Jamaica Real Estate Roundup — Q2 2016: Election, Transition, and a Property Market Reading the Signals

• JLP election victory February 25; Holness confirms IMF programme continuity.
• Market reads political transition positively; policy stability confirmed.
• BOJ easing path maintained; commercial mortgage rates improving.
• Residential market cautious in Q2; diaspora and investor segments most active.
• Tourism building steadily; shoulder season above prior year data.

The second quarter of 2016 was, for Jamaica’s property market, a period of political transition assessment. The Andrew Holness JLP government, which had taken office following its narrow single-seat majority victory in the February 25 general election, had moved with some speed in its early weeks to resolve the question that the market most urgently needed answered: would the new administration maintain the IMF Extended Fund Facility programme’s fiscal commitments, or would it seek to revisit the consolidation framework in the name of the growth agenda its election platform had emphasised? The answer, communicated through the government’s early budget presentations and its engagement with the IMF, was unambiguous: the programme would continue, the primary surplus targets would be honoured, and the consolidation trajectory that had been delivering the macro improvements of the preceding several years would not be reversed.

For the property market, the resolution of this question was itself a market-positive development. The uncertainty of the election period — the months before and immediately after the February vote during which the policy direction of the incoming government was unclear — had produced the predictable response of cautious participants: buyers deferring decisions pending clarity, developers slowing project commitment until the framework was established, sellers moderating their expectations in light of the temporarily reduced demand. By April and May, as Q2 2016 unfolded and the Holness government’s commitment to programme continuity became clear, this uncertainty premium was unwinding, and the market’s activity was reflecting the improved clarity of the policy environment.

The Policy Environment and Property Market Confidence

The confirmation of IMF programme continuity under the new government had the effect, for the property market, of removing one of the scenario risks that had been tempering participant confidence since the election campaign began. A government that had chosen to abandon or fundamentally renegotiate the programme would have introduced a period of macro uncertainty whose consequences for the interest rate environment, the exchange rate, and investor confidence would have been deeply negative for property values and transaction volumes. The market had been pricing some probability of this scenario into its Q1 behaviour; Q2’s clarity allowed the unpricing of that risk premium.

The Bank of Jamaica’s Q2 2016 monetary policy decisions maintained the easing trajectory that the new government’s macro framework was supporting. The MPC’s Q2 communications reinforced the forward guidance that mortgage market participants needed to plan confidently about the direction of financing costs, and the commercial banks’ mortgage rate adjustments through the quarter continued the progressive improvement in affordability conditions that the easing cycle had been delivering.

Residential Market: Transition Caution

The residential market’s Q2 2016 performance was characterised by the cautious activity that transition periods typically produce. The buyers who had been waiting for the election’s resolution before committing were, through April and May, returning to the market in the measured way of decision-makers who had been through enough uncertainty to have developed a caution that the resolution of one uncertainty did not instantly dissolve. The sense that the macro environment was improving and the direction of rates was clear was sufficient to motivate the buyers who had been waiting for a trigger, but not sufficient to produce the urgency that would characterise the market in its later, more energetic phases.

The segments most active through Q2 2016 were those whose buyers were least sensitive to the policy uncertainty that had been suppressing the broader market. The diaspora buyer — whose purchase calculus was driven by exchange rate dynamics and the longer-term Jamaican economic narrative rather than by the near-term policy signal of any particular quarter — was active through the spring selling season at levels consistent with the prior year. The investor buyer — seeking rental yield in the Kingston professional market or short-term rental income in the resort areas — was similarly active, driven by the yield metrics of individual assets rather than the macro uncertainty that weighed more heavily on the primary residence purchaser.

Strata Apartments: Through the Transition

The strata apartment segment demonstrated, through Q2 2016, a resilience to the transition period’s uncertainty that the conventional residential market did not fully share. The projects whose pre-sales were underway maintained their sales momentum through the election period and its aftermath, with the buyers who had already committed to their units showing no significant cancellation activity and the new buyer enquiries flowing at rates that, while below the post-clarity levels of mid-year, were sufficient to sustain the pipeline’s pre-sales progress. The strata buyer’s typically longer investment horizon — the recognition that they were buying into a project whose completion lay eighteen months to two years in the future — meant that the near-term political uncertainty was less material to their decision than it might have been for a buyer seeking immediate occupancy.

Tourism and the Shoulder Season

The Q2 2016 tourism season — the shoulder period that bridges the winter peak and the summer travel market — delivered performance broadly in line with the improving trajectory that the preceding year’s data had established. The Jamaica Tourist Board’s April to June arrivals data was above the Q2 2015 comparable, with the North American source markets — particularly the United States and Canada — showing the improvement that the expanded airlift capacity of recent years was making possible. The resort operators’ occupancy and revenue data reflected the sector’s improving fundamentals, and the investment in resort quality and capacity that the improving economics were validating was continuing to advance the island’s competitive position in the Caribbean tourism market.

Commercial Property: The Business Environment

The commercial property market’s Q2 2016 conditions mirrored the cautious but improving character of the residential sector. The Kingston office market was showing occupancy improvement as the business confidence that the IMF programme’s track record and the political transition’s positive resolution were generating expressed itself in the space-expansion decisions of firms whose revenue recovery was beginning to outgrow their right-sized post-austerity footprints. The retail sector was navigating the evolving consumer landscape with the tools available to its operators: tenant mix refinement, the integration of experiential elements that e-commerce alternatives could not replicate, and the management of lease terms in a market where the relative leverage of landlord and tenant was shifting with each quarter’s recovery increment.

Mid-Year Assessment: Building Through Transition

The second quarter of 2016 closes with Jamaica’s property market having successfully navigated a political transition whose outcome was, from the market’s perspective, the best that could have been hoped for: a change of government accompanied by continuity of the economic framework. The market’s fundamentals — the rate environment, the tourism trajectory, the improving consumer confidence, the growing strata supply pipeline — are all pointing in the right direction. The pace of improvement remains measured rather than dramatic, but the preconditions for the more active market that the improving macro environment is promising are assembling themselves with the quarter-by-quarter consistency that, in retrospect, characterises recoveries that prove durable.

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