Caribbean Property & Investment Review — Edition 139, January 2015

Publication Date: 3 January 2015  |  Coverage Period: 3 December 2014 – 2 January 2015

Morning Briefing

• US-Cuba normalisation announced: On 17 December 2014, Presidents Obama and Castro simultaneously announced the restoration of diplomatic relations between the United States and Cuba — the most significant geopolitical development in the Caribbean in decades, with potentially transformative implications for the region’s tourism, investment and property markets.
• Oil prices hit crisis lows: WTI crude has traded as low as $45–$50 per barrel through December and into January, well below even the revised fiscal assumptions T&T’s Finance Ministry has been working with; the duration of this price level is now the central question for Caribbean energy economies.
• T&T austerity package taking shape: The Persad-Bissessar government is assembling what will effectively be an emergency economic programme to manage the fiscal impact of sustained low oil prices; details are expected in the new year.
• Caribbean 2014 tourism a record year: The Caribbean Tourism Organisation’s preliminary 2014 data confirms a record year for regional visitor arrivals; the DR, Jamaica and the Eastern Caribbean all exceeded 2013 performance.
• Jamaica 2014 reform year assessed: With 2014 closing, Jamaica’s IMF programme delivers its most positive annual assessment since signing; the primary surplus, fiscal deficit and current account have all improved materially.
• Caribbean holiday season closes strongly: Christmas and New Year tourism performance across the non-energy Caribbean — Jamaica, Barbados, Antigua, St Lucia — confirms the winter 2014/15 season as one of the strongest in recent years.

US-Cuba Normalisation: A Historic Shift for Caribbean Tourism and Investment

The announcement on 17 December 2014 that the United States and Cuba would restore full diplomatic relations after more than fifty years of Cold War estrangement is the most consequential geopolitical development in the Caribbean since the Cuban missile crisis. Presidents Obama and Castro, in simultaneous televised addresses, announced a comprehensive re-engagement: diplomatic missions would be re-opened, travel and commercial restrictions would be eased, and the two countries would begin normalising a relationship that has been frozen since the early 1960s.

For the Caribbean property and investment community, the implications of this announcement are profound and will take years to fully materialise, but the direction of their impact is clear. Cuba, with its extraordinary natural assets, its rich cultural heritage, its relatively undeveloped tourism infrastructure, and its 11 million-strong domestic market, sits at the heart of the Caribbean archipelago as perhaps the most significant untapped real estate and tourism investment opportunity in the Western Hemisphere. The prospect of American tourists — currently barred by the US embargo from visiting Cuba as tourists — eventually being able to travel freely to the island could transform Cuban and regional Caribbean tourism economics in ways that are difficult to fully quantify.

The immediate practical implications are still being worked out. The US trade embargo requires Congressional action to be fully lifted, and a Republican-controlled Congress that took office in January 2015 is unlikely to move swiftly on Cuba legislation. The regulatory changes that Obama can implement by executive order — expanded permitted travel categories, increased remittances, limited financial transaction permissions — will begin to open pathways, but the full opening of the US-Cuba tourism market is a medium-term prospect rather than an immediate reality.

Nonetheless, the announcement has already changed the investment calculus for Cuba in fundamental ways. International hotel groups that have been cautiously watching the US-Cuba relationship are now actively accelerating their engagement with Cuban government entities. Developers who have been blocked from meaningful Cuba planning by the uncertainty of the political relationship are now preparing investment proposals. The flow of international capital toward Cuba — from European, Latin American and Canadian investors who have always been legally able to invest there, and now from the growing category of US investors who can begin to engage — is likely to accelerate meaningfully through 2015.

What US-Cuba Normalisation Means for the Wider Caribbean

The competitive implications of Cuba’s opening for the wider Caribbean tourism and property market are a source of both opportunity and anxiety among regional stakeholders. The anxiety perspective holds that Cuba’s eventual opening to US tourists will divert significant visitor flows away from existing Caribbean destinations that have built their tourism economies serving the North American market in Cuba’s absence. Jamaica, the Dominican Republic, the Bahamas, Mexico’s Caribbean coast — all have built substantial capacity serving visitors who cannot easily choose Cuba. When Cuba becomes accessible, those visitors will have a new and compelling option.

