Jamaica Real Estate Roundup — Q3 2013: The IMF Programme’s First Full Quarter, and What It Means for Property

• IMF EFF first full quarter; fiscal framework now operating at full scope.
• National Debt Exchange complete; domestic debt cost structure transformed.
• Summer tourism steady; arrivals data in line with prior year levels.
• Property market adjusting; initial demand compression beginning to show.
• BOJ rates elevated; mortgage affordability at multi-year constrained levels.

The third quarter of 2013 was the first complete quarter of the IMF Extended Fund Facility programme’s operation, and Jamaica’s property market was in the earliest stages of absorbing its implications. The May 2013 agreement — signed following the completion of the National Debt Exchange in February, which had restructured Jamaica’s domestic debt obligations in ways that had materially improved the government’s primary balance arithmetic and demonstrated to the international financial community the seriousness of Jamaica’s fiscal consolidation intent — had put in place the framework of fiscal disciplines, structural reforms, and IMF monitoring that would define the economic environment for the years ahead. The Q3 2013 property market was operating in the first quarter of that new environment, and the initial signals of the demand-side compression that the programme’s disciplines would produce were beginning to be visible in the transaction data and the behaviour of the market’s participants.

The initial property market response to the EFF’s signing was mixed. The positive read — adopted by those who understood the programme’s medium-term logic — was that the fiscal consolidation and the NDX together represented the most serious effort Jamaica had made in the modern era to address the structural fiscal imbalances that had kept the economy’s borrowing costs elevated and its growth potential constrained, and that success would eventually produce the macro improvements whose property market consequences would be positive and durable. The more immediate read — available to anyone observing the market’s Q3 data — was that the programme’s initial disciplines were compressing the household incomes and consumer confidence that property market demand required, and that the short-term consequences for transaction volumes and buyer urgency were negative.

The NDX: Debt Restructuring’s Property Market Implications

The National Debt Exchange’s completion in February 2013 had been one of the most significant financial events in Jamaica’s recent history. The voluntary exchange of existing domestic debt instruments for new bonds at lower coupon rates had reduced the government’s domestic debt service costs substantially, improving the primary balance and creating the fiscal headroom that had made the IMF programme’s negotiation viable. For the domestic financial sector, the NDX had produced the lower yields on government paper that the exchange’s design had intended, with consequences for the commercial banks’ portfolio yields and the financial institutions’ investment returns that were still working themselves through the system as Q3 2013 unfolded.

The implications for the property market were indirect but real. The reduced yields on domestic government paper were, in theory, creating incentives for the commercial banking sector to seek returns in the lending market — including the residential mortgage market — at rates that the previous high-yield government paper environment had made less attractive. But the BOJ’s overnight policy rate remained elevated, constraining the floor below which commercial lending rates could fall without creating unacceptable margin compression, and the banks’ risk appetite for mortgage lending in the austerity environment remained conservative. The direction of travel was positive, but the arrival at mortgage rates that would meaningfully expand the qualifying buyer pool was still quarters away.

Summer Tourism: Steady Conditions

The Q3 2013 summer tourism season’s July to September performance was broadly in line with the comparable 2012 period, reflecting a sector that was maintaining its position in the competitive Caribbean tourism market without yet generating the growth that the improved macro narrative’s implications for the resort-area property market required. The North American summer travel market’s demand for Caribbean destinations was recovering from the post-2008 financial crisis’s suppression, but the recovery’s pace was gradual rather than dramatic, and Jamaica’s capture of the improving demand was constrained by the airlift limitations that the route network’s development had not yet fully addressed.

The resort-area property market’s investor cohort was reading the tourism data carefully, aware that the sector’s recovery trajectory would determine the rental yield environment for the short-term rental and villa investment assets that constituted the most tourism-sensitive component of the residential property market. The Q3 2013 data was not generating the urgency that a more dramatically improving tourism picture would have produced, but it was consistent with the gradual recovery narrative that the medium-term investment case required.

The Kingston Residential Market: Absorption Phase

Kingston and St Andrew’s residential market was, through Q3 2013, in what market analysts would recognise as an absorption phase: the period in which a market adjusts to new external conditions by finding, through the trial and error of individual transactions, the equilibrium that the changed conditions produce. The equilibrium that Q3 2013’s conditions were producing was one of lower transaction volumes, extended marketing periods, and achieved prices that reflected the buyer pool’s reduced qualifying capacity rather than the sellers’ reference prices from more active periods.

The residential market’s upper end — the quality detached properties in the established communities of upper St Andrew whose prices reflected the structural scarcity of genuinely premium residential supply — was absorbing the changed conditions better than the middle market. The premium segment’s buyer pool — concentrated in the senior business and professional class whose income was less directly compressed by the programme’s public sector disciplines — was smaller than in more active periods but was not absent, and the premium properties whose locational quality and structural characteristics gave them genuine scarcity value were transacting at prices that, while moderated from peak levels, were not experiencing the sharp corrections that a fully distressed market would have produced.

The NHT Programme in the Consolidation Environment

The National Housing Trust’s Q3 2013 operations were being shaped by the twin pressures of the continued qualifying demand from its contributor base and the resource constraints that the fiscal consolidation environment was imposing on its construction and lending programmes. The Trust’s mortgage lending was continuing at the pace that its entitlement framework and the available housing supply determined, but the NHT’s broader development programme — its construction of new housing units for allocation to qualifying contributors — was operating in a resource environment that the programme’s fiscal disciplines had made more constrained than the scale of the housing deficit required.

Quarter Close: The New Era Begins

The third quarter of 2013 closes with Jamaica’s property market in the first quarter of a new macroeconomic era whose full dimensions will only become clear over the years of the EFF programme’s implementation. The fiscal consolidation is underway, the NDX’s domestic debt restructuring is complete, and the IMF’s monitoring framework is in place. The property market is in the early stages of absorbing these changes, and the absorption is producing the constraints on transaction volumes and buyer urgency that new frameworks of fiscal discipline characteristically impose in their initial quarters. The market participants who understand both the short-term cost and the medium-term logic of what Jamaica is doing are the ones best positioned to navigate the period ahead with patience and perspective.

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