Jamaica Real Estate Roundup — Q2 2017: The Long Easing and the First Signs of Recovery

• BOJ rate easing gathering pace; mortgage affordability improving steadily.
• Tourism building toward a stronger 2017 annual performance.
• Residential market in early recovery; transaction volumes above 2016 comparable.
• Strata apartment concept gaining buyer acceptance in Kingston market.
• Holness government economic programme on track; fiscal targets being met.

The second quarter of 2017 found Jamaica’s property market in the early and uneven stages of a recovery whose preconditions had been in assembly for the better part of two years. The Bank of Jamaica’s rate easing cycle, which had been progressively reducing the overnight policy rate from the higher levels that had prevailed through the middle years of the decade, was by Q2 2017 delivering the improvement in commercial mortgage affordability that its logic had always promised — but delivering it gradually, cumulatively, in a manner whose effects were visible in the quarterly data only when compared across multiple periods rather than in any single quarter’s movement. The market was recovering. The recovery was real. But it was the kind of recovery that required patience and close reading of the data to perceive, rather than the kind that announced itself in the elevated activity and accelerating prices that would, in later years, define Jamaica’s property market’s character.

The macroeconomic environment of Q2 2017 was the product of the Andrew Holness JLP government’s continuation of the fiscal discipline that the IMF’s Extended Fund Facility had mandated and the preceding Portia Simpson Miller administration had implemented through the most difficult years of the programme. The primary surplus targets that the IMF programme required were being met, the public debt trajectory was stabilising, and the improving sovereign creditworthiness that this performance was generating was translating into the reduced borrowing costs and improved investor confidence that private sector investment — including the property sector’s development investment — depended upon. The IMF’s own quarterly reviews of Jamaica’s programme performance were delivering broadly positive assessments, providing the external validation that reinforced domestic and international confidence in the trajectory.

The Rate Environment: Easing and Its Effects

The Bank of Jamaica’s Q2 2017 monetary policy decisions reflected an MPC that had, over the preceding several quarters, established a clear and consistent direction of travel: the overnight policy rate was being reduced in measured steps, and the MPC’s communications were providing the forward guidance that allowed mortgage market participants to plan around the expectation of further easing in the periods ahead. The commercial banks had been translating the policy rate movements into mortgage rate reductions that were improving the qualifying conditions for potential borrowers at the middle market price points that the residential sector’s demand base was concentrated in.

The practical consequence of the easing for the property market was visible in the improving qualifying arithmetic for the dual-income professional household that represented the most active component of Q2 2017’s residential buyer pool. The combination of lower mortgage rates, the gradual improvement in formal sector wages, and the modest price appreciation that the residential market had been delivering meant that the gap between aspiration and qualifying capacity was narrowing, and the population of households able to make the numbers work on a property purchase they had previously deferred was growing with each quarter’s easing increment.

Tourism: The Building Season

The tourism sector’s Q2 2017 performance was consistent with the improving trajectory that the annual data had been building since the recovery from the 2014–2015 period of softer performance. The April to June shoulder season — which bridges the end of the winter peak and the beginning of the North American summer travel market — delivered arrivals data that the Jamaica Tourist Board’s quarterly reporting confirmed as above the Q2 2016 comparable. The resort operators’ occupancy and revenue-per-room metrics were improving, and the investment in room capacity expansion and resort quality that the improving economics of the sector were making viable was beginning to express itself in the construction activity visible at the major resort areas.

The tourism sector’s health mattered to the property market through the standard mechanisms of employment income and investment confidence in the resort parishes, but in Q2 2017 it also mattered through the specific mechanism of the short-term rental market’s growing maturity. The platforms that had been transforming the relationship between residential property ownership and tourism accommodation globally were establishing a meaningful presence in Jamaica’s resort areas, and the investment calculus of the residential buyer who planned to use a property as a short-term rental asset when not in personal occupation was beginning to shape demand in the Montego Bay, Negril and Ocho Rios residential markets in ways that the conventional long-term rental investment logic did not capture.

The Kingston Residential Market

Kingston and St Andrew’s residential market in Q2 2017 was characterised by the tentative but growing willingness of buyers who had been deferring purchase decisions through the tightest years of the austerity period to act on intentions that the improving conditions were making executable. The buyer’s market that had prevailed through 2013 and 2014 — when the combination of tight financing, constrained consumer confidence and adequate inventory had kept prices flat and sellers under pressure — was transitioning toward a more balanced dynamic in which the improving demand side was beginning to reduce the leverage that buyers had become accustomed to exercising.

The detached house in the established Kingston residential communities remained the most sought-after residential asset, and its Q2 2017 performance was the residential market’s most visible indicator of improved conditions. Quality properties in the upper St Andrew neighbourhoods that the professional and business class had historically occupied were attracting more expressions of interest than in comparable Q2 periods of the preceding two or three years, and the gap between asking and achieved prices was narrowing as the improving demand reduced sellers’ willingness to discount from their assessed value.

The townhouse and gated community segment — the mid-market product that new development activity had continued to produce even through the tighter years — was performing steadily. The developers who had maintained their programmes through 2015 and 2016 were now completing and selling units into a market that was more receptive than it had been when the projects were conceived, and the sales data from these completions were providing the validation that encouraged the next cohort of developers to commit to new starts.

The Strata Moment

The strata apartment concept was, through Q2 2017, completing the transition from novelty to mainstream in Jamaica’s residential property market. The early-mover projects that had pioneered the concept — the developers who had brought Jamaica’s first managed apartment schemes to market in the 2013–2015 period and whose experience had generated both the buyer validation and the developer learning that the concept required to establish itself — were now being joined by a growing cohort of developers who had observed the early movers’ commercial performance and were committing to the format with the confidence that the track record justified.

The Q2 2017 strata market’s most significant development was the broadening of the buyer base beyond the early-adopter professional and investor profile that had characterised the earliest launches. Buyers who had been observing the concept at a distance — sceptical of the strata ownership model, uncertain about the management quality that the schemes would deliver, cautious about the new product type’s resale liquidity — were beginning to cross the threshold into purchase as the track record accumulated. The first completions of strata projects in the Kingston market were generating the resale data that addressed the liquidity concern, and the management performance of the completed schemes was providing the quality evidence that the sceptics had been waiting for.

Affordable Housing: The NHT and the Deficit

The National Housing Trust’s Q2 2017 activity reflected the ongoing challenge of the affordable housing deficit that the austerity years had deepened. The Trust’s mortgage lending programme was delivering financing to contributors whose entitlements were qualifying at the pace that the formal employment sector’s growth was generating, but the supply of housing solutions at the price points accessible to the Trust’s contributor base remained insufficient to meet the accumulated demand that the constrained years had deferred. The policy discussions of 2017 around the NHT’s mandate and investment priorities were familiar in their content — the acknowledgement of the deficit, the articulation of targets, the commitment to delivery — without yet producing the supply-side response that the deficit’s scale required.

Mid-2017: Assessment and Outlook

The second quarter of 2017 closes with Jamaica’s property market in a genuine but early-stage recovery. The rate environment is improving, the tourism sector is building momentum, the strata concept is establishing itself as a durable component of the residential supply picture, and the conventional residential market is returning to activity levels that, while still modest by the standards of a fully recovered market, represent real improvement over the constrained conditions of the preceding several years. The structural challenges — the affordable housing deficit, the construction cost environment, the limited supply of serviced residential land at accessible locations — remain, and their resolution will require sustained policy attention and private investment over a period of years. But the direction, in the mid-point of 2017, is positive, and the building blocks of the more active market that the improving macro conditions are pointing toward are being assembled.

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