Jamaica Real Estate Roundup — Q1 2017: A New Government, a Continuing Programme, and a Property Market in Waiting

• Holness government maintaining fiscal discipline; IMF targets being met.
• BOJ rate easing beginning to improve commercial mortgage affordability.
• Winter tourism season solid; arrivals data above prior year levels.
• Residential market cautiously improving; Kingston transactions above 2016 Q1.
• Deferred demand building; strata apartments attracting growing buyer interest.

The opening quarter of 2017 found Jamaica’s property market at what may, with the benefit of the coming years’ perspective, be understood as an inflection point: the moment when the prolonged compression of the austerity years began, tentatively and without fanfare, to give way to the early movements of recovery. The Andrew Holness JLP government, which had won the February 2016 general election on a platform of economic growth and job creation and had spent its first year navigating the realities of the IMF programme disciplines it had inherited, was by Q1 2017 demonstrating the continuity of commitment to fiscal consolidation that the programme required, while beginning to articulate the longer-term growth agenda that its electoral mandate had promised. The property market’s Q1 2017 performance reflected both the persistence of the constraints that the austerity years had imposed and the first signs of the release that the improving conditions were beginning to allow.

The Bank of Jamaica’s monetary policy posture through Q1 2017 was one of measured and gradual easing from the higher overnight policy rate levels that had prevailed through the middle years of the decade. The MPC’s Q1 communications signalled confidence in the inflation moderation path that justified the easing direction and provided forward guidance that mortgage market participants could begin to factor into their medium-term planning. The commercial banks’ translation of the BOJ’s rate movements into their mortgage product pricing was improving the affordability calculations for potential borrowers at the middle market price points, and each quarter’s easing increment was enlarging the pool of households for whom the numbers on a property purchase were beginning to work.

The IMF Programme Context

The IMF’s Extended Fund Facility agreement with Jamaica — the programme that had been the defining framework of the island’s economic management since 2013 — was by Q1 2017 in its concluding phase, with the question of what succeeded it — a precautionary stand-by arrangement, a clean exit, or some other transitional framework — a matter of active discussion between the Jamaican authorities and the Fund. The programme’s track record by this point was one of remarkable compliance: Jamaica had met the fiscal targets that the EFF required through a period of political transition, maintaining the primary surplus discipline across a change of government in a manner that spoke to an institutional commitment to the programme’s objectives that went beyond any single administration’s political choices.

For the property market, the IMF programme’s relevance was primarily through the macro environment it was shaping. The fiscal consolidation that the programme required had, in its most acute years, compressed the public investment and the household income growth that demand-side property market vitality depended upon. By Q1 2017, that compression was easing as the programme approached its end, the fiscal space created by the primary surplus was being directed toward growth-supporting investment and services, and the private sector confidence that the successful programme track record had generated was beginning to translate into the investment decisions that the property market’s supply side needed.

Winter Tourism: The Season’s Contribution

The January to March period is, for Jamaica’s tourism sector, the winter peak — the months in which the North American and European markets’ cold-weather populations seek Caribbean sun and Jamaica competes most directly for the premium holiday budgets that its all-inclusive and boutique resort operators have built their business models around. Q1 2017’s performance in this critical window was solid: arrivals data above the Q1 2016 comparable, resort occupancy in the Montego Bay, Negril and Ocho Rios clusters consistent with the improvement that had been the sector’s direction since the softer years of 2014 and 2015, and revenue-per-room metrics that reflected both the improved volume and the modest yield improvement that the recovering competitive position was delivering.

The diaspora component of Q1’s visitor flows — the Jamaican-born residents of the UK, Canada and the United States whose return visits during the Christmas and New Year period extend into January and whose property market engagement is among the most commercially significant of any buyer segment — had delivered activity in the residential market above the Q1 2016 level. The exchange rate dynamics that had been making Jamaica’s property market increasingly attractive to diaspora buyers holding harder currencies were, by Q1 2017, well established as a structural feature of the investment calculus, and the improving economic narrative around Jamaica’s fiscal consolidation was reinforcing the confidence that those dynamics required to convert into purchase decisions.

The Kingston Residential Market in Early Recovery

Kingston and St Andrew’s residential market was, through Q1 2017, operating in the conditions of early and cautious recovery that the improving macro backdrop was beginning to support. The established residential communities of upper St Andrew — Cherry Gardens, Norbrook, Mona, Stony Hill, the grid of communities that the professional and business class had occupied through the city’s growth and whose housing stock represents the residential market’s quality reference points — were showing the first sustained improvement in transaction volumes and achieved prices that the data had registered in several years.

The improvement was real but modest. The properties that the market’s most active buyers were seeking — the well-maintained three and four-bedroom house in the gated or semi-private residential community, at the price point accessible to the dual-income professional household whose NHT entitlement and commercial mortgage capacity could together fund the purchase — were moving with a decisiveness that had not characterised the Q1 2015 or Q1 2016 markets. But the speed of decision-making and the frequency of multiple-offer situations that would come to define the market in its later boom years were not yet features of the Q1 2017 environment. The recovery was present and building; it was not yet visible in its fully developed form.

Strata Development: The Concept Establishes Itself

The strata apartment sector’s Q1 2017 story was one of consolidation and growing confidence. The projects that had been pioneering the concept in Jamaica — testing whether a buyer population accustomed to the Caribbean tradition of the detached family house would adapt to the urban apartment model that had become standard in North American and European cities — were generating the track record whose commercial and quality evidence was enabling the sector to grow. The completions that Q1 2017 delivered, and the pre-sales activity on the projects whose completion dates lay a year or two in the future, were together building the inventory and the investor confidence that the segment needed to establish itself as a durable feature of Kingston’s residential supply landscape.

The buyer profile for strata units in Q1 2017 remained concentrated in the investor and professional segments, with the investor buyer — seeking rental yield from a managed asset in a location attractive to the professional renter population — particularly active. The rental demand for quality strata apartments in Kingston’s new stock was strong, driven by the returning diaspora professional, the business-purpose renter from the US and Canadian market, and the local professional who valued the managed living environment and the location premium that the best strata schemes offered. The rental yields that the early strata projects were delivering were attracting the attention of the investment community and generating the reputational validation that new launches needed to accelerate their pre-sales.

The Commercial Sector and Business Investment

The commercial property market’s Q1 2017 conditions reflected the cautious but improving business investment environment that the macro data was beginning to support. The Kingston office market — the New Kingston commercial corridor and the emerging clusters of office space in the surrounding sub-markets — was showing the first signs of improving occupancy as businesses that had right-sized their space during the tightest years began to expand again. The pipeline of new commercial development was limited by the still-conservative development economics of a market in which the financing cost and the rental rate expectations had not yet converged at levels that made new office development straightforwardly viable, but the improving demand picture was beginning to shift the calculation.

Q1 Close: Foundations in Place

The first quarter of 2017 closes with Jamaica’s property market on a trajectory that the conditions being assembled will, over the next three to four years, prove to have been the foundations of a significantly more active market. The rate easing has created the affordability improvement that demand-side recovery requires. The tourism sector’s recovery is generating the income and confidence that resort-area and diaspora-facing segments depend on. The strata concept’s establishment is creating the supply side diversity that a mature market needs. And the IMF programme’s fiscal discipline has delivered the macro stability that property investment requires. None of these developments has yet expressed itself in the transaction volumes, price appreciation and development activity that a fully recovered market would produce. But the preconditions are being met, and the property market that Jamaica’s Q1 2017 data describes is one whose medium-term trajectory, for those with the patience and the capital to participate in it, is pointing clearly upward.

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