Caribbean Property & Investment Review — August 2014

Publication Date: 3 August 2014  |  Coverage Period: 3 July – 2 August 2014

Morning Briefing

• Oil prices easing from peak: WTI crude has declined from its late-June peak of approximately $107 per barrel to trade in the $97–$102 range through July; analysts are divided on whether this represents a temporary consolidation or the beginning of a more sustained correction driven by rising US shale output.
• Caribbean summer tourism at peak: July tourism data across most Caribbean destinations confirms a record summer season; Jamaica’s north coast, the Dominican Republic’s all-inclusives and Barbados’s boutique properties all reporting strong occupancy rates.
• Jamaica NHT housing delivery: The National Housing Trust announces completion of housing units at multiple sites under its current building programme, reinforcing its role as the primary engine of affordable homeownership for Jamaican families.
• CBI applications strong: Citizenship by investment programme advisers report sustained application volumes across St Kitts, Grenada, Antigua and Dominica, with Chinese and Gulf state nationals continuing to dominate the applicant profile.
• Caribbean construction cost pressures: Building material price increases in several markets are beginning to pressure developer margins, a consequence of sustained construction activity and some import cost inflation across the region.
• Hurricane season remains quiet: The 2014 Atlantic hurricane season continues to track below normal, with no significant Caribbean storm threats in July, providing ongoing reassurance to property insurers and coastal investors.

Oil Prices Begin to Ease: First Tremors for Caribbean Energy Economies

The oil price picture through July 2014 is subtly shifting, and while the shift is as yet modest, its potential implications for the Caribbean — particularly for Trinidad & Tobago — are not lost on regional economists and property market observers. WTI crude, which touched approximately $107 per barrel in late June, has pulled back toward the $97–$102 range through July. The decline partly reflects seasonal demand patterns, but more structurally it reflects the ongoing surge in US domestic crude production from shale formations in Texas, North Dakota and elsewhere. Rising supply from non-OPEC sources is gradually tilting the market’s balance.

For Trinidad & Tobago, oil remains well above the threshold required to balance the government’s budget. At prices above $80 per barrel, T&T’s fiscal position is broadly manageable; the country has accumulated some financial buffers through the Heritage and Stabilisation Fund during the boom years. But the directional change in oil prices — from peak back toward the middle of the range — is a reminder of the fundamental vulnerability of an economy as dependent on energy revenues as T&T’s. Property market professionals in Port of Spain are noting a slight increase in caution among higher-end buyers, though actual transaction volumes have not yet declined meaningfully.

The broader regional implication of an oil price softening is more muted, since most Caribbean economies are net oil importers. For Jamaica, Barbados and the Eastern Caribbean island states, lower oil prices are actually an economic positive — they reduce energy import costs, ease pressure on foreign exchange reserves, and create space for lower fuel prices that benefit transportation and business costs. The net effect on Caribbean real estate of a sustained oil price decline would therefore be differentiated: negative for T&T, broadly neutral to positive for most other markets.

Summer Tourism Performance Validates Caribbean Property Values

As August begins, July tourism data is flowing in across Caribbean destinations, and the picture is strongly positive. Jamaica’s Tourism Product Development Company reports hotel occupancy rates running approximately 5 percentage points above the comparable period in 2013. The Dominican Republic’s all-inclusive sector continues to demonstrate the resilience and demand-depth that has made it the Caribbean’s largest tourism economy. Barbados, notwithstanding its broader economic challenges, is reporting improved visitor arrivals particularly from the UK, which remains by far the most important European source market for the island.

For the Caribbean property investment community, consistent strong tourism performance through the 2014 summer season is the single most important validation of the investment thesis for hospitality-linked real estate. Hotel investors who have committed capital to Caribbean assets over the past two or three years are seeing that commitment justified by occupancy and rate performance that supports reasonable yield expectations. Developers planning new projects are seeing in the summer 2014 data a clear encouragement to proceed with their pipeline properties.

The Bahamas, positioned primarily as a luxury and gaming destination with Nassau’s Atlantis resort and Paradise Island as anchors, is also reporting a positive summer season. Baha Mar — the major new resort development on Cable Beach — continues its construction progress, with the project remaining one of the largest single hotel investments in Caribbean history and a significant bet on the long-term growth of premium Caribbean tourism. When Baha Mar opens, it will dramatically expand Nassau’s luxury accommodation capacity and test the market’s ability to absorb the additional supply.

Jamaica NHT: Delivering Affordable Housing Under Fiscal Constraint

The National Housing Trust continues to be the most important institutional actor in Jamaica’s residential property market. Operating under mandate to provide mortgage financing and housing solutions for Jamaican workers who contribute to the NHT through payroll deductions, the Trust has maintained its delivery programme through the IMF austerity period with considerable resourcefulness. New housing completions at sites in St Catherine, St James and other parishes are maintaining the pipeline of affordable homeownership opportunities for middle-income Jamaicans.

