Caribbean Property & Investment Review — December 2015

Publication Date: 3 December 2015  |  Coverage Period: 3 November – 2 December 2015

Morning Briefing

• COP21 IN SESSION: The United Nations Climate Change Conference opened in Paris on 30 November 2015 with 196 nations represented; as this edition goes to press, negotiators are working intensively toward a landmark global agreement, with Caribbean small island states among the most urgent voices for an ambitious outcome. No agreement has yet been reached.
• WTI crude oil fell to approximately US$40 per barrel through November — its lowest level since 2009 — intensifying the fiscal crisis in Trinidad & Tobago and raising fundamental questions about the pace of Guyana’s Liza field development investment sanctioning.
• The Federal Reserve is widely expected to raise US interest rates by 25 basis points at its 15–16 December meeting — the first hike since June 2006 — with significant implications for USD-denominated Caribbean property financing costs and investment yield calculations.
• Jamaica’s winter tourism season is delivering on its exceptional advance booking performance, with December hotel occupancy rates across Montego Bay and Ocho Rios tracking 14 percent ahead of December 2014 as US and European visitors arrive in record numbers.
• The Bahamas’ reconstruction effort in the Joaquin-affected Family Islands continued through November, with insurance settlements beginning to flow and the first government-funded reconstruction housing units breaking ground on Acklins and Crooked Island.
• Barbados’s government presented its 2016 budget in November, maintaining the fiscal consolidation path while introducing selective incentives for tourism investment and committing additional resources to the public beach and heritage infrastructure upgrade programme announced in October.

COP21 Paris: Caribbean Climate Urgency at the Centre of the World

The COP21 United Nations Climate Change Conference opened on 30 November 2015 in Le Bourget, Paris, and as this edition of the Caribbean Property & Investment Review goes to press, the negotiations are at a critical and intensely active stage. Representatives of 196 nations, including the full complement of Caribbean small island states acting in coordinated fashion through CARICOM and the Alliance of Small Island States, are engaged in around-the-clock negotiations on the text of what is hoped to be a landmark global climate agreement. No final agreement has yet been reached as we publish, and the final shape of any accord — particularly on the critical questions of temperature targets, finance, and loss and damage — remains to be determined.

What is clear, even before any agreement is concluded, is that the Paris conference has elevated the Caribbean’s climate vulnerability to the centre of global political consciousness in a way that no previous COP has achieved. The diplomatic strategy pursued by CARICOM — combining moral urgency on the 1.5-degree temperature target with concrete presentation of the physical and economic consequences of inadequate climate action for small island states — has resonated powerfully in the corridors of the Bourget convention centre and in the media coverage that has reached audiences of tens of millions worldwide.

For Caribbean property investors, the Paris negotiations carry implications that extend well beyond the immediate policy horizon. The trajectory of global warming — and specifically whether the world can limit temperature increases to 1.5 or 2 degrees Celsius above pre-industrial levels — will be one of the most significant determinants of long-term Caribbean coastal property values. At the lower end of the warming range, the Caribbean’s beaches, reefs, and low-lying coastal landscapes — which underpin the entire tourism and lifestyle property proposition — can be preserved in something approaching their current form. At higher warming levels, rising seas, acidifying oceans, and intensifying storms will progressively erode the natural assets that make Caribbean real estate valuable.

The property insurance industry is already beginning to price in climate risk trajectories over multi-decade timeframes. Reinsurance models that were calibrated to historical storm frequency and intensity data are being updated to incorporate forward-looking climate projections, and the markets that update their risk models most aggressively — incorporating higher storm intensity assumptions and sea level rise projections — are beginning to demand higher premiums for Caribbean coastal coverage. The direction of travel for Caribbean property insurance costs is upward, independent of the outcome of any individual hurricane season or any single climate conference.

The specific provisions that Caribbean delegations are most focused on in Paris include: the adoption of a 1.5-degree temperature limit as the agreement’s central ambition; the establishment of an adequate and predictable financial mechanism for climate adaptation funding, channelling resources to vulnerable developing nations; and the creation of a framework for addressing loss and damage — the residual harm from climate change that cannot be adapted to — that provides Caribbean nations with a pathway to compensation for impacts that are already unavoidable regardless of future emissions trajectories. All three of these provisions are contested in the negotiations, and the final agreement — if one is reached — will represent a negotiated compromise rather than everything that Caribbean nations have sought.

