Jamaica Real Estate Roundup — Q2 2015: Austerity’s Long Shadow and the Early Light of Recovery

• IMF programme disciplines constraining income growth and consumer confidence.
• BOJ easing delivering cumulative mortgage affordability improvement.
• Shoulder tourism season above Q2 2014; sector building positive momentum.
• Strata sector first genuine pipeline; Kingston skyline beginning to change.
• Residential market subdued; deferred demand accumulating for future release.

The mid-point of 2015 found Jamaica’s property market in the condition that market analysts who had been following the island’s economic trajectory closely had been expecting: real but slow improvement in a sector whose demand side was constrained by the IMF programme’s compression of household income and whose supply side was responding with the caution that limited financing availability and subdued buyer confidence required. The headline story of Q2 2015 was not dramatic — there was no single event or data release that transformed the market’s character — but the cumulative evidence of the quarter’s data was of a market in which the underlying conditions were improving with the patient consistency of a sector whose fundamentals were better than its current activity levels suggested and whose trajectory, for those with the patience to read it, was positive.

The IMF Extended Fund Facility’s programme disciplines remained the property market’s most significant external constraint. The primary surplus requirements that the programme mandated were being met, and the consequences of meeting them — the public sector wage restraint, the controlled public investment, the reduced transfer payments — were still filtering through to the household balance sheets that the residential market’s demand side depended upon. The fiscal consolidation was working in the macro terms that the IMF measured: the debt trajectory was improving, the deficit was narrowing, the international reserves were building. But its success was also, by design, moderating the pace of income growth and consumer spending that property market activity required.

The Rate Easing: Mechanism and Effect

The Bank of Jamaica’s Q2 2015 monetary policy decisions maintained the easing trajectory that had been established through the preceding quarters. The MPC’s communications through the quarter reflected an institution managing the balance between the inflation conditions that justified continued easing and the exchange rate dynamics that constrained the pace at which easing could proceed without creating the Jamaican dollar depreciation pressure that the programme’s external stability objectives did not permit. Within those constraints, the rate path was downward, and the commercial banks’ mortgage pricing was following the policy rate with the competitive responsiveness of a market in which the improving quality of mortgage demand was making product differentiation through pricing more commercially attractive than it had been in the most constrained years.

The practical consequence for Q2 2015’s residential market was a gradual expansion of the population of households whose qualifying arithmetic worked at the price points they were seeking. The first-home buyer whose NHT entitlement was accumulating and whose commercial mortgage qualifying capacity was improving with each quarter’s rate movement was, by Q2 2015, closer to the threshold for a purchase decision than they had been at Q2 2014. Some of those households were crossing the threshold and buying. Others were calculating that another quarter or two of improvement in both their savings position and the rate environment would bring them to the unit or neighbourhood they actually wanted, and were deferring accordingly. Both responses were rational, and both were shaping the Q2 market’s character.

Tourism: Building the Shoulder Season

The April to June shoulder season’s tourism performance was one of the Q2 2015 market’s modest positive surprises. The Jamaica Tourist Board’s preliminary arrivals data for the period showed improvement over Q2 2014, driven primarily by the North American market’s improved take-up of Jamaica’s expanded airlift capacity and the resort operators’ more aggressive digital marketing investment in the channels that the spring travel planning season’s decision-makers were using. The UK market’s performance was more variable, reflecting the competitive pressure from European destinations that the favourable euro exchange rate was making unusually attractive to British holiday-makers through the spring and early summer of 2015.

The tourism sector’s improving Q2 trajectory was adding the kind of economic confidence to the resort-area property markets that the Kingston residential market’s own fundamentals were not yet generating independently. The Montego Bay and Negril residential markets — where the correlation between tourism performance and property investment interest was strongest — were showing the improvement in buyer enquiry and transaction pace that the sector’s better occupancy and revenue data was generating, and the resort-adjacent residential development activity was reflecting the developers’ improved confidence about the tourism sector’s medium-term trajectory.

The Strata Moment: Pipeline Becomes Reality

The strata apartment sector’s Q2 2015 position was one in which the concept’s transition from novelty to established format was making tangible progress. The projects that had been the early movers — the developers who had committed to the strata format when the concept’s commercial viability in the Jamaican market was still being tested — were by Q2 2015 delivering completions whose quality and management performance were providing the evidence that later-mover developers and their potential buyers needed to commit with confidence. The cranes that were beginning to be a feature of Kingston’s northern and eastern horizons — the physical evidence of mid-rise residential construction at a scale and frequency the city had not seen in the residential sector before — were themselves a confidence signal, the visible manifestation of developer commitment that the strata concept’s abstract promise had become concrete reality.

The Q2 2015 pre-sales market for strata units was generating activity that the developers who had committed to the format were finding validating, even if the pace of sales was below the more active markets that subsequent years would produce. The buyer who was committing to a strata unit in Q2 2015 was, in most cases, buying into a project that would not complete for eighteen months to two years — a commitment whose scale and duration required a confidence in the project’s developer, the strata format’s management quality, and the market’s trajectory that the available evidence was making progressively more supportable.

Commercial Property: The Business Sector’s Footprint

The commercial property market’s Q2 2015 conditions reflected the cautious business investment environment that the IMF programme years had produced. Kingston’s New Kingston commercial corridor — the primary destination for the professional services, financial sector and corporate head office tenants that define the premium commercial market — was managing the dual pressure of improving demand from recovering business revenues and the legacy vacancy of space that the right-sizing of the austerity years had created. The net absorption of commercial space through Q2 2015 was positive but modest, and the rental rate environment reflected the oversupply of quality space that the austerity-period right-sizing had left as its legacy in the premium office market.

Mid-Year 2015: The Long Road and Where It Leads

The second quarter of 2015 closes with Jamaica’s property market on the long road of structural recovery whose destination — a market in which the underlying demand of the island’s population for quality housing at accessible price points is being met by a supply pipeline whose development economics work and whose financing conditions are supportive — is visible in the distance even if the pace of progress toward it remains measured. The austerity years have imposed real costs on the market: deferred purchases, compressed price appreciation, a supply pipeline that ran well below demand for too long. Those costs are being worked off, quarter by quarter, with the patient consistency of a market whose structural fundamentals are sound even when its cyclical conditions are not optimal. The mid-year 2015 picture is of a market building toward a more active future that the improving macro environment is making increasingly credible.

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