Jamaica Real Estate Roundup — Q1 2018: Winter Confidence and the Long Road to Recovery

• Winter tourism season delivers strong Q1 arrivals and income boost.
• BOJ easing path continues; mortgage affordability gradually improving.
• Residential sales pace in Kingston and St Andrew above prior year.
• Strata apartment pipeline expands; multiple new project launches registered.
• IMF programme disciplines holding; fiscal consolidation on track.

The first quarter of 2018 opened with Jamaica’s property market operating in the relatively benign conditions that the winter tourism season typically provides — elevated employment in the hospitality sector, increased consumer spending in the resort parishes, and the heightened activity of the diaspora visitor cohort whose return to Jamaica during the Northern Hemisphere winter months has historically been one of the more reliable seasonal drivers of residential property interest. The January to March window is, for the Jamaican property market, the period in which the preceding year’s savings decisions and the current year’s investment intentions collide with the available inventory, and Q1 2018’s collision produced a market that was noticeably more active than its Q1 2017 counterpart.

The macroeconomic backdrop for Q1 2018 was the most supportive it had been in several years. The Bank of Jamaica’s ongoing rate easing was progressively reducing the headline cost of commercial mortgage financing. Inflation was moderating, the Jamaican dollar was holding at levels that made the import-heavy construction supply chain’s cost structure more manageable than in the higher-inflation periods of earlier in the decade, and the IMF’s Extended Fund Facility programme — whose completion was now in sight — had delivered the fiscal consolidation and institutional reform that had been its conditions, generating in the process the improved sovereign creditworthiness and investor confidence that underpinned the environment of Q1 2018.

Tourism: Winter Peak Delivers

Q1 2018’s tourism data, while not yet fully compiled at this writing, points toward a strong winter season across Jamaica’s major resort destinations. Montego Bay, Negril and Ocho Rios all reported occupancy rates consistent with the improved performance that had characterised the recovery trajectory building since 2015. The airlift picture — the number of seats available from the key source markets of North America and the United Kingdom — continued to grow as carriers responded to the yield data that Jamaica’s resort operators were generating and invested in additional frequency and new routes. The Canadian market, historically an important contributor to Jamaica’s winter arrivals, performed well through Q1.

The tourism sector’s Q1 performance mattered to the property market in the standard ways — the employment income and the consumer spending it generated feeding through to the household balance sheets of the working population in the resort-dependent parishes — but also in the specific way of diaspora property interest. The returning Jamaican visitor who spent the winter months exploring the Kingston property market, walking through developments in the resort areas, and gathering the intelligence necessary to make a purchase decision was a characteristic figure of the Q1 market. Their activity in Q1 2018 was above the comparable Q1 2017 levels, reflecting both improved confidence in Jamaica’s economic trajectory and the specific investment calculus of offshore Jamaicans who were beginning to see the island’s property market as an attractive destination for capital that the exchange rate dynamics were making more powerful than in earlier years.

The Rate Environment and Mortgage Markets

The Bank of Jamaica’s Monetary Policy Committee delivered its Q1 2018 communications in a tone of measured confidence about the progress of inflation moderation and the sustainability of the rate easing path. The overnight policy rate continued its gradual descent, and the commercial banks — which had been managing their mortgage book conservatively through the higher-rate years — were beginning to sharpen their offerings in the residential mortgage market as the improved rate environment and the recovering demand picture made competitive positioning more worthwhile. The spread between the policy rate and the commercial mortgage rate was narrowing as competition for the improved quality of mortgage demand began to express itself in product terms.

The National Housing Trust continued to function as the primary affordable homeownership financing mechanism for the majority of Jamaica’s working households, with its mortgage rates — set by policy rather than by market dynamics — holding at the levels that made NHT financing the preferred option for contributors whose income profile qualified them for Trust support. The Trust’s Q1 2018 mortgage approval volumes were broadly consistent with the pace of the preceding quarters, reflecting the steady if unspectacular demand from contributors whose years of accumulated entitlement were reaching qualifying levels at the pace that the employment base’s growth was generating.

