Pre-Olympic Jamaica: Property Market Eyes the London Moment — July 2012

Publication Date: July 3, 2012 | Coverage Period: June 3–July 2, 2012 | Category: Monthly Review

Month in Brief

• Jamaica’s diaspora community in London and across the United Kingdom enters a period of heightened national pride ahead of the London 2012 Olympic Games, scheduled to open July 27 — just beyond this edition’s coverage window — with property market observers noting that diaspora sentiment and brand visibility can have a measurable, if lagged, effect on overseas purchasing interest in Jamaican real estate.
• The Bank of Jamaica maintains its policy rate at approximately 6.25 per cent through June, providing no fresh impetus for commercial lenders to ease the 11-14 per cent mortgage rates that continue to suppress formal sector transaction volumes.
• The summer visiting season gets under way in earnest through June, with diaspora Jamaicans arriving from North America and Europe in numbers that estate agents describe as comparable to or marginally ahead of the equivalent period in 2011.
• Kingston residential rental vacancy rates remain near historical lows, with landlords in the New Kingston, Half-Way Tree and Liguanea corridors reporting waiting lists for quality two- and three-bedroom apartments at rents of $65,000-$100,000 per month.
• The government-owned National Water Commission signals that infrastructure investment in Greater Portmore and in selected rural parish towns will be advanced, a development that market participants expect will have a positive downstream effect on residential land values in those corridors.
• Global commodity prices ease modestly through June as recession fears in Europe and a slowdown in Chinese demand temper oil and steel markets, providing marginal relief to construction cost pressures but insufficient to shift the fundamental affordability calculus for Jamaican developers.

Housing Market

The Jamaican residential property market entered July 2012 in a familiar state of constrained equilibrium, with the summer season providing seasonal colour but no structural shift in the underlying dynamics of supply scarcity, financing cost and demand compression that have characterised the market since 2009.

In Kingston, transaction activity picked up modestly through June as the summer visiting season brought diaspora buyers into the market. Estate agents in the uptown corridors — Norbrook, Cherry Gardens, Barbican, Stony Hill — reported an increase in accompanied viewings and in requests for property valuations, the latter being a standard precursor to purchase negotiations. Conversion from viewing to offer remained slow by pre-crisis standards, but the directional movement was positive.

The inner-city and lower-income sub-markets continued to be dominated by the NHT pipeline. Units in government-sponsored schemes in areas such as Seaview Gardens, Arnett Gardens and sections of St. Catherine remained the primary route to formal ownership for working-class Jamaicans. Demand for these units consistently exceeded supply, with waiting lists at the NHT running to many months for the most sought-after locations.

The north coast luxury market showed signs of quiet life. Several villas and beachfront properties in the Montego Bay and Ocho Rios areas that had been listed for extended periods without generating serious offers received renewed interest from buyers described by agents as a mix of returning diaspora and international purchasers attracted by US-dollar pricing that, in historical context, represented fair value relative to comparable Caribbean markets.

Land markets in the parish towns — May Pen, Mandeville, Black River, Falmouth — remained active at the base, with serviced lots continuing to attract buyers who were building over multi-year timelines, funded primarily by remittances. This segment of the market is structurally insensitive to mortgage rates in a way that the formal purchase market is not, which accounts for its relative resilience even in difficult macroeconomic conditions.

Government Policy

The PNP government’s housing policy posture through the June coverage period was characterised by a combination of administrative consolidation and political signalling. Prime Minister Simpson Miller, whose personal commitment to housing as a social policy vehicle is well-established, was reported to have chaired a special cabinet sub-committee session focused on the NHT’s performance against its 2012-13 targets and on the status of the government’s land audit exercise announced in May.

The NHT itself released data indicating that mortgage approvals for the first two months of the financial year were running at a pace consistent with the 3,500 unit annual target, though disbursement — the point at which funds actually reach beneficiaries and developers — continued to lag approvals due to title and conveyancing delays at the property level. This distinction between approval and disbursement was identified as a key operational problem requiring urgent attention, as it created the appearance of NHT activity without the actual economic impact of new unit completions.

The Ministry of Transport, Works and Housing — whose remit covers a significant portion of the government’s capital spending on residential infrastructure — indicated in June that road rehabilitation works in several housing scheme communities were being accelerated, partly in response to longstanding complaints from residents and partly as a visible demonstration of the new government’s responsiveness to its core constituents.

On the regulatory front, the Urban Development Corporation published updated design guidelines for multi-family residential development in the Kingston Metropolitan Region, signalling an intention to increase density in selected zones served by existing infrastructure. This was welcomed by developers as a step toward reducing the per-unit land cost in an environment where greenfield development has become prohibitively expensive.

Construction Sector

Construction activity through the June coverage period remained below the levels that industry associations regard as consistent with meaningful progress against the island’s 100,000-plus unit housing deficit. However, there were scattered indications that conditions were stabilising after the sustained contraction of 2009-11.

The Jamaica Contractors Association reported at its mid-year briefing that member firms had seen a modest uptick in residential project tenders, primarily in the $3-8 million per unit segment associated with NHT-eligible schemes. However, award rates remained low, reflecting both the cautious disposition of lenders and the difficulty developers faced in achieving the pre-sale thresholds required to access construction finance.

Cement consumption data, which serves as a useful proxy for construction activity across both the formal and informal sectors, showed a year-on-year increase of approximately 3-4 per cent for the January-June period, suggesting that the self-build and extension market was compensating partially for the weakness in formal sector starts. This pattern is consistent with remittance-funded construction, which tends to proceed in phases over multiple years and is therefore less sensitive to single-period financing conditions than formal developer schemes.

