Caribbean Property & Investment Review — September 2014

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

Morning Briefing

• Oil falls sharply toward $88: WTI crude dropped from approximately $96 at the start of August to around $88 by the coverage period close — a decline of nearly 9% in a single month that is sharpening concern among T&T government officials and energy sector analysts about the fiscal year trajectory.
• Hurricane season 2014 remains quiet: August passed without a significant Atlantic hurricane threatening Caribbean destinations; the 2014 season is now tracking as one of the quietest in recent memory, providing ongoing relief to property insurers and coastal investors.
• Jamaica IMF review positive: The IMF’s latest quarterly review of Jamaica’s Extended Fund Facility reports targets broadly met; the Portia Simpson Miller government marks the programme’s continued success in stabilising the fiscal position.
• T&T energy sector watching OPEC: Trinidad & Tobago’s energy sector observers are watching closely for signals from OPEC’s forthcoming meeting about whether the cartel will act to defend oil prices; the Persad-Bissessar government’s fiscal planning assumptions are being revisited.
• DR tourism records continuing: The Dominican Republic Tourism Ministry reports August visitor arrivals running at record levels; the DR is on course to set a new full-year visitor record in 2014.
• Guyana exploration drilling continues: ExxonMobil’s Stabroek Block drilling programme proceeds; while no discovery announcement has been made, geological assessments continue to be reported as encouraging by industry observers.

Oil Price Decline Sharpens: T&T’s Fiscal Foundations Under Review

The oil market story that began as a footnote in August has become a headline concern by September. WTI crude has declined from the approximate $107 peak in late June to around $88 per barrel by the end of August — a fall of nearly 18% in approximately two months. The pace and scale of the decline is now attracting serious attention from economists and government officials across the Caribbean, but nowhere more acutely than in Trinidad & Tobago, where petroleum revenue accounts for a dominant share of government income and underpins much of the formal economy’s dynamism.

The government of Prime Minister Kamla Persad-Bissessar is facing its first serious oil-price-driven fiscal challenge since taking office in 2010. During most of the PP administration’s tenure, oil has been supportive — prices above $90 per barrel have allowed the government to maintain social spending, fund infrastructure investment, and keep employment in the energy sector robust. The Heritage and Stabilisation Fund provides some buffer, but T&T’s budget has been calibrated on assumptions of oil prices in the $80–$90 range; further declines below $80 would create genuine fiscal pressure requiring either expenditure cuts or drawdown of reserves.

For the property market, the initial impact is psychological more than transactional. Actual real estate volumes and prices in Port of Spain and its suburbs have not yet registered significant change — energy sector employment remains stable, and the income flows supporting residential property demand have not yet been materially affected. But conversations in property market circles are shifting. Buyers who might have committed to higher-priced properties in June are now pausing to assess the oil price outlook. Developers with projects at advanced planning stages are reviewing their assumptions about buyer demand and financing costs. The market is not panicking, but it is paying attention to the energy price signal in a way it was not three months ago.

Hurricane Season 2014: A Quiet Year Confirmed

As August ends, the 2014 Atlantic hurricane season has delivered on its below-normal forecast. No major hurricane has struck a Caribbean island during what is statistically the most active two-month period of the season. The Caribbean property insurance market is breathing a collective sigh of relief. Insurers who faced a challenging 2013 renewals cycle following elevated catastrophe risk pricing have been able to restore some balance to their books through a second consecutive quiet season.

For Caribbean real estate investors, the quiet hurricane season is meaningful beyond the immediate absence of storm damage. Insurance costs for coastal Caribbean properties have been under sustained upward pressure in recent years, driven by actuarial models that assign high damage probabilities to beachfront and low-lying properties. Two quiet seasons in a row provide at least some basis for arguing against further premium increases, and may allow some property owners to negotiate more favourable renewal terms.

However, climate risk specialists are careful to note that quiet Atlantic seasons are not evidence of a structural reduction in Caribbean hurricane risk. The factors that produce intense Atlantic hurricane seasons — sea surface temperatures, wind shear patterns, ENSO cycle position — remain subject to variability that can produce dramatically active seasons with little advance warning. Property investors in coastal Caribbean locations should treat the 2014 quiet season as a welcome outcome rather than a signal to reduce their hurricane risk preparedness or insurance coverage.

Jamaica: IMF Reform Holds, Property Market Stabilising

Jamaica’s IMF programme continues to be one of the region’s more consequential economic stories, even if its day-to-day drama is less acute than the oil price movements affecting T&T. The latest quarterly review by the Fund has confirmed that Jamaica is broadly meeting its programme targets — fiscal deficit reduction, tax administration improvement, and structural reform of state enterprises. For a programme that many observers expected Jamaica to struggle to maintain, the sustained compliance record through now more than a year of implementation represents a meaningful achievement by the Simpson Miller administration.

