Caribbean Property & Investment Review — February 2015

Publication Date: 3 February 2015  |  Coverage Period: 3 January – 2 February 2015

Morning Briefing

• Oil holds near multi-year lows: WTI crude continues to trade in the $45–$50 per barrel range through January 2015, with no immediate catalyst for recovery visible; US shale production has not yet declined meaningfully in response to lower prices, maintaining the supply-side pressure that OPEC’s November decision unleashed.
• T&T austerity programme confirmed: The Persad-Bissessar government has confirmed the broad outlines of its fiscal adjustment programme, including capital expenditure deferrals, a review of state enterprise subsidies, and accelerated Heritage and Stabilisation Fund drawdowns to cover the near-term revenue gap.
• Trinidad Carnival 2015 approaches: Carnival is scheduled for February 16–17, and Port of Spain is preparing for the annual economic and cultural celebration that remains one of the Caribbean’s most attended events; hotel bookings for the Carnival period are strong despite the broader economic uncertainty.
• US-Cuba relations: first practical steps: January has seen the first practical implementation steps from the December normalisation announcement, with the Obama administration publishing expanded permitted categories for US-Cuba travel and increased remittance allowances; the commercial gateway is beginning to open.
• Jamaica winter season strong: January tourism data confirms Jamaica is maintaining the strong winter season performance established in November and December; north coast hotel occupancy running meaningfully ahead of the same period last year.
• Caribbean property markets diverging: The gap in performance between T&T’s correcting energy-sector property market and the tourism-driven markets of Jamaica, Barbados and the Eastern Caribbean is widening; investors and analysts are recalibrating Caribbean portfolio allocations accordingly.

T&T Austerity: Consequences for Property Markets

Trinidad & Tobago’s fiscal adjustment is now moving from emergency discussions to implemented measures, and the consequences for the property market are becoming clearer and more tangible. The Persad-Bissessar government’s austerity programme, assembled through January 2015, includes significant deferrals of capital expenditure, a review of subsidies provided to state enterprises, and the drawdown of reserves from the Heritage and Stabilisation Fund. These measures, while necessary given the fiscal arithmetic of $45–$50 per barrel oil, have direct and indirect effects on the property market that are now being felt.

The most direct effect is through the construction sector. Government capital projects — roads, buildings, utilities infrastructure — that were funded on the basis of $80–$90 oil are being deferred or cancelled. Contractors who had planned their 2015 order books around continued government infrastructure spending are finding that pipeline significantly reduced. This is affecting employment in the construction trades and in the professional services that support construction projects — engineers, architects, quantity surveyors. The construction sector’s difficulties ripple outward into the residential market through reduced disposable income for construction workers and through the diminished confidence of developers who depend on subcontractors and tradespeople whose income streams are now less certain.

The energy companies themselves are implementing cost reduction measures that are beginning to affect the commercial property market. Several international energy operators have announced regional headcount reductions, and T&T operations are not immune. The result is reduced demand for the class A office space in Port of Spain that has been one of the commercial property market’s most resilient segments throughout the boom years. Rental reviews that might previously have resulted in increases are now seeing landlords accept flat or even slightly reduced rents to retain creditworthy energy company tenants. Vacancy rates in class A offices, while not yet alarming, are trending in the wrong direction.

Residential property in Port of Spain’s affluent suburbs is experiencing the most visible market adjustment. Properties that were listed at peak prices through mid-2014 are now sitting on the market without buyers at those levels. Asking price reductions of 10–15% are becoming more common as sellers accept the reality of a changed market. First-time buyers and upgraders who were previously priced out of the market are beginning to find opportunities, but their willingness to transact is tempered by uncertainty about their own employment security and income prospects in an economy where the largest sector is retrenching. The market needs time to find its new equilibrium, and that process is likely to extend through most of 2015.