Materials cost pressures eased marginally through June as global commodity markets pulled back. Steel reinforcement prices, which had risen through the early part of the year tracking international iron ore and scrap markets, softened slightly, as did the landed cost of certain imported finishes and fittings. Contractors cautioned that these were one-month movements rather than structural trends, and that the overall cost environment for residential construction remained elevated by historical standards.

Investment Climate

The global investment climate through June 2012 remained unsettled. The European sovereign debt saga continued to generate periodic bouts of market volatility, with the European Union summit of June 28-29 producing a provisional agreement on banking union that provided temporary relief to financial markets but left fundamental questions about the architecture of the eurozone unresolved.

For Jamaica, the June summit’s outcomes were watched carefully. Any measure that reduced the probability of a disorderly Greek exit or a Spanish banking collapse would reduce the risk premium on all frontier market assets, including Jamaican government securities and, indirectly, the cost of commercial credit. The summit agreement was characterised by market analysts as constructive but insufficient — a judgement that left Jamaica’s external borrowing environment essentially unchanged from the preceding month.

Domestically, investor confidence in the property sector was being supported by several structural factors that did not feature prominently in day-to-day market commentary but which underpinned the medium-term case for Jamaican residential real estate: population growth, household formation, urbanisation, and the finite supply of serviced land in desirable locations. These fundamentals, combined with the persistent housing deficit, suggested that property prices in quality sub-markets had limited downside even in a period of economic stagnation.

The Jamaica Stock Exchange’s property-adjacent listings — companies with real estate holdings or construction exposure — performed broadly in line with the wider market through June, reflecting neither investor excitement nor alarm about the sector’s near-term prospects.

Diaspora Dimension

The diaspora angle to the Jamaican property market was particularly prominent in this coverage period, for a reason that extended beyond the usual summer seasonal dynamic. The approaching London 2012 Olympic Games — opening July 27, just days beyond this edition’s coverage window — had generated a wave of Jamaican national consciousness among the island’s large UK-based community that market observers believed could translate, with a lag, into heightened property purchasing intent.

Jamaica’s expected strong performance on the track — the country’s sprint programme, anchored by Usain Bolt and Shelly-Ann Fraser-Pryce among others, was widely anticipated to dominate the sprinting events — was expected to raise Jamaica’s global profile markedly in the weeks following the Games. Historically, spikes in Jamaica’s international visibility have been associated with subsequent increases in diaspora engagement with island affairs, including property purchasing. The effect is typically modest and lagged, but it is real enough to have been noted by real estate professionals in previous cycles.

In London itself, estate agents with Jamaican connections reported that community events in the run-up to the Olympics were generating informal conversations about property back home. Several Jamaican-owned real estate firms had taken the pragmatic step of scheduling promotional events in London to coincide with the diaspora concentration expected during the Games period, hoping to convert national pride into purchase enquiries.

In North America, the summer season was producing its usual cohort of diaspora buyers. The Jamaican dollar’s continued modest depreciation against the US and Canadian dollars meant that the purchasing power of diaspora earnings in the Jamaican market remained favourable, a factor that agents consistently cited as the single most important determinant of diaspora purchase activity in any given period.

Affordability Watch

The affordability picture through June 2012 was, in the aggregate, unchanged from the preceding months: structurally difficult for the working and lower-middle classes, manageable for the formal sector professional class with NHT access, and comfortable only for the upper-income cohort purchasing without significant leverage.

The NHT’s rate structure — zero per cent for the lowest income bracket, rising to five per cent at the upper income ceiling of the scheme — remained the single most important affordability enabler in the market. At a two per cent NHT rate on a $4 million loan over twenty years, monthly repayments of approximately $20,000 brought ownership within reach of a household earning $400,000 per year. At a commercial rate of 12 per cent on the same loan, repayments would approach $44,000 — more than double, and beyond the means of the same household.

The government’s stated intention to review NHT loan limits — flagged in the budget and reiterated through May — had not yet produced a concrete announcement by the close of the June coverage period. Industry observers noted with increasing impatience that each month of delay in raising limits was a month in which construction cost inflation eroded the real value of the current limits, effectively tightening the affordability constraint even without a nominal change in policy.

Looking Ahead

The period from July onward offers several potential catalysts for the Jamaican property market, though whether any of them will shift the market’s fundamental trajectory remains uncertain.

The London Olympics — opening July 27 — represent the most immediate and visible opportunity. Jamaica’s anticipated success on the track will focus global attention on the island in a way that no advertising campaign could replicate. For the property market, the direct effect will be modest, but the brand elevation and diaspora pride amplification could generate meaningful increases in purchase enquiries in the weeks that follow the Games.

The IMF programme negotiations, which have been the subject of ongoing discussion since the PNP took office in January, are expected to reach a conclusion in the coming months. A programme announcement would likely be accompanied by a statement of intent on fiscal consolidation, potentially including measures with implications for property transaction costs such as transfer tax and stamp duty. Market participants will be watching the fiscal package carefully for any such provisions.

The NHT loan limit review remains the most consequential near-term policy decision for the affordable housing segment. A meaningful increase — indexed to construction cost movements since the last revision — would expand the addressable market for NHT-only borrowers and could provide a meaningful stimulus to developer pre-sales in the sub-$10 million segment, potentially unlocking new scheme initiations that the current limits have rendered financially unattractive.

For now, as Jamaica stands on the threshold of what promises to be a landmark summer — both for the nation’s athletes on the world stage and for the diaspora communities whose engagement with the homeland remains the quiet engine of the residential property market — the mood is one of cautious anticipation. The structures of constraint that have defined the market since 2009 have not dissolved. But the current moment carries, at least, the possibility of a lift. The island is watching the track. The property market is watching the calendar.