Post-Season Momentum: Jamaica’s Property Market as Hurricane Risk Recedes — September 2015

Publication Date: 3 September 2015 | Coverage Period: 3 August – 2 September 2015 | Category: Monthly Review

August 2015 in Brief

• Hurricane season continues but peak risk window approaching end; construction momentum rebuilding
• NHT loan ceiling revision widely anticipated before end of 2015; market pricing in improvement
• Oil prices slide further toward US$45–50 per barrel; most significant energy cost relief of the year
• Global financial market volatility in August creating uncertainty in emerging market currency flows
• BOJ intervening modestly to support Jamaican dollar as USD strengthens globally
• Construction starts in St. Catherine, St. James, and Kingston picking up after seasonal pause

Housing Market Overview

As August 2015 drew to a close, Jamaica’s housing market was positioning for what many in the industry anticipate will be a more active final quarter. The hurricane season — statistically, the riskiest months are August and September — constrains outdoor construction activity and introduces caution into property transactions. As the season moves toward its statistical tail, the construction sector typically accelerates, drawing down backlogs and advancing projects deferred during the peak risk window.

The month of August was not without its complications. Global financial markets experienced a period of acute volatility in the third week of August, triggered by concerns about China’s economic growth trajectory. Emerging market currencies across the world weakened materially against the US dollar. Jamaica was not immune: the Jamaican dollar experienced some downward pressure, and the BOJ intervened modestly in the foreign exchange market to manage the pace of depreciation. The episode was a reminder that Jamaica’s improving fundamentals — while real — do not fully insulate the economy from global market sentiment shifts.

In the residential property market, activity in August was somewhat softer than the diaspora-driven July peak, as expected. However, enquiry levels remained solid, and a number of transactions initiated during summer diaspora visits moved toward completion. The pipeline of supply from both government and private developers continued to advance.

Oil Prices: The Deepening Dividend

August brought a further sharp decline in global crude oil prices. Brent crude, which had been trading in the US$55–60 range through much of the first half of 2015, fell through US$50 per barrel and at points approached US$45 per barrel — levels not seen since the 2008–2009 financial crisis period. For Jamaica, which imports all of its petroleum, this represents the largest single beneficial economic development of the past decade.

The macroeconomic arithmetic is straightforward. Jamaica spends approximately US$1.5 billion annually on petroleum imports in a high-price environment. At US$45–50 per barrel versus the US$100+ levels of mid-2014, the annual saving to the Jamaican economy is in the range of US$500–700 million — a sum equivalent to roughly 4–5% of GDP. This flows through to improved current account balances, lower inflation, reduced pressure on the Jamaican dollar, improved business margins across the economy, and lower household energy bills.

For the housing and construction sector specifically, the impact is visible in project cost structures. Contractors who priced jobs in mid-2015 at the then-prevailing fuel costs are finding that actual energy expenditures are coming in below budget, improving margins on fixed-price contracts. New projects being costed now benefit from the lower fuel price baseline, making previously marginal developments more economically viable.

NHT: The Ceiling Anticipation

Industry sources indicate that a revision to the NHT loan ceiling is actively under consideration and may be announced before the end of 2015. The current ceiling of approximately J$4.5 million has been in place for several years, during which construction costs have risen materially. A ceiling increase to J$5.5 million — which would represent a J$1 million or approximately 22% uplift — is the figure most frequently cited in industry discussions.

The significance of such a move would be considerable. An additional J$1 million of NHT financing at the Trust’s preferential interest rates — between zero and approximately 4–5% annually — versus the same amount borrowed commercially at 9–12% generates monthly payment savings of several thousand Jamaican dollars. Over the life of a 25–30 year mortgage, the cumulative difference is material. More immediately, a higher ceiling would bring a larger universe of properties within the reach of NHT-only financing for buyers whose incomes qualify them for the maximum loan but who currently face a gap between the NHT ceiling and the price of a suitable property.

Developers have already begun factoring the anticipated ceiling increase into their product design. Communities being planned with a first-sales target in the first half of 2016 are being sized and priced with the expectation that the NHT ceiling will be higher by the time buyers seek financing. This forward-looking adjustment by the development community is itself a positive sign of confidence in the housing supply pipeline.

