Jamaica Real Estate Roundup — Q3 2018: Summer Momentum in a Market Finding Its Stride

• Summer tourism season delivers strong Q3; 2018 full-year trajectory positive.
• BOJ continues rate easing; commercial mortgage affordability at multi-year best.
• Residential transactions improving; Kingston strata market growing in depth.
• Hurricane season active regionally but spares Jamaica significant direct impact.
• Construction sector active; hotel and residential pipelines running concurrently.

The third quarter of 2018 was, for Jamaica’s property market, a period of building momentum in conditions that were, for the first time in several years, genuinely supportive of the sector’s natural demand dynamics. The Bank of Jamaica’s gradual rate easing, the tourism sector’s strong summer performance, the ongoing fiscal consolidation’s contribution to macroeconomic stability, and the emergence of the strata apartment development pipeline as a meaningful source of new residential supply were all pointing in the same direction: toward a property market that was, quarter by quarter, improving its position relative to the constrained conditions of the earlier part of the decade.

The BOJ’s Monetary Policy Committee maintained its gradual easing trajectory through Q3 2018, continuing the rate reductions that had been progressively bringing commercial lending rates down from the levels that had constrained affordability through the IMF programme years. The quarterly MPC communications acknowledged the improving inflation data — consumer prices were operating within or near the four-to-six per cent target range with a consistency that the earlier, more volatile inflation environment had not provided — while maintaining the gradual rather than aggressive character of the easing in deference to the need to consolidate the inflation credibility that the framework had been building. For the property market, this translated into a commercial mortgage rate environment that was, by Q3 2018, meaningfully more accessible than it had been in 2015 or 2016, and that was attracting buyers who had been watching the rate trajectory and choosing the Q3 2018 moment as the point at which the arithmetic of their purchase decision had become supportable.

Tourism: The Summer Season’s Contribution

The July-September period is traditionally Jamaica’s strongest for North American summer travel, when school holiday schedules and the Caribbean’s warm-weather appeal converge to drive the highest arrival volumes of the year. The 2018 summer season delivered data that was tracking ahead of the comparable 2017 period, continuing the recovery trajectory that had been building since the mid-decade. Resort occupancy in Montego Bay, Negril and Ocho Rios was strong through July and August, with the major all-inclusive properties reporting performance figures that justified the maintenance and expansion investment they had been making. The emergence of new direct air routes from North American cities to Sangster International Airport in Montego Bay — a development that the tourism authorities and the Airports Authority of Jamaica had been actively promoting — was expanding the addressable market by reducing the friction of connection travel that had previously constrained arrivals from secondary North American cities.

The tourism sector’s Q3 2018 performance had direct and indirect effects on the property market that were visible in the quarter’s data. The direct effects — employment income in the resort parishes, the short-term rental demand that visitor spending generated, the commercial property occupancy of tourism-ancillary retail and service businesses — were sustaining the demand base of the resort-area residential markets. The indirect effects — the broader economic confidence signal that a strong tourism performance sends to domestic and international investors — were contributing to the improving investor sentiment that the property market’s Q3 activity reflected.

Hurricane Season: Regional Activity, Limited Jamaican Impact

The 2018 Atlantic hurricane season produced significant activity in the Caribbean basin through August and September, with Hurricane Florence making its devastating landfall in the Carolinas in mid-September and Hurricane Michael developing as the quarter closed into what would become a catastrophic Category 5 landfall in the Florida Panhandle in October. Jamaica was spared direct impact from the season’s major storms, the island’s location in the western Caribbean providing the degree of shelter from the most common Atlantic storm tracks that had historically resulted in Jamaica experiencing fewer direct major hurricane strikes than the eastern Caribbean island chains.

The hurricane season’s passage without significant Jamaican impact was a neutral rather than positive factor for the property market — the absence of storm damage was the baseline expectation, not a windfall. But the regional activity of the season was a contextual reminder, relevant to every Caribbean property investor, of the structural insurance and building code considerations that responsible property ownership in the hurricane zone required. The Jamaica property sector’s building regulatory framework and the insurance market’s coverage requirements were the institutional expressions of a risk management posture that the hurricane season’s annual activity reinforced.

Residential Market: Kingston and Beyond

The Kingston and St Andrew residential market’s Q3 2018 performance reflected the improving confidence of a buyer population that was responding to better affordability conditions with purchase decisions whose pace was, by the end of the quarter, notably more active than the comparable period of 2016. The middle market — the two and three-bedroom residential house in the established suburban communities that represented the aspirational target for a large segment of the island’s working and professional population — was generating the consistent enquiry volumes and transaction completion rates that characterised a market in healthy demand without the excess urgency of a bubble.

The strata apartment segment was the residential market’s most dynamic sub-sector in Q3 2018. The completions of projects that had been underway through 2016 and 2017 were entering the market at price points that were finding buyers, and the pre-sales launches of new developments were attracting interest that validated the developers’ decision to bring apartment supply to the Kingston market in greater quantity than the preceding decade had produced. The buyer profile for the apartment segment was evolving: the young professional first-time buyer, the investor purchasing for yield through the short-term and long-term rental markets, and the overseas buyer whose connection to Jamaica made a Kingston apartment a more personally meaningful investment than a financial instrument — all of these were converging on a product category that had not previously been available at scale in the Jamaican market.

Commercial Construction: Hotels and Offices

The construction sector’s Q3 2018 activity level was supported by two concurrent demand streams: the hotel and resort construction that the tourism sector’s strong performance was justifying across the western and northern parishes, and the residential strata development pipeline that was generating construction demand in Kingston and St Andrew. The concurrent operation of both demand streams was creating a tight market for skilled construction labour — masons, carpenters, steelworkers, electricians and the project management professionals who oversee large construction programmes — whose services were in demand from multiple competing projects simultaneously.

Building materials costs through Q3 2018 were broadly manageable within project budgets, reflecting a global commodities environment that had not yet experienced the supply chain disruptions and energy price shocks that would arrive with the Russia-Ukraine war in 2022. Steel and cement — the primary structural materials of the strata development sector’s construction methods — were available at prices that the projects’ financial models had been built around, and the labour and materials management disciplines of the more experienced development operations were producing project deliveries that maintained the timeline and budget performance that pre-sold buyers and pre-committed financiers required.

NHT Activity and Affordable Supply

The National Housing Trust’s Q3 2018 mortgage lending and development activity was operating at the pace that its contributor base’s demand and its financial capacity supported. Mortgage approvals through the quarter reflected the improving income conditions of formal-sector workers whose contributions were generating the entitlements that qualified them for Trust financing. The Trust’s own development pipeline — scheme housing projects in St Catherine, Portland and other parishes, as well as the urban residential development at Ruthven Towers and similar Kingston-area projects that were in various stages of planning and execution — was advancing toward the completions that would expand affordable supply.

Outlook: A Strengthening Quarter in a Strengthening Year

The third quarter of 2018 closes with Jamaica’s property market in a position of improving health relative to where it has been for most of the post-2008 period. The improving macro fundamentals — the BOJ’s rate easing, the fiscal consolidation’s results, the tourism sector’s performance — are creating conditions that the residential market is beginning to respond to with the confidence that had been constrained through the austerity years. The strata development trend is adding a dimension to the supply side that the market had not previously had. And the hurricane season’s passage without significant Jamaican impact has preserved the conditions for a positive close to the year. The fourth quarter, with the diaspora’s Christmas visit season and the winter tourism peak’s opening, will be the test of whether Q3’s momentum can be sustained and extended into the close of what is shaping up to be the most positive year for Jamaica’s property market since the financial crisis.

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