The Federal Reserve Rate Hike: Implications for Caribbean Property

The Federal Reserve’s Open Market Committee meeting on 15–16 December is universally anticipated to deliver the first increase in the US federal funds rate since June 2006. The market pricing assigns an overwhelming probability to a 25-basis-point hike, bringing the target range from 0–0.25 percent to 0.25–0.50 percent. While the absolute level of US interest rates would remain historically low even after such a move, the directional signal — that the period of near-zero interest rates in the world’s largest economy is ending — is significant for Caribbean property markets in ways that investors need to understand and plan for.

The most direct channel of impact is on the financing cost of US dollar-denominated property transactions. Caribbean markets that primarily transact in USD — the Cayman Islands, the Turks & Caicos, the US Virgin Islands, Belize, and the Bahamas — will see their mortgage and development financing costs move in lockstep with the Fed. For buyers financing premium property purchases with USD mortgages, a rate hike increases the monthly debt service burden and modestly reduces the maximum loan amount for which they qualify. In an already expensive market like Cayman’s Seven Mile Beach corridor, this compression at the margin could affect transaction volumes if rate hikes accumulate to a meaningful level.

The indirect channels of impact are broader. A Fed rate hike strengthens the US dollar, which has direct implications for Caribbean tourism: a stronger dollar makes Caribbean destinations more expensive for visitors from sterling and euro-zone countries, who represent significant visitor segments for Barbados, Antigua, and other islands with strong European tourism bases. The effect on North American visitors is the reverse: a stronger dollar makes Caribbean destinations that price in local currencies (Jamaica dollars, Eastern Caribbean dollars, Barbadian dollars) effectively cheaper for US visitors, which is positive for tourism and for rental property yields denominated in those currencies.

For property investors calibrating their return expectations for 2016 and beyond, the most important adjustment is to planning assumptions about financing costs. The era of near-zero base rates — which has supported Caribbean property valuations since 2009 by reducing the yield differential between real estate and fixed income to minimal levels — is drawing to a close. Investors who have built business cases on perpetually low financing costs should stress-test those cases against a scenario in which the US federal funds rate reaches 1.5 to 2 percent over the next two years, as the market’s current forward curve suggests.

Oil Prices and the Caribbean Energy Economy Year-End

WTI crude oil’s fall to approximately US$40 per barrel through November 2015 — its lowest level since the 2008–2009 financial crisis — brings the year to a close with the Caribbean’s energy-producing economies under sustained pressure. For Trinidad & Tobago, which has been managing the consequences of lower oil prices since mid-2014, the further decline through the autumn has deepened a fiscal challenge that the Rowley budget of October addressed but did not resolve. The Heritage and Stabilisation Fund buffer is finite; structural fiscal reform is the only durable solution.

The paradox that oil-importing Caribbean nations are benefiting from the same price environment that is damaging oil exporters is real but underappreciated. Jamaica, Barbados, Antigua, Grenada, and the other non-energy-producing Caribbean economies have seen their import bills reduced significantly by lower oil prices, freeing up foreign exchange and improving their current account positions. For Jamaica in particular — which imports virtually all its energy — the fall in oil prices has contributed meaningfully to the improvement in the inflation and current account dynamics that have supported the IMF programme’s success.

Guyana’s Liza field development is being assessed by ExxonMobil against oil price scenarios that include the possibility of an extended period of sub-US$50 prices. The company has consistently indicated that the Liza field’s development economics remain viable at lower oil prices — a reflection of its high-quality light crude, low finding costs, and the deepwater development infrastructure that ExxonMobil brings to the project. However, the investment sanctioning timeline will be influenced by the company’s view of the price environment, and a prolonged period of sub-US$45 prices could push the formal Final Investment Decision further into the future. Georgetown’s property market is pricing in some of this uncertainty, with the extraordinary appreciation pace of the summer months having moderated to a more measured rate of enquiry and transaction through the autumn.

Jamaica: Year-End Tourism Record Confirmed

Jamaica’s 2015 tourism performance is on track to be the strongest in the island’s recorded history. December hotel occupancy tracking 14 percent above December 2014 confirms that the summer record-breaking has extended into the winter peak season, and that Jamaica’s 2015 full-year arrivals total will comfortably exceed the 2.1 million stopover visitors recorded in 2014. The Caribbean Tourism Organisation, in its preliminary year-end assessment, identifies Jamaica as the region’s fastest-growing major destination for 2015, with the island’s combination of airlift growth, product quality improvements, and effective destination marketing cited as the principal drivers.

For property investors, Jamaica’s record tourism year translates into tangible data on rental yield performance. Short-term rental operators across the island’s main corridors report that 2015 annual revenues have exceeded their prior-year targets by substantial margins in many cases, and that the platform data — particularly Airbnb booking metrics — shows a step-change improvement in occupancy rates and average daily rates compared to 2014. This performance will underpin developer confidence in the new residential and hospitality projects currently moving through the planning system and will attract new investment into the market from regional and international buyers who have been monitoring Jamaica’s recovery with increasing interest.