Construction Activity: Sector Positions for Q4

The construction sector is positioning for an active final quarter as hurricane season risk abates. Project sites that have been operating at reduced intensity through the August weather risk window are ramping up. Sub-contractors — electricians, plumbers, tilers, painters — who typically find their order books lighter in the August–September window are reporting improving demand as developers push to complete units before year-end.

The geographic distribution of construction activity reflects the established patterns: St. Catherine dominates by volume of new affordable and middle-income units, Kingston leads in value terms for upper-segment and commercial work, and the north coast parishes of St. James and St. Ann are active in both residential and tourism-related construction. The pattern of activity is consistent with the demographic and economic geography of the island.

Steel reinforcement and cement — the two most significant structural material inputs — remain priced at levels that constrain margins for lower-income housing schemes. Government import duty structures on construction materials have been a subject of periodic industry lobbying; calls for targeted duty reductions on materials used in affordable housing construction are a recurring feature of housing sector advocacy. To date, such relief has been modest.

Mortgage and Finance Market

Commercial mortgage rates have continued their gradual drift downward. A small number of building societies have moved their headline rates to the lower end of the advertised range for qualifying borrowers, and competition for the NHT co-financing segment — borrowers who have exhausted their NHT entitlement and need a commercial top-up — has intensified modestly. The total commercial mortgage market in Jamaica, while small relative to GDP, is growing as more properties are purchased with formal financing.

The BOJ’s policy rate has continued its gradual downward path. The interest rate reported at approximately 5.5% earlier in the year has moved further toward 5.25–5.0% as the BOJ judges that inflation is contained and the fiscal programme remains on track. The translation of BOJ rate cuts into commercial mortgage rate reductions is not immediate or proportional, but the direction of travel is constructive for the housing market over the medium term.

Investment Outlook

Investor interest in Jamaica’s real estate sector has been sustained by the combination of improving macroeconomic fundamentals, attractive US-dollar-denominated yields on commercial properties, and the visible growth in Jamaica’s tourism sector. The announcement of new hotel investments on the north coast — several international brands expanding their Jamaica footprints — creates a positive halo effect for surrounding residential communities, which benefit from proximity to employment and tourism visitor spend.

For domestic institutional investors, Jamaican real estate remains an attractive asset class relative to government securities. With GOJ bond yields declining as fiscal credibility improves, the relative yield on rental property — particularly in the commercial and mixed-use segments in Kingston and Montego Bay — has become more competitive. This dynamic is driving some portfolio reallocation toward property among Jamaica’s institutional investor community.

Diaspora Buyers: Post-Summer Follow-Through

The diaspora buying activity that peaks in July–August does not end abruptly with the return of visitors to their overseas homes. Estate agents report that September and October typically see elevated levels of follow-through: buyers who viewed properties during summer visits continue negotiations by email and phone, returning diaspora family members act as local proxies in the transaction process, and some buyers who deferred decisions during the high-competition August window come back to the market with clearer intent.

The NHT’s overseas contributor programme — which allows Jamaicans living abroad to continue contributing to the Trust and thereby preserve their borrowing entitlements — is an important dimension of diaspora housing engagement. Overseas contributors who have maintained their contributions over a qualifying period are entitled to NHT loans when they purchase property in Jamaica, providing access to preferential financing even for buyers whose primary income is earned abroad.

Regional Context

The global financial market volatility experienced in August — driven primarily by concerns about China’s economic deceleration and its implications for global commodity demand — has created a more cautious backdrop for emerging market and small open economy assets. Caribbean sovereign bond spreads widened modestly in the volatility episode, though Jamaica’s spreads remained tighter than many peers, reflecting the credibility gains from IMF programme compliance.

The US Federal Reserve’s September meeting — widely watched for a potential first rate hike since 2006 — passed without a move, with the Fed citing global market uncertainty as a reason for caution. The deferral of the first Fed hike has provided temporary relief to emerging market currencies and reduced some pressure on the Jamaican dollar. However, most market observers continue to anticipate a Fed rate increase before year-end, and Jamaica will need to manage the exchange rate and capital flow implications when it comes.

Looking Ahead

October and November will be pivotal months for Jamaica’s housing market. The expected announcement of the NHT loan ceiling increase — if it materialises as anticipated — will be the most significant housing policy development of 2015. The end of hurricane season will unlock a seasonal construction acceleration. BOJ rate policy and the global interest rate environment — particularly the imminent Fed rate decision — will shape the external backdrop. The conditions for a constructive year-end are in place, contingent on policy delivery and global macro stability.