Caribbean Property & Investment Review — November 2014

Publication Date: 3 November 2014  |  Coverage Period: 3 October – 2 November 2014

Morning Briefing

• Oil crashes toward $65 per barrel: WTI crude has accelerated its decline through October, falling from approximately $80 to trade near $65 by the coverage period close — a 19% drop in a single month that is creating genuine fiscal crisis conditions for Trinidad & Tobago.
• OPEC meeting looms large: The cartel’s late-November meeting in Vienna is now the most closely watched event in Caribbean economic circles; widespread expectation that Saudi Arabia will choose to defend market share over price is sending oil prices still lower in anticipation.
• T&T emergency budget discussions: The Persad-Bissessar administration has convened emergency discussions with Finance Ministry officials to assess budget revision requirements; capital projects are being reviewed for deferral and social programme commitments are under renewed scrutiny.
• Caribbean winter season arrivals strong: First November visitor arrivals data for Jamaica and Barbados confirms the winter season is opening strongly, with hotel occupancy in Montego Bay and the Barbados west coast running ahead of prior year.
• Jamaica fiscal improvement: The latest IMF quarterly review confirms Jamaica continues to meet its programme targets, with the fiscal deficit narrowing on track and the primary surplus improving ahead of expectations.
• Barbados arrivals up: Statistics from the Barbados Tourism Authority show October tourist arrivals running approximately 4% ahead of the prior year — modest but welcome improvement for an economy in desperate need of tourism revenue growth.

Oil at $65: T&T Enters Crisis Territory

The speed and scale of the oil price collapse through October 2014 has transformed the economic landscape for Trinidad & Tobago in a way that was considered unlikely just four months ago, when prices were near $107 per barrel. WTI crude now trades near $65 per barrel — a decline of approximately 39% from the June peak. For a country whose government budget, state enterprise finances and broader economic vitality are so directly tied to petroleum revenues, this is not merely an economic challenge but a genuine fiscal emergency.

Emergency budget discussions in Port of Spain are focused on a stark arithmetic: at $65 per barrel, T&T’s petroleum revenues fall sharply below the levels needed to fund the government’s 2014/2015 budget as approved. Capital expenditure deferrals are the first line of response — infrastructure projects that were scheduled for tender or commencement are being pushed into the future. The construction sector, which had been one of the most active components of the T&T economy during the oil boom years, is beginning to feel the first tremors of this tightening. Contractors who have become accustomed to a steady pipeline of government-funded work are facing the prospect of a significantly reduced order book in 2015.

For the property market, the impact is now moving from psychological to transactional. Higher-end residential listings in Port of Spain’s affluent suburbs are beginning to sit on the market longer. New development project sales offices are reporting a visible reduction in buyer enquiry volumes. The commercial leasing market, while not yet showing dramatic vacancy increases, is beginning to see some energy company office footprint reviews as those companies assess their own cost structures in the context of sustained lower oil prices. The T&T property cycle, which has tracked the oil price with remarkable fidelity over the past decade, appears to be entering its correction phase.

The Heritage and Stabilisation Fund, T&T’s sovereign wealth buffer, is expected to be drawn upon to cover the immediate fiscal gap. However, prolonged use of the HSF at current rates of drawdown would exhaust its capacity within a number of years, making the sustainability of the current price decline the most critical variable. T&T government officials are publicly maintaining that this is a temporary disruption; private conversations suggest considerably more concern about the prospect of an extended period of low oil prices.

OPEC’s November Meeting: The Decision That Will Shape Caribbean 2015

The Organisation of the Petroleum Exporting Countries meets in Vienna later this month, and the meeting has attracted Caribbean attention far beyond the usual circle of energy sector professionals. For T&T, for Guyana’s nascent exploration ambitions, and for the broader regional conversation about energy-dependent economic models, the OPEC outcome will be pivotal.

Market expectations, reflected in the continued downward drift of oil prices in October, are that Saudi Arabia — the cartel’s dominant member — will resist pressure to cut production. Saudi Arabia’s calculus, as it has been explained by its representatives in recent weeks, prioritises defending OPEC’s market share against the rising tide of US shale production over defending a specific price level. This strategic choice, if confirmed at the Vienna meeting, would signal that the current low-price environment is deliberate and sustainable from OPEC’s perspective — potentially for an extended period.

For T&T, the difference between an OPEC production cut — which might bring prices back toward $80 or higher within months — and an OPEC decision to hold production is the difference between a difficult but manageable fiscal adjustment and a potentially severe multi-year economic contraction. The Caribbean property market community is watching Vienna with an intensity it has rarely devoted to an OPEC meeting before.

Caribbean Winter Tourism: Bright Spot in a Darkening Landscape

Against the gloom of the oil price story, the Caribbean’s winter tourism season is opening with genuine encouragement. Jamaica’s tourist arrivals for October are running ahead of 2013 levels, driven by improved North American airlift and the cumulative effect of several years of product investment at the island’s major resort properties. Montego Bay’s hotels are reporting strong group bookings from the US corporate and leisure markets, and Negril is seeing solid individual traveller demand.

