Jamaica Real Estate Roundup — Q2 2014: One Year of Austerity, and the Property Market’s Reckoning

• One year since IMF EFF signing; programme constraints fully embedded in market.
• BOJ policy rate at restrictive levels; commercial mortgage affordability constrained.
• Tourism Q2 performance below targets; occupancy recovering but slowly.
• Kingston residential transactions extended; buyer leverage near cycle high.
• Pioneer strata projects testing market; earliest pre-sales activity underway.

The second quarter of 2014 arrived at the one-year mark of Jamaica’s IMF Extended Fund Facility agreement, providing the first opportunity to assess the full annual cycle of the programme’s property market impact against the baseline of the conditions that had prevailed before the consolidation disciplines had fully embedded themselves in the economy’s behaviour. The assessment, measured against the property market’s activity data, was one of significant constraint: transaction volumes in the Kingston residential market were below the Q2 2013 comparable, buyer urgency was reduced, seller negotiating leverage had declined, and the financing costs that the elevated BOJ policy rate environment was imposing on commercial mortgage borrowers were maintaining an affordability gap between qualifying capacity and desired property price that the market’s inventory did not easily bridge.

The macro rationale for the constraint was, to the sophisticated observer of Jamaica’s economic circumstances, clear: the IMF programme’s fiscal disciplines were the precondition for the debt trajectory improvement, the inflation moderation, and the eventual rate easing that would over the medium term restore the property market’s demand conditions to something approaching the levels that the underlying demographic and investment demand suggested were achievable. The programme’s short-term costs and its medium-term benefits were both real, and Q2 2014 was firmly in the short-term costs portion of the cycle. The property market’s participants were living in the trough; the peak they were heading toward was, in Q2 2014, still a matter of faith rather than data.

The IMF Programme at One Year

The IMF’s May 2014 assessment of Jamaica’s programme performance — the one-year review that the anniversary of the EFF’s signing had triggered — delivered broadly positive findings. The primary surplus targets were being met, the structural reform conditionality was being implemented, and the fiscal consolidation’s macro metrics — the debt-to-GDP trajectory, the primary balance, the reserve adequacy — were moving in the directions the programme had specified. The Fund’s positive assessment was being translated by the international rating agencies and investment community into the improving creditworthiness signals that lowered Jamaica’s borrowing costs in the international markets and provided the foundation for the domestic rate easing that the BOJ’s improving inflation conditions were beginning to justify.

For Jamaica’s property market, the programme’s one-year positive review was simultaneously a validation of the trajectory the economy was on and a reminder that the constraints producing the current market’s suppression were not yet lifting. The rate easing that the improving conditions were beginning to justify had not yet begun in any material way, and the income growth that would eventually translate the recovering macro into household purchasing power was still constrained by the programme’s wage disciplines. The market was in the trough, and the trough was proving, as troughs typically do, deeper and more sustained than optimistic early projections had suggested.

Tourism: Recovery Slower Than Target

The Q2 2014 tourism season’s shoulder period — the April to June months that bridge the winter peak and the summer travel market — delivered performance that the Jamaica Tourist Board and the resort operators characterised as disappointing relative to the targets they had set for the year. The North American market’s demand for Jamaica had been growing, but the pace of growth was below the trajectory that the expanding airlift capacity and the increasing digital marketing investment had been expected to generate. The Montego Bay resort corridor’s Q2 occupancy data reflected the softer-than-targeted performance, and the revenue-per-room metrics were under pressure as operators competed for the available demand with the promotional pricing that the shortfall was requiring.

The tourism sector’s Q2 2014 underperformance relative to targets had a direct bearing on the property market through the employment income channel: the hospitality sector employment base in the resort parishes was generating less income growth than the more buoyant performance targets had assumed, and the resort-area property market’s demand from this employment base was correspondingly constrained. The investment buyer who was calibrating the short-term rental yield potential of resort-area property against the tourism sector’s current performance was finding the Q2 2014 data less compelling than the sector’s advocates had suggested it would be.

The Kingston Residential Market: Buyer’s Conditions

Kingston and St Andrew’s Q2 2014 residential market was operating in what could fairly be characterised as the most buyer-favourable conditions in a decade. The combination of reduced buyer competition — the income compression having narrowed the pool of households with the qualifying capacity to execute a purchase at the market’s price points — elevated financing costs and the sellers’ awareness that the alternative to the current market’s conditions was an extended period of vacancy or extended marketing costs had produced a negotiating dynamic in which buyers with qualifying capacity and willingness to commit had real leverage over the asking prices that sellers’ initial expectations had reflected.

The practical expression of this leverage was visible in the extended time-on-market for quality residential properties and the gap between initial asking price and eventual achieved price that Q2 2014’s transactions were recording. Properties that would, in a more active market, have sold within weeks of listing were spending months on the market before achieving the price adjustment that the buyer pool’s response was requiring. Sellers who had the financial capacity to wait were waiting, maintaining asking prices against a market that their agents were, with increasing urgency, telling them did not support those prices in the current conditions.

Pioneer Strata Projects

The strata apartment sector’s Q2 2014 position was one of genuine pioneering activity in the specific sense of the term: the developers who were advancing the format in Jamaica were going where no one had gone before in the local market, without the benefit of a proven track record to point potential buyers toward and in conditions that any rational assessment of the market’s current state would have characterised as sub-optimal for a new product launch. The fact that they were proceeding regardless was a consequence both of the conviction that the concept’s long-term merit in the Jamaican market was independent of its short-term timing and of the project development timelines that had committed them to their current positions before the IMF programme’s full market impact had been as clear as it was by Q2 2014.

The buyers who were engaging with the pioneer strata projects in Q2 2014 were, in the large majority, investor buyers whose decision was driven by the yield arithmetic of the completed asset in the professional rental market rather than by the emotional drivers of the primary residence purchase. The calculation these buyers were making — the projected rental income against the purchase price and the financing cost — was, in Q2 2014’s conditions, still compelling enough to generate the pre-sales activity that the pioneer projects needed to maintain their bank financing and their construction schedules.

Quarter Close: Waiting for the Turn

The second quarter of 2014 closes with Jamaica’s property market in the constrained conditions that the programme cycle’s trough produces. The one-year programme assessment’s positive findings suggest that the macro trajectory is correct and that the improving conditions whose property market consequences will eventually be felt are being built. The property market’s participants are waiting for the turn — the moment when the rate easing, the income recovery, and the restored consumer confidence that the programme’s success is building toward express themselves in the transaction volumes and price trends that a recovering market produces. Q2 2014 is not that moment. But it is a quarter that the market will, with the perspective of the years ahead, understand as the period in which the foundations of the recovery were being laid.

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