The NHT’s mortgage book is expanding, driven partly by first-time buyers taking advantage of the Trust’s subsidised interest rates and partly by existing beneficiaries seeking to upgrade or improve their properties. The Trust’s role as a counter-cyclical housing finance institution — maintaining lending activity even when private sector mortgage credit is constrained by broader economic caution — is particularly valuable in the current austerity environment. Without the NHT, Jamaica’s residential property market would be substantially less active.

Challenges remain significant, however. Construction costs are rising, land acquisition for new projects is increasingly complex, and the backlog of NHT contributor applicants awaiting housing solutions far exceeds annual delivery capacity. The Trust is exploring new delivery models including partnerships with private developers and joint venture arrangements with the government’s National Land Agency. These structural innovations may increase throughput in coming years, but the fundamental challenge of matching housing supply to the demand from Jamaica’s working population remains formidable.

CBI Real Estate: Eastern Caribbean Development Activity

Across the Eastern Caribbean, citizenship by investment-linked real estate development continues at a pace that was unimaginable before the programmes achieved their current scale. In St Kitts, qualifying developments across the island report continued pre-sales activity even as the programme undergoes reform. In Grenada, two or three major qualifying resort projects are simultaneously in various stages of construction and marketing, representing the most active period of resort development the island has seen in decades. Antigua is following a similar pattern, with English Harbour-area developments and north coast resort projects capturing CBI investor interest.

The economics of CBI-linked development have attracted a sophisticated class of developer with international financing capabilities. These developers understand the CBI buyer profile — typically wealthy, often from China or the Gulf states, motivated primarily by the passport and secondarily by the investment quality of the underlying asset. They structure their projects accordingly: premium specifications, international management brands, and investment structures that allow CBI buyers to exit after the mandatory holding period without disrupting operations. The alignment of CBI programme requirements with real estate development economics has created a distinctive Caribbean asset class that exists at the intersection of investment migration and hospitality property.

Caribbean Leaders This Month

Jamaica — Tourism Performance Champion: Record north coast hotel occupancy and improving visitor spend data make Jamaica the summer 2014 tourism outperformer, validating the investment credentials of the island’s hospitality property market.

Dominican Republic — Construction Supremacy: New hotel and residential projects continuing to break ground across Punta Cana, Cap Cana and Santo Domingo; the DR remains the unrivalled leader in Caribbean construction activity.

Grenada — CBI Development Active: Multiple qualifying resort projects simultaneously under construction or in advanced pre-sales represents the busiest development period in Grenada’s modern tourism history.

Trinidad & Tobago — Watching Oil Carefully: Despite the moderate oil price pull-back, T&T’s property market remains healthy; energy sector employment is stable and Port of Spain commercial rents are holding.

Barbados — Summer Occupancy Solid: Premium west coast properties reporting strong summer occupancy despite the island’s fiscal pressures; British visitor demand provides a resilient base for the luxury market.

St Kitts — Programme Reform Progressing: The CBI programme reform is moving forward constructively; reformed structures are expected to attract higher-quality applicants and provide more durable support for qualifying real estate values.

Bahamas — Baha Mar Progress: Construction progress on the Cable Beach mega-resort continues; when it opens, it will represent a transformational addition to Nassau’s premium accommodation inventory.

Cayman Islands — Financial Services Anchor: Grand Cayman’s real estate market continues to benefit from its position as a premier offshore financial centre; high-end residential and commercial property markets remain well-supported by the professional services sector.

Overall Caribbean Market Performer — August 2014: Jamaica. Record summer tourism performance, NHT housing delivery, and nascent international investor interest in north coast hospitality assets combine to give Jamaica the strongest overall property market narrative in the region this month.

Looking Ahead

The oil price story will be the most important macro variable to watch for the Caribbean through the autumn. Current prices remain above T&T’s fiscal comfort zone, but the direction of travel — from $107 back toward $97–$102 — is a trend that warrants monitoring. If US shale production continues to grow and OPEC does not move to defend prices, further declines are possible. The point at which T&T’s property market would begin to register the impact is probably somewhere below $80 per barrel on a sustained basis — still well below current levels, but a threshold that could come into view if the downward trend continues into the autumn.

Hurricane season enters its peak window in August and September. The 2014 season’s below-normal character reduces aggregate risk but does not eliminate individual storm possibilities. The Caribbean property market would benefit from another quiet season completing without a significant strike, allowing the insurance market to remain well-priced and investor confidence to remain undisturbed by catastrophe risk concerns.

CBI programme integrity will be an ongoing theme through the second half of 2014. International regulatory scrutiny of Caribbean citizenship programmes — from OECD member countries, from the EU and from the US — is increasing. The programmes need to demonstrate robust due diligence and comply with international transparency standards if they are to retain the access privileges — particularly visa-free travel — that make the Caribbean passports commercially valuable. Any programme that experiences a significant due diligence failure would face consequences that would be felt immediately in the qualifying real estate market.

The Caribbean Property & Investment Review is published monthly and covers real estate markets, investment trends and economic developments across the Caribbean region. Edition 144, August 2014.

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