Residential Market: The Kingston Opportunity

The Kingston and St Andrew residential market was, through Q1 2018, the most analytically interesting segment of Jamaica’s property landscape. The combination of improving mortgage affordability, recovering formal employment, and the emerging strata development supply pipeline was creating a market in transition — one that was moving, slowly but perceptibly, from the subdued conditions of the austerity years toward the more active environment that the improving fundamentals were beginning to support.

The conventional detached residential market in the established Kingston neighbourhoods was showing modest but real price appreciation, driven by the imbalance between a demand side that was recovering more quickly than a supply side that had been severely constrained by the development economics of the preceding five years. The quality houses in the most sought-after locations of Cherry Gardens, Norbrook, Mona and the upper reaches of St Andrew were generating multiple expressions of interest and selling at or above asking price — a pattern that reflected the fundamental undersupply of quality detached residential property that the constrained development environment had produced.

The townhouse segment — the gated community development of mid-range units at the price points accessible to dual-income professional households — was performing steadily. The projects that had been developed through the tightest years of the austerity period, when developer courage and buyer confidence had been simultaneously tested, were generating the resale activity of owners who had purchased in those earlier years and were now seeing modest but real appreciation in the value of their investment. This resale activity was feeding the secondary market with inventory at prices that provided useful reference points for the developers pricing new projects.

Strata Development: The Pipeline Grows

The strata apartment segment was Q1 2018’s most dynamic story. The number of projects in various stages of development — from planning and permitting through construction to pre-sales and completions — was higher in Q1 2018 than at any comparable point in the preceding decade, and the pace of new project registrations suggested that the pipeline would continue to grow through the remainder of the year. The developers who had been building the strata concept’s track record in Jamaica through the early-mover projects of the preceding years were now joined by a wider cohort of developers who had observed the early movers’ commercial outcomes and were committing capital to the segment.

The buyer profile for strata apartments in Q1 2018 remained characteristically diverse: the young professional purchasing a first property, the investor assembling a rental portfolio, the downsizing empty-nester seeking a managed living environment, and the diaspora buyer seeking a Jamaican foothold without the management burdens of a detached house. The product’s appeal across these distinct buyer types gave the segment a resilience that single-profile demand structures do not provide, and the developers who understood this diversity were designing projects that could serve multiple segments simultaneously.

Construction Costs and Supply Chain

The construction supply chain’s Q1 2018 cost environment was, by the standards of earlier in the decade, relatively manageable. The moderation of inflation that the BOJ’s easing cycle had been accompanied by, and the relative stability of the Jamaican dollar that the improved fiscal and current account positions were supporting, meant that the imported materials that constitute a significant proportion of Jamaica’s construction cost structure were not generating the price escalation that had been a persistent challenge for developers trying to maintain project economics through the higher-inflation years.

Labour costs in the construction sector — driven by the capacity constraints of a workforce whose skilled trades component had been depleted by the combined effects of emigration and the reduced construction activity of the austerity years — remained a real cost pressure. The availability of experienced trades workers for the expanding pipeline of concurrent projects was a recurring concern among developers, and the training and workforce development initiatives that the sector’s representative bodies had been advocating for were not yet producing the skilled workforce volumes that the pipeline required.

Outlook: Building Toward the Mid-Year

The first quarter of 2018 closes with Jamaica’s property market on a trajectory of gradual improvement that the supporting macro conditions make sustainable for the medium term. The rate easing has further to run, the tourism recovery is adding income to the household balance sheets that the property market’s demand side depends on, and the strata supply pipeline is generating the new product that the market needs to accommodate its recovering demand. The pace is measured rather than dramatic, and the participants who have been through the austerity years bring a caution to their commitments that prevents the kind of exuberance that precedes correction. But the direction is positive, and the conditions being built in Q1 2018 are the foundations from which the more active market of the years ahead will grow.

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