Jamaica Real Estate Roundup — Q3 2014: Programme Disciplines, Summer Tourism, and a Market Under Pressure

• IMF EFF first full year; fiscal consolidation compressing household income.
• BOJ policy rate elevated; mortgage affordability at multi-year low.
• Summer tourism modest improvement; North American arrivals slightly above 2013.
• Residential market subdued; extended time-on-market, reduced buyer urgency.
• Strata concept earliest Kingston projects in planning and pre-sales stage.

The third quarter of 2014 found Jamaica’s property market in the deepest constrained conditions that the IMF Extended Fund Facility programme’s implementation had yet produced. The May 2013 agreement’s fiscal disciplines — in their first full year of operation through 2014 — were delivering the macro consolidation outcomes that the programme’s architects had designed them to produce: a primary surplus being maintained, a public debt trajectory beginning to bend, an improving sovereign creditworthiness visible in the international bond markets. But the costs of this delivery were being borne, quarter by quarter, by the household income base and the consumer confidence that the property market’s demand side depended upon, and Q3 2014’s residential market data reflected those costs with the unsparing clarity of a market in which the fundamentals that drive activity were simultaneously constrained.

The Bank of Jamaica’s overnight policy rate remained elevated through Q3 2014 at levels that made commercial mortgage financing expensive relative to the affordability conditions that would eventually characterise the post-easing cycle market. The MPC’s Q3 communications were beginning to acknowledge the improving inflation picture in language that market participants were reading, with cautious optimism, as the precursor to a potential easing cycle — but the actual rate reductions that would meaningfully change the mortgage market’s dynamics were not yet underway, and the commercial banks’ lending standards remained conservative in a market where the combination of elevated rates and programme-compressed incomes was making the qualifying mathematics of residential mortgage lending unforgiving for a large proportion of potential borrowers.

The Programme’s Property Market Mathematics

The IMF EFF programme’s property market impact operated through several concurrent channels. The public sector wage restraint that the programme required was directly compressing the incomes of the large cohort of Jamaican households whose primary earner was employed in the public sector or in industries whose wage structures were benchmarked to the public sector. For these households — whose NHT contributions and commercial mortgage qualifying capacity were the primary parameters of their property purchasing power — the programme’s disciplines were translating directly into deferred purchase decisions and extended savings periods before the qualifying thresholds that the available property stock’s prices required could be reached.

The private sector was experiencing a different version of the same constraint. The fiscal consolidation’s compression of public investment and consumer spending was reducing the revenue and profit growth of private sector businesses whose activity was linked to the domestic economy’s health, and the reduced revenue growth was moderating the private sector wage increases that the property market’s middle-income buyer population depended upon. The net result, across both the public and private sector household cohorts, was a property market demand base that was growing more slowly than the underlying demographic pressure suggested it should be, and whose purchasing capacity at any given price point was improving more slowly than the market’s supply conditions required.

Summer Tourism: Modest Positive

The Q3 2014 tourism season’s July to September performance delivered the modest improvement over Q3 2013 that the sector’s developing trajectory was generating. The North American summer travel market’s demand for Jamaica was improving gradually, supported by the expanded airlift that the preceding years’ route additions had produced and the resort operators’ continued investment in the digital marketing channels through which the modern leisure traveller’s destination decisions were increasingly being made. The Montego Bay resort corridor’s occupancy data reflected the modest improvement, and the revenue-per-room metrics were holding at levels that sustained the economics of resort operation and quality maintenance even if they did not yet justify the capacity expansion investments that a more robust performance would have prompted.

The tourism sector’s Q3 2014 contribution to the property market was primarily through the employment income it generated in the resort-dependent parishes and the investment confidence it provided for the resort-area residential market’s longer-term participants. The short-term property market impact of tourism sector performance — the direct stimulus to residential demand from improved hospitality employment incomes — was modest in Q3 2014, but the medium-term signal that an improving tourism trajectory provided for the resort-area residential investment community was real and was influencing the developer and investor community’s project planning assumptions even if it was not yet expressing itself in Q3 2014’s transaction data.

The Kingston Residential Market

Kingston and St Andrew’s residential market in Q3 2014 was operating with the subdued urgency that the programme’s conditions had imposed on both the buyer and seller communities. The buyers who were in the market were characteristically patient and price-disciplined — aware of their leverage in a market where the reduction in buyer numbers had shifted negotiating advantage toward them — and the sellers who needed to transact were adjusting their expectations in the direction of the market’s current reality rather than the recovery they were anticipating. The middle market — the two and three-bedroom house in the established residential communities — was experiencing the most pronounced reduction in transaction pace relative to historical norms, reflecting the direct impact of the income compression on the segment’s buyer population.

The premium end of the Kingston residential market was performing somewhat better than the middle, sustained by a demand base of senior business and professional class buyers whose income position was less directly affected by the programme’s public sector disciplines and who were using the constrained conditions of the market to negotiate the quality properties they had been seeking into positions that the prior year’s more competitive market had not offered. The achieved prices at the premium end reflected the market’s constrained conditions while maintaining values that the structural scarcity of quality premium residential supply underpinned.

The Strata Concept: Genesis in Adversity

The strata apartment sector’s Q3 2014 position was one of genuine conceptual innovation in the face of market adversity. The developers who were advancing the strata concept in Jamaica in 2014 were doing so in conditions that the conventional wisdom of development finance would have identified as sub-optimal: constrained buyer purchasing power, elevated financing costs for both developer and purchaser, and a market in which the new product format was competing for the attention of a buyer population whose attention to any property purchase was itself limited by the macro constraints. That the earliest strata projects were advancing their pre-sales programmes in these conditions was a testament to both the developers’ conviction in the concept’s merit and the buyers’ recognition that the constrained period was, paradoxically, an opportunity to secure entry-level positions in a product category whose value they anticipated would improve significantly as the macro conditions recovered.

NHT: The Affordable Mandate Under Pressure

The National Housing Trust’s Q3 2014 operations reflected the pressure that the programme’s fiscal framework was placing on every public institution with a spending mandate. The Trust’s mortgage lending programme was maintaining the pace that its contributor base’s qualifying entitlements and the available housing supply allowed, but the resource constraints of the programme environment were limiting the volume of new housing scheme development that the Trust’s construction programme could advance. The affordable housing deficit — the gap between the volume of housing solutions the market was delivering and the volume that the demographic demand at entry-level price points required — was, through the constrained conditions of the programme years, widening rather than narrowing. The structural challenge was real, and the programme’s disciplines were not providing the conditions in which it could be addressed at the scale the need required.

Quarter Close: Constrained but Not Broken

The third quarter of 2014 closes with Jamaica’s property market in the deepest trough of the IMF programme cycle’s property market impact. The market is constrained. The buyer pool is reduced. The transaction pace is below potential. But the market is not broken. The structural drivers of long-term demand — the demographic pressure, the diaspora purchasing interest, the income gains of the tourism-dependent employment base — are intact beneath the programme-era constraints. The rate easing that the improving inflation picture is beginning to justify is not yet underway at a scale that changes the market’s dynamics, but its logic is clear and its inevitability is increasingly part of the market’s planning assumptions. The property market of Q3 2014 is biding its time, and its patience will be rewarded.

Follow Jamaica Homes on Youtube @jamaicahomes and Instagram @jamaica_homes and on Facebook @jamaicahomes Send us a message or email us at onlinefeedback@jamaica-homes.com or editor@jamaica-homes.com