Trinidad Carnival 2015: Economic Bright Spot in a Difficult Year

Against the backdrop of austerity and oil price anxiety, Trinidad Carnival on February 16–17 represents both a cultural celebration and an economic lifeline. Carnival is T&T’s most important annual tourism event, attracting tens of thousands of visitors from the Caribbean diaspora in North America and Europe, from CARICOM neighbours, and from an increasingly diverse international audience that has discovered the world’s greatest street party. Hotel bookings for Carnival week in Port of Spain are strong — the event sells out accommodation across the capital and into the surrounding areas well in advance.

The economic significance of Carnival extends well beyond hotel occupancy. Visitor spending across accommodation, food and beverage, fetes and concerts, costume bands and music productions collectively generates economic activity that, in a compressed two-week period, provides a meaningful contribution to T&T’s GDP. The Carnival economy — costume designers, mas camps, steel bands, calypsonian artists, fete organisers, transport operators — employs thousands of Trinidadians in creative and service industries that are largely immune to the oil price cycle that is punishing the formal economy.

For the property market, Carnival’s annual cycle has a specific and positive effect on short-term rental yields in Port of Spain. Villa and apartment owners who list their properties for Carnival week can command premium rates — multiples of their normal per-night pricing — from visitors seeking accommodation during the most competitive booking period of the year. This short-term rental premium provides some income offset against the longer-term difficulties that Port of Spain’s residential property market is beginning to experience. And in a year when the Carnival itself is celebrated with particular intensity as a cultural assertion of T&T’s identity amid economic difficulty, the visitor numbers may be even stronger than normal.

US-Cuba: Investment Pipeline Begins to Form

Six weeks after President Obama’s December 17 announcement, the practical contours of US-Cuba engagement are beginning to take shape. The Treasury and Commerce departments have published new regulations expanding the categories of permitted US travel to Cuba — educational, cultural, journalistic, religious and professional travel is now more easily accessible to US citizens. Remittance limits from the US to Cuba have been raised. US financial institutions can now open correspondent accounts with Cuban banks. These are the regulatory building blocks of a gradually opening commercial relationship, even while the trade embargo itself — which requires Congressional action — remains in place.

For the Caribbean property investment community, the most significant early-stage development is the acceleration of international hotel company engagement with Cuba. Starwood Hotels, Marriott, and other major groups have been reported as having opened or intensified discussions with Cuban state tourism entities about management agreements for existing Cuban hotels and potential new development partnerships. The Cuban hotel stock — largely government-owned and in varying states of repair and quality — represents a massive upgrade investment opportunity if the regulatory framework allows international capital to participate.

The broader Caribbean is watching these developments carefully. For existing Caribbean hotel investors, the key question is whether Cuba’s gradual opening creates a new competitive threat or a rising tide of Caribbean tourism interest that lifts all boats. The evidence from other markets that have opened to tourism following long periods of restriction — Myanmar, for example, or Vietnam in the 1990s — suggests that initial excitement generates strong demand growth that, at least initially, outpaces supply expansion. If Cuba follows a similar pattern, the early years of opening could see Caribbean-wide tourism demand increase rather than simply redistribute.

Caribbean Property Markets: The Divergence Widens

The most striking feature of the Caribbean property market landscape in early 2015 is the growing divergence between the energy-dependent market of Trinidad & Tobago — in clear correction — and the tourism-driven markets of Jamaica, Barbados, the Dominican Republic and the Eastern Caribbean — broadly holding or modestly improving. This divergence reflects the fundamental structural difference between economies built on exhaustible commodity revenues and those built on the more renewable resource of natural beauty, culture and hospitality.

Jamaica’s property market, entering 2015 with the momentum of strong IMF reform compliance and a record tourism year behind it, is showing some of the most positive signals it has generated in several years. Foreign direct investment enquiries into the hospitality sector are increasing. The NHT continues to deliver affordable housing and mortgage finance to its contributor base. Private sector mortgage lending is showing tentative signs of modest recovery as banks become somewhat more comfortable with Jamaica’s macroeconomic trajectory. These are not dramatic positive developments, but in the context of a market that has been through years of IMF-imposed austerity, they are meaningful.

