ahead

July and August will bring the twin pressures of peak hurricane-season risk and peak tourism-season opportunity. The coming weeks represent the critical juncture at which weather patterns begin to organise into the wave systems that, under the right conditions, can develop into named tropical storms. Islands across the arc from Trinidad in the south to the Bahamas in the north will be monitoring the National Hurricane Center’s advisories with close attention, knowing that a single significant landfall could materially alter the economic calculus for tourism operators, property owners and government treasuries alike.

At the same time, the summer months represent the highest-traffic period for Caribbean property viewings by Northern Hemisphere visitors. Real-estate agents from Turks & Caicos to Tobago are reporting healthy forward enquiry books, and the hope is that the improving sentiment among high-net-worth buyers will translate into transactions before the end of the third quarter. The absence of a significant hurricane strike during July and August would be the single most important positive development for Caribbean property sales in the second half of 2011.

On the macroeconomic front, attention will turn to the direction of European sovereign-debt markets. The Eurozone’s peripheral debt crisis — centred on Greece but with implications for Ireland, Portugal and potentially Spain and Italy — is beginning to register in Caribbean tourism boards’ forward data as a factor dampening UK and European visitor arrivals. Should the crisis deepen over the summer, the knock-on effect for Caribbean tourism revenues and property demand from European buyers could be significant.

Caribbean Property & Investment Review is published on the first business day of each month. Coverage period for this edition: 3 May – 2 June 2011. Next edition publishes 4 July 2011.

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