Caribbean Leaders This Month

Caribbean Small Island States — COP21 Voice: The Caribbean’s delegations to the Paris climate conference demonstrated the most effective and coordinated regional climate diplomacy in CARICOM’s history, securing prominent placement of the 1.5-degree target in the negotiating text and focusing global media attention on the existential climate stakes for small island developing states.

Jamaica — Tourism Record Confirmed: Jamaica’s December data confirming a 14 percent year-on-year occupancy premium cemented the island’s status as the Caribbean’s 2015 tourism growth champion, with direct positive implications for the property rental market and developer confidence heading into 2016.

Dominican Republic — Full-Year Milestone: The DR confirmed record full-year arrivals exceeding 5.5 million for 2015, reinforcing its position as the Caribbean’s highest-volume tourism destination and underpinning the resort-residential market’s continued strength into the year-end.

Barbados — Budget Discipline: The November budget maintained Barbados’s fiscal consolidation path while introducing targeted tourism investment incentives and committing to the infrastructure upgrade programme — a combination that, if implemented effectively, should begin to yield measurable improvements in the island’s competitiveness as a tourism and property investment destination.

Bahamas — Recovery Progress: The commencement of government-funded reconstruction housing on the Joaquin-affected islands of Acklins and Crooked Island, supported by insurance settlements and Caribbean Development Bank financing, marked a meaningful step in a reconstruction programme that will extend well into 2016 and beyond.

Cayman Islands — Year-End Premium Market: Seven Mile Beach’s year-end luxury transaction data is expected to confirm 2015 as Cayman’s strongest residential market in seven years, with the island’s combination of financial sector strength, tourism growth, and premium property product maintaining its position as the Caribbean’s most liquid ultra-high-net-worth market.

Trinidad & Tobago — Budget Credibility: Despite the challenging oil price environment, PM Rowley’s first budget received broadly positive assessments from rating agencies and international investors, who recognised the government’s commitment to fiscal adjustment even as they maintained caution about the structural reform timeline.

Overall Performer — Jamaica: In a year of considerable regional turbulence — oil price collapse, hurricane devastation, energy sector stress, and global financial market volatility — Jamaica has stood apart as the Caribbean’s most consistently positive property investment story. Its combination of record tourism, IMF programme success, improving credit conditions, and a large, unmet housing demand creates an investment thesis that grows more compelling with each passing quarter.

Looking Ahead

The Paris climate negotiations are at their most critical stage as this edition publishes. The outcome — whether a historic agreement that sets the world on a credible path to limiting warming, a partial agreement that falls short of Caribbean ambitions, or a failed summit — will shape the long-term investment narrative for Caribbean coastal property more profoundly than any single event in recent memory. The Caribbean’s diplomatic teams are working toward the most ambitious possible outcome, and the region’s property investors should be watching the Paris developments with the attention they deserve.

The Federal Reserve’s rate decision later this month will close a chapter in Caribbean property market history. The years since 2009 have been shaped, more than is sometimes acknowledged, by the extraordinary accommodative monetary policy of the world’s major central banks. As that era ends — gradually, with the Fed’s first tentative step in December — Caribbean property markets will need to demonstrate that their fundamentals — tourism growth, supply deficits, demographic demand, and the unique lifestyle and investment proposition of the Caribbean — are sufficient to sustain valuations and transaction volumes in a world of gradually normalising interest rates.

As 2015 draws to a close, the Caribbean property market can take stock of a year that was, on balance, one of the most eventful and — across most markets — most positive in recent memory. Record tourism, a world-class oil discovery in Guyana, historic US–Cuba diplomatic normalisation, Jamaica’s remarkable reform dividend, and the Dominican Republic’s extraordinary economic growth have all contributed to a regional investment narrative of genuine momentum. Hurricane Joaquin’s devastating strike on the southern Bahamas, T&T’s oil price crisis, and the approaching Fed rate hike are real headwinds. But the Caribbean’s structural attractiveness as an investment destination — its natural beauty, its strategic geography, its growing connectivity to global markets, and its deepening tourism demand — enters 2016 stronger than it has been in a decade.

The Caribbean Property & Investment Review is published monthly and provides analysis of real estate, economic, and investment developments across the Caribbean region. This edition covers the period 3 November to 2 December 2015. All market data reflects conditions prevailing during the stated coverage period.

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