Waiting on Dudus: Extradition Tension Clouds Jamaica’s Investment Climate – June 2011

Publication Date: June 3, 2011 | Coverage Period: May 3-June 2, 2011 | Category: Monthly Review

Month in Brief

• Christopher “Dudus” Coke remained at large as May closed, with US-Jamaica extradition tensions continuing to weigh on bilateral relations and the island’s international investment reputation more than a year after the Tivoli Gardens security operation.
• The Bank of Jamaica held its benchmark rate in the 6.5-7.5 percent corridor, maintaining the patient easing trajectory established in the wake of the February 2010 Jamaica Debt Exchange; commercial mortgage rates remained at 11-14 percent.
• European sovereign debt concerns intensified during May, with Greece’s fiscal programme falling behind schedule and eurozone finance ministers in intensive negotiations over a revised support package.
• Jamaica’s GDP growth for the first quarter of 2011 was estimated at approximately one to one-and-a-half percent annualised — a recovery of sorts, but insufficient to generate the employment and income growth that would meaningfully improve housing affordability.
• NHT mortgage application volumes remained steady, with demand continuing to outstrip the supply of qualifying properties at concessionary price points.
• North coast tourism season data for April-May showed visitor arrivals modestly above the comparable 2010 period, a cautiously positive signal for resort-adjacent property demand.

Housing Market

Jamaica’s residential property market in May operated against the familiar backdrop of unresolved bilateral tension with the United States — a tension that, while primarily political and legal in its immediate manifestation, carries real economic and reputational costs for the island’s investment climate. Christopher Coke, the subject of a US extradition request since 2009, remained at large through the coverage period, sustaining a state of diplomatic uncertainty that has persisted for more than two years and that overshadows Jamaica’s engagement with international investors in multiple sectors, including real estate.

Despite this overhang, the property market itself showed the kind of quiet resilience that characterises markets driven primarily by local fundamentals rather than international capital flows. In Kingston and St Andrew, transaction flow in the middle and upper-middle segments was consistent with the pace established in the first quarter. Agents reported no unusual surge in listings — a sign that owners are not seeking to exit en masse — and no exceptional distress pricing. The market’s limited liquidity, often cited as a weakness, also insulates it from the sharper corrections seen in more active markets when sentiment sours.

In the lower tier, NHT-backed transactions continued to provide the most reliable source of market activity. First-time buyers with NHT eligibility were actively seeking properties in the J$5-12 million range across St Catherine, Clarendon, and St Elizabeth, where land costs are lower and NHT-financed construction has added modest but real supply. The challenge in this segment is not demand — it is supply, both in terms of the volume of qualifying properties and the geographic distribution of NHT-developed housing relative to employment centres.

The rental market in New Kingston showed continued firmness. Demand from corporate tenants, government-linked organisations, and the NGO sector sustained vacancy rates at low levels in the one-to-three bedroom apartment category. Landlords with well-maintained properties in accessible locations were reporting stable to modestly rising rents, a function of limited supply rather than spectacular income growth among the tenant pool.

Government Policy

The government’s housing agenda in May was overshadowed — as it has been for much of the past year — by the Coke extradition issue and its management of the US bilateral relationship. From a property market perspective, the absence of new legislative initiative is itself notable: the government has shown no appetite to advance the stamp duty reform, REIT legislation, or land administration improvements that industry bodies have been lobbying for, and the fiscal consolidation constraints of the post-JDX environment leave limited room for new spending commitments on affordable housing supply.

The NHT’s programme continued to operate within its approved parameters. The Trust’s budget for fiscal year 2011-12 was set with the expectation of continuing the construction and mortgage programmes at broadly the pace of the prior year. NHT officials have emphasised the importance of the land acquisition pipeline — the Trust’s ability to acquire land ahead of development — as the critical bottleneck in expanding supply, and have called for expedited processing of land transactions through the National Land Agency.

The planning system continued to attract criticism from developers and construction professionals for its processing times and the complexity of the approvals process for residential subdivisions. The National Environment and Planning Agency’s workload has grown with the recovery in development applications, but resources have not grown commensurately, resulting in extended wait times that add financing carrying costs to development projects and ultimately push up the price of new housing supply.

Construction Sector

Construction activity in May was dominated by public sector works. NHT-commissioned schemes in multiple parishes were at various stages of progress, with the Trust’s contractors pressed to maintain schedules against a background of elevated materials costs. Steel reinforcing bar, cement additives, and imported building products all carry foreign exchange exposure that makes fixed-price contracting a challenge in a period of J$/US$ volatility.

Private sector residential development remained cautious. The financing environment for property developers — with commercial construction loans priced at 13-16 percent and with banks requiring substantial equity contributions and pre-sales before advancing funds — continues to deter all but the most financially robust promoters. Several developers with approved planning permissions reported that they were awaiting more favourable financing conditions before breaking ground, a decision that keeps units out of the supply pipeline and extends the affordability gap.