The property market implications of sustained IMF compliance continue to be nuanced. On the negative side, the austerity measures are suppressing private sector wage growth and consumer confidence, limiting the pool of buyers who can afford market-rate residential property. On the positive side, fiscal credibility is gradually improving Jamaica’s sovereign credit outlook, reducing borrowing costs, and making the country more attractive to international institutional investors. Several international real estate funds have recently expressed interest in Jamaica’s hotel and commercial property sectors — interest that would have been less likely without the IMF programme’s stabilising effect.

The National Housing Trust continues to be the market’s most active institutional player. NHT-supported mortgages and NHT-developed housing projects are maintaining a floor of transaction activity that the private market could not sustain on its own in the current environment. For investors seeking to understand the underlying health of Jamaica’s residential property market, NHT activity data is the most reliable indicator available.

Dominican Republic: Tourism Records and Construction Momentum

While T&T faces oil-driven uncertainty and Jamaica navigates austerity, the Dominican Republic continues on its consistent growth trajectory. August visitor arrival data confirms that 2014 will be a record year for Dominican tourism, with the all-inclusive sector in Punta Cana and the boutique and upper-midscale sectors in Las Terrenas, Cabarete and Puerto Plata all contributing to the strong aggregate numbers. The DR’s tourism infrastructure — multiple international airports, strong hotel capacity, and an established tour operator network — is performing to its design specifications.

Construction in the Dominican Republic shows no meaningful signs of slowing. The pipeline of approved projects in Punta Cana alone is substantial, and Santo Domingo continues to see commercial and residential development that reflects a growing domestic market of middle-class consumers. For Caribbean regional investors, the DR’s consistent outperformance relative to most other markets is now an established pattern rather than a surprise — the country has earned its reputation as the region’s most reliably dynamic property market through several consecutive years of strong data.

Caribbean Leaders This Month

Dominican Republic — Tourism Record Year: August visitor arrivals data confirms 2014 will be the DR’s best tourism year on record; the construction pipeline supporting that tourism capacity continues to expand.

Jamaica — IMF Compliance Champion: Sustained programme compliance is gradually rebuilding Jamaica’s international investment credibility; international enquiries into hospitality and commercial assets are an encouraging early sign.

Trinidad & Tobago — Caution Rising: With oil at $88 and falling, the T&T property market is entering a period of increased uncertainty; commercial real estate remains active but residential buyer caution is visible.

Barbados — Tourism Season Closing Positively: The summer season closes with Barbados reporting improved UK visitor numbers; the Platinum Coast villa market remains resilient despite the island’s continuing fiscal challenges.

Grenada — CBI Development Progressing: Qualifying resort projects continue to move from pre-sales toward construction phases; Grenada’s CBI programme is cementing its position as one of the region’s most active investment destinations.

Guyana — Exploration Sustained: ExxonMobil’s continued Stabroek Block drilling activity keeps Guyana’s energy prospect on regional investors’ radar without yet producing a confirmed commercial discovery.

Antigua — Winter Season Prep: Antigua’s tourism and real estate sectors are beginning preparation for the winter high season; marina properties and north coast resort investments are well positioned for the incoming season.

St Kitts — CBI Programme Stabilising: The reform process is advancing toward completion; developers with qualifying properties expect clearer programme parameters to support a stronger CBI sales pipeline into the year’s final quarter.

Overall Caribbean Market Performer — September 2014: Dominican Republic. Consistent record tourism performance and an unmatched construction pipeline give the DR its position at the top of the regional leaderboard for the third time in five months.

Looking Ahead

The oil price trajectory going into October is the critical near-term variable for the region’s most energy-exposed economy. OPEC’s scheduled November meeting will be closely watched by T&T government officials and property market professionals alike. If the cartel chooses to cut production to defend prices, a partial recovery is possible. If Saudi Arabia and other core OPEC members elect to defend market share rather than prices, further downward pressure could materialise through the fourth quarter. The outcome of that November meeting could be one of the most consequential events for Caribbean property markets in the remainder of 2014.

Caribbean hurricane season will be definitively assessed by late September, when the statistical probability of major Atlantic storm formation declines sharply. A benign close to the season would confirm 2014 as one of the quietest recent years and provide genuine relief to the Caribbean property insurance market. Investors with uninsured or underinsured coastal exposure should nonetheless use this period to review their risk management arrangements before the next season opens in 2015.

Jamaica’s winter tourism season, which begins to ramp up from October through November, will be an important test of whether the strong summer performance represents a sustained improvement or a seasonal peak. Advance booking data from North American tour operators and airlines will provide early signals. Strong forward bookings would support the hospitality investment case and provide encouragement to developers considering new north coast or south coast resort projects.

The Caribbean Property & Investment Review is published monthly and covers real estate markets, investment trends and economic developments across the Caribbean region. Edition 143, September 2014.

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