The opportunity perspective, which the more optimistic analysts favour, holds that Cuba’s opening will grow the total Caribbean tourism pie rather than simply redistribute it. Cuba’s extraordinary appeal as a destination — its unique culture, its perfectly preserved mid-century architecture, its pristine beaches, its musical heritage — will attract visitors who are not currently making Caribbean tourism choices. New Caribbean travellers activated by Cuba’s opening may, over time, discover the broader region and begin to explore other Caribbean destinations alongside or subsequent to Cuba visits. Under this scenario, Cuba is an asset for Caribbean tourism marketing, not just a competitor.

For property investors, the most direct implication of Cuba’s opening is for those who can access Cuban real estate through whatever mechanisms the evolving legal framework allows. Cuba’s constitution prohibits foreign ownership of property, and that will not change quickly. But the hotel management and joint venture investment structures through which international companies already operate in Cuba — partnering with Cuban state entities — are likely to expand. New models for investment participation in Cuban hospitality assets, within the framework of Cuban law, will be developed as the commercial opportunity becomes clearer. Caribbean real estate investors who understand the region’s hotel and resort economics will be well positioned to engage with this opportunity as it develops.

2014 Year in Review: From Optimism to Oil Crisis

A full-year review of Caribbean property market performance in 2014 reveals a story of two distinct halves. The first half — roughly through the end of June — was characterised by the most positive Caribbean investment environment in several years. Oil prices were near $100–$107 per barrel, sustaining T&T’s energy economy. CBI programmes were flourishing across four Eastern Caribbean destinations. Caribbean tourism was recording its strongest year in recent memory. The Dominican Republic was generating construction activity at record rates. Jamaica was meeting its IMF targets and seeing the first green shoots of international investor confidence return.

The second half of 2014 was defined by the oil price collapse that accelerated from July onward, culminating in OPEC’s November decision to maintain production and the subsequent crash of WTI crude toward $45–$50 by year-end. This development bifurcated the Caribbean property market narrative in a way that will shape the region’s investment landscape for years. T&T, which had been the region’s strongest energy-sector property market, entered a correction phase. The non-energy Caribbean — Jamaica, Barbados, the Eastern Caribbean, the Dominican Republic — continued to perform relatively well, supported by strong tourism revenues that are, in any case, partly benefited by lower energy costs.

The year closed with the US-Cuba normalisation announcement providing an entirely new dimension to Caribbean investment thinking. Alongside the oil crisis, Cuba’s opening is the story that will most shape how the region’s investment community thinks about Caribbean real estate through 2015 and beyond. Together, these two events — one a crisis, one an opportunity — define a Caribbean that is simultaneously dealing with the risks of energy dependence and the possibilities of a historic geopolitical opening.

Oil at $45-50: T&T’s Crisis Deepens

With oil trading at $45–$50 per barrel as the new year opens, Trinidad & Tobago’s economic situation is serious. The fiscal shortfall at these price levels compared to even revised budget assumptions is substantial. The Heritage and Stabilisation Fund is being drawn down at a rate that cannot be sustained indefinitely. Government capital spending is being curtailed, affecting the construction sector. Energy companies are beginning to implement the first rounds of operational cost reductions and headcount reviews. The trickle-down effects on Port of Spain’s professional services sector — law firms, accounting practices, financial services — that serves the energy industry are becoming more visible.

For the property market, 2015 opens with declining transaction volumes, increasing listing periods, and a visible shift in the buyer-seller negotiating dynamic in favour of buyers. Sellers who bought at peak or near-peak prices face the prospect of achieving values below their acquisition cost if they need to transact in the current environment. New development activity is slowing as developers reassess pre-sales viability at lower price assumptions. The commercial market is showing rising office vacancy as energy companies consolidate their footprints. This is a property cycle correction that will take time to work through, and its severity will be determined by how long oil prices remain at current levels.