The self-build sector — Jamaica’s informal but substantial parallel to the formal construction market — continued to absorb a significant share of household construction activity, particularly in rural parishes and outer Kingston. This sector is largely invisible to formal market statistics but is estimated by industry practitioners to account for the majority of new dwelling units added to the national housing stock in any given year. Its outputs are often of variable quality, frequently lack formal planning approval, and rarely produce the kind of titlable, mortgageable property that can support NHT or commercial lending.

Investment Climate

The persistence of the Coke extradition issue through May 2011 continued to impose a reputational cost on Jamaica’s investment climate that is difficult to quantify but unmistakable in quality. International investors — whether considering tourism infrastructure, financial services, or real estate — operate within a risk framework that incorporates governance perception, bilateral relations, and rule of law. On all three dimensions, the unresolved extradition request has been a negative signal for more than two years.

Domestic institutional investors — pension funds, insurance companies, and the NHT itself — have continued to maintain their real estate allocations, reflecting both the absence of dramatically superior alternatives and the structural logic of property as an inflation hedge in a market with chronic undersupply. The Jamaica Stock Exchange, while not a pure proxy for property sentiment, has shown modest positive momentum through 2011, suggesting that domestic capital has not entirely retreated from risk assets despite the external and governance headwinds.

The north coast resort property market showed signs of gradual recovery in May, with villa owners and guesthouse operators reporting improved advance bookings for the forthcoming winter season. This is a positive indicator for the resort-adjacent property segment, where buyer interest has historically tracked tourism performance with a lag of one to two seasons.

Diaspora Dimension

Remittance inflows in May were broadly consistent with the improving trend established since mid-2010, with preliminary data suggesting a modest year-on-year gain. The Jamaican diaspora in the United States — the dominant source of remittance flows — continued to operate in an improving but fragile US labour market, where Caribbean-born workers are disproportionately represented in healthcare, construction, and hospitality — sectors that have been recovering at a moderate pace.

Diaspora property enquiries tracked by major estate agencies remained active through May. The profile of the typical diaspora buyer — a middle-professional income Jamaican based in New York, Miami, or London, seeking a retirement or holiday property in the J$8-30 million range — remained the most reliable source of demand for the upper-middle segment of the residential market. The Coke extradition uncertainty, while a source of reputational discomfort, has not appeared to materially suppress diaspora purchase intentions; if anything, some diaspora buyers treat Jamaica’s challenges as a reason to engage rather than to retreat.

Affordability

Jamaica’s housing affordability crisis is structural, persistent, and largely immune to the cyclical events that dominate monthly headlines. The housing deficit of over 100,000 units has accumulated over decades of supply shortfall relative to household formation, compounded by a formal construction cost base that places new market-rate housing beyond the reach of the majority of the workforce. In May 2011, none of the structural drivers of this crisis moved in a direction that would narrow the gap.

Commercial mortgage rates at 11-14 percent, combined with the income levels of the formal Jamaican workforce, produce an affordability ratio that is deeply challenging even for dual-income households in the lower professional category. A couple jointly earning J$1.2 million per year — above the median for formal-sector workers — can sustain a mortgage of approximately J$7-8 million at commercial rates over 20 years, sufficient to purchase a modest dwelling in an outer parish but not in Kingston, St Andrew, or the established residential communities closest to employment centres.

The NHT’s intervention compresses this picture meaningfully for eligible borrowers, but the Trust’s capital is finite and its eligibility criteria, while broad, exclude informal sector workers who may represent the majority of the housing-deficit population. Extending the reach of subsidised finance to a larger share of the workforce — through mechanisms such as co-operatives, employer-linked schemes, or micro-finance instruments adapted for incremental building — is a policy direction that housing practitioners have been advocating for years without yet finding the political traction to advance.

Looking Ahead

The overriding question as June begins is when — not if — the Coke extradition matter will be resolved. The diplomatic and legal process has moved to the point where a conclusion appears near, and the property market, along with the broader investment community, is watching for the signal that the US-Jamaica relationship can be reset on a more constructive basis. When that resolution comes, its effects on the property market will be indirect and gradual rather than immediate and dramatic — but the direction will be positive.

The international backdrop adds a layer of uncertainty. European sovereign debt management is in a critical phase, with Greece’s position requiring decisions from eurozone leaders that could either stabilise or further destabilise global financial markets. For Jamaica, the concern is primarily the second-order effects: on remittance capacity from UK-based Jamaicans, on European tourism demand, and on the global risk appetite that influences foreign direct investment into Caribbean markets.

This review will return in July to assess market conditions through the full month of June. By that point, the extradition question may well have been resolved — for better or worse — and the property market’s initial response will be visible. The structural fundamentals of the Jamaican market — chronic undersupply, a motivated diaspora, a large and growing population — do not depend on any single political event for their validity, but governance resolution would remove the most prominent near-term drag on investor sentiment.