Barbados’s October tourist arrival data — showing approximately 4% year-on-year improvement — is more meaningful than it might appear. The island has been struggling with arrivals stagnation for several years, and any positive trend is commercially significant for a tourism-dependent economy facing significant fiscal headwinds. The British market’s loyalty to Barbados is the primary driver of this improvement; UK visitor numbers have been recovering alongside the UK economy’s own post-recession performance.

For the property market implications, sustained strong winter tourism performance is the single most important factor supporting Caribbean hospitality real estate values. Hotel operators who can demonstrate consistently strong occupancy and rate performance have the strongest basis for resisting any valuation pressure from nervous investors and lenders. The winter 2014/15 season’s opening performance is providing exactly this support.

Jamaica: Fiscal Improvement Builds Credibility

Jamaica’s IMF programme is approaching its second year of implementation with something it struggled to achieve in its early months: genuine credibility. The Fund’s latest quarterly review confirms that Jamaica is meeting its fiscal programme targets — the primary surplus is improving ahead of schedule, the fiscal deficit is narrowing, and structural reforms in tax administration and state enterprise management are progressing. These achievements, while not dramatic in isolation, represent a sustained performance that the sceptics of Jamaica’s reform capacity said would be impossible.

The real estate market implications are beginning to be felt in the commercial and hospitality sectors more than in the residential market. International investors who had been treating Jamaica as too high-risk for meaningful capital commitment are beginning to revisit that assessment. Several institutional-scale expressions of interest in Jamaica’s hotel and commercial property sectors have been reported in October, suggesting that the combination of IMF programme credibility and strong tourism performance is creating a more hospitable environment for foreign direct investment.

The residential market continues to be more directly affected by the austerity environment’s impact on domestic consumer incomes. NHT activity remains the primary source of transactional momentum in the affordable and middle segments. The private mortgage market is beginning to show some tentative signs of increased lending appetite as banks become slightly more confident in Jamaica’s macroeconomic trajectory, but this remains a gradual rather than rapid shift.

Caribbean Leaders This Month

Jamaica — IMF Reform Credibility: Fiscal programme targets met ahead of schedule; international investor interest in hospitality and commercial assets showing measurable increase as programme credibility builds.

Dominican Republic — Recession-Proof Tourism: DR’s all-inclusive sector continues to deliver strong occupancy through the shoulder season; Punta Cana luxury market remains active with high-net-worth buyers from the Americas and Europe.

Barbados — Arrivals Recovery: The 4% year-on-year improvement in October visitor arrivals is the best sustained performance Barbados has seen in several years; west coast villa market is reflecting this cautious optimism.

Trinidad & Tobago — Emergency Footing: Oil at $65 has forced the government onto an emergency budget footing; T&T’s property market is entering what may prove to be a sustained period of correction after years of energy-fuelled growth.

Antigua — Sailing Season Strong: Antigua’s Sailing Week and associated events continue to generate strong economic activity; marina-adjacent real estate is benefiting from sustained yachting community demand.

St Kitts — CBI Post-Reform: With programme reforms largely complete, St Kitts CBI is entering a phase of re-marketing; qualifying developers expect improved sales conditions in 2015 under the clearer programme framework.

Grenada — First CBI Completions: First cohort of CBI-qualifying resort unit completions expected in coming weeks; successful passport processing will validate the programme’s commercial proposition and support the next phase of development.

Cayman Islands — Financial Sector Steady: Grand Cayman’s financial services sector is operating normally despite global market turbulence; the island’s residential property market benefits from the stability of financial services employment.

Overall Caribbean Market Performer — November 2014: Jamaica. The combination of advancing IMF programme credibility, strong winter tourism season opening, and growing international institutional interest in Jamaican hospitality real estate gives Jamaica its first month as the regional market performer of the year.

Looking Ahead

November’s OPEC meeting outcome will be the defining moment for T&T’s economic outlook going into 2015. Whatever the decision, it will set the parameters within which T&T’s government must plan, its businesses must invest, and its property market must find its new equilibrium. The Caribbean property investment community would be well advised to monitor this meeting’s outcome carefully and update their assessments of T&T exposure accordingly.

The Caribbean winter tourism season’s early performance needs to be sustained through December and January to have meaningful commercial impact. The Christmas and New Year period is particularly important for premium villa rentals and boutique hotel revenues. A strong December would meaningfully validate the positive signals seen in November’s opening data and support property values across the region’s leisure real estate markets.

Jamaica’s 2015 economic outlook will begin to take shape through the remainder of 2014. If the IMF programme continues on track and the winter tourism season delivers, Jamaica enters 2015 with more economic momentum than it has had in several years. The property market implications of this improving trajectory — still early stage, still fragile — should become more visible through 2015’s first and second quarters.

The Caribbean Property & Investment Review is published monthly and covers real estate markets, investment trends and economic developments across the Caribbean region. Edition 141, November 2014.

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