Caribbean Leaders This Month

Cuba — Historic Opening: The US normalisation announcement of December 17 makes Cuba the Caribbean’s most talked-about investment prospect; international hotel groups and developers are beginning to accelerate their Cuba engagement strategies.

Jamaica — Best Year Since IMF: 2014 closes as Jamaica’s strongest year of IMF programme compliance; the combination of fiscal reform credibility and record tourism performance makes Jamaica the non-energy Caribbean’s most compelling investment case entering 2015.

Dominican Republic — Record Year: 2014 sets a new DR visitor arrival record; Punta Cana and Cap Cana luxury property markets close the year with strong buyer pipelines, carrying positive momentum into 2015.

Barbados — Holiday Season Success: Strong Christmas and New Year occupancy at west coast properties confirms Barbados’s ability to sustain premium property values through British market loyalty despite the island’s challenging fiscal position.

Trinidad & Tobago — Crisis Management: Oil at $45–$50 per barrel represents an extreme stress test for T&T’s economy; the government’s fiscal response and its impact on the property market will be the region’s most-watched economic story of early 2015.

Antigua — Holiday Season Strong: Christmas and New Year occupancy at English Harbour-area properties and the island’s north coast resorts provides positive revenue validation for Antigua’s hospitality property investors.

Grenada — CBI Track Record Building: First successful CBI passport approvals for qualifying resort buyers builds programme credibility; Grenada enters 2015 as one of the Eastern Caribbean’s most commercially mature CBI destinations.

Bahamas — Cuba Watch: The Bahamas, which sits geographically closest to Cuba among US-aligned Caribbean destinations, is watching the normalisation announcement carefully; proximity could be an advantage in a Cuba-adjacent tourism routing, but also creates competitive exposure.

Overall Caribbean Market Performer — January 2015: Jamaica. A year-end summary that shows Jamaica meeting its IMF targets, achieving record winter tourism performance, and attracting growing international investment interest makes it the Caribbean’s most convincing property market narrative for the period in review.

Looking Ahead

The Caribbean enters 2015 with a genuinely bifurcated outlook. For energy-dependent T&T, the immediate priority is managing the fiscal adjustment to sustained low oil prices while preventing the economic correction from becoming a systemic crisis. For the non-energy Caribbean — Jamaica, Barbados, the Eastern Caribbean, the Dominican Republic — the priorities are maintaining the tourism momentum of 2014, managing the opportunities and risks created by Cuba’s opening, and building on the improving investment environment that a supportive macro backdrop and strengthening institutional frameworks have begun to create.

US-Cuba normalisation will be the story that regional analysts and investors track most closely through the first half of 2015. The pace of regulatory change under Obama’s executive authority, the Congressional debate over lifting the embargo, and the practical steps that international hotel companies and developers take to engage with Cuba will together determine how quickly the investment opportunity becomes actionable. Caribbean property investors who want to position themselves for Cuba-related opportunities should begin developing their understanding of the Cuban legal framework, the available investment structures, and the geographic and product positioning that will be most commercially compelling when the market opens more fully.

Oil price dynamics will continue to dominate T&T’s economic narrative and, to a lesser degree, the broader Caribbean investment mood. If prices find a floor in the $45–$50 range and begin a gradual recovery toward $60–$70, T&T’s adjustment, while painful, should be manageable within the country’s fiscal and financial buffers. If prices remain at current levels or fall further, the scale of T&T’s economic challenge grows significantly. The oil market’s direction through the first quarter of 2015 will set the tone for the region’s most energy-exposed economy’s entire year.

The Caribbean Property & Investment Review is published monthly and covers real estate markets, investment trends and economic developments across the Caribbean region. Edition 139, January 2015.