Barbados continues to navigate its own fiscal difficulties while drawing strength from its tourism sector’s performance. The winter 2014/15 season has been one of the island’s stronger recent performances, driven by UK visitor loyalty and improving US arrivals. The Platinum Coast property market remains one of the Caribbean’s most resilient premium segments, supported by a buyer base with the financial depth to hold through market cycles. Barbados’s broader economy and its non-premium property market face more challenging conditions, but the high end has consistently demonstrated its ability to maintain values through periods of macroeconomic stress.

Caribbean Leaders This Month

Jamaica — Winter Season Sustaining: January hotel occupancy data confirms Jamaica is maintaining its best winter season performance in several years; strong IMF reform credentials are attracting institutional-level investor enquiries into the hospitality sector.

Dominican Republic — Momentum Holding: 2015 opens with the DR’s Punta Cana and Cap Cana markets maintaining positive buyer momentum from 2014’s record year; new hotel development announcements continue to reflect confidence in the destination’s long-term trajectory.

Trinidad & Tobago — Carnival Lifeline: With broader property market correction underway, Carnival 2015 on February 16–17 provides a vital cultural and economic boost; short-term rental premiums during Carnival week offer property owners some offset against a difficult broader market.

Barbados — Platinum Coast Steady: Premium west coast properties maintaining values through strong winter season performance; UK buyer loyalty provides the resilient demand base that defines this market’s distinctive character.

Cuba — Investment Pipeline Forming: International hotel groups’ accelerating engagement with Cuba post-normalisation is the most exciting emerging story in Caribbean investment; the practical mechanics of Cuba participation are becoming clearer as the regulatory framework develops.

Grenada — CBI Mature Market: With its first cohort of passport approvals successfully processed, Grenada’s CBI programme enters 2015 as the region’s most commercially validated newer programme; developer confidence in the next phase of qualifying projects is high.

St Kitts — Post-Reform Position: The reformed CBI programme is now being marketed actively to international advisers; developers with qualifying properties are reporting improved enquiry quality from a more sophisticated investor base post-reform.

Antigua — Winter Season Strong: English Harbour’s marina scene and the island’s north coast resort properties are performing well through the peak winter season; Antigua’s sailing and yachting reputation continues to attract premium visitor spending.

Overall Caribbean Market Performer — February 2015: Jamaica. Sustained winter tourism outperformance, advancing IMF reform credibility, improving foreign investment interest, and the NHT’s continued delivery of housing to middle-income Jamaicans combine to give Jamaica the Caribbean’s most comprehensively positive property market story as early 2015 unfolds.

Looking Ahead

The Caribbean’s property market divergence between energy-dependent and tourism-dependent economies is likely to persist and possibly widen through the coming months, as the duration of low oil prices becomes clearer and as tourism economies continue to benefit from the favourable macro backdrop of low energy import costs, strong North American consumer confidence, and expanding airlift. Investors should be thinking carefully about their Caribbean portfolio composition in light of this structural divergence, ensuring appropriate exposure to markets with tourism-driven fundamentals while managing down exposure to T&T’s correcting energy-sector market.

US-Cuba normalisation will continue to generate both excitement and debate in Caribbean investment circles through the spring and summer of 2015. As international hotel companies make concrete announcements about Cuba projects and as the regulatory framework for US engagement with Cuba becomes clearer, the investment opportunity will become more specific and more actionable. Caribbean property investors who have not yet begun to assess the Cuban opportunity as part of their regional strategy should do so now, even if actual deployment of capital into Cuba remains some way off.

The spring of 2015 will bring the Caribbean tourism season toward its end and the beginning of the summer cycle. The performance of the 2014/15 winter season — which has been strongly positive across most non-energy Caribbean markets — will be assessed in full as the season concludes in April. If the full-season data confirms the strong opening performance, it will provide a solid foundation of investor confidence in the tourism property investment thesis heading into 2015’s second half. For a region navigating significant uncertainty on the energy side, the tourism sector’s consistent performance remains the most reliable anchor of Caribbean property market confidence.

The Caribbean Property & Investment Review is published monthly and covers real estate markets, investment trends and economic developments across the Caribbean region. Edition 138, February 2015.

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