Jamaica Real Estate Roundup — Q1 2019: Confidence Builds on a Strengthening Foundation

• Jamaica enters 2019 with its strongest macroeconomic fundamentals in a decade.
• BOJ continues easing; commercial mortgage rates at their most accessible in years.
• Winter tourism season delivers strong first quarter; full-year record in prospect.
• Residential market opens 2019 with improved buyer confidence and transaction pace.
• Strata development pipeline growing; developers responding to urban apartment demand.

The first quarter of 2019 opened with Jamaica’s property market operating against the most supportive macroeconomic backdrop it had encountered since before the financial crisis of 2008-2009 and the decade of fiscal adjustment that had followed. The island had, by the close of 2018, completed the substance of its Extended Fund Facility programme with the International Monetary Fund — four years of primary surpluses, debt reduction, public sector reform and structural adjustment whose discipline had been maintained through three changes of government and the sometimes painful political economy of austerity in a small open economy with limited fiscal room. The programme’s results were visible in the data: the debt-to-GDP ratio was on a convincingly declining path, international reserves were adequate, the exchange rate was reasonably stable, and the institutional credibility that the IMF programme’s successful navigation had established was attracting the kind of long-term investment capital that a growing economy requires.

The Bank of Jamaica had been converting these improving fiscal conditions into a more accommodative monetary policy stance through a gradual rate easing process that had been reducing commercial lending rates from the higher levels that the earlier, more stressful macroeconomic environment had required. The overnight policy rate, declining through 2018 and into 2019, was creating a mortgage market whose cost to borrowers was meaningfully lower than it had been three or four years earlier — not yet at the extraordinary pandemic-era lows that would arrive in 2020, but significantly more accessible than the rates that had constrained the property market through the deepest years of the IMF adjustment period. For buyers who had been watching the rate environment and waiting for the right moment to enter the market, Q1 2019 represented a point at which the arithmetic of mortgage affordability had improved sufficiently to bring their aspirations within practical reach.

Tourism: The Winter Season and the Year Ahead

The tourism sector’s Q1 2019 performance — encompassing the peak winter season months of January, February and March, when North American and European visitors seeking Caribbean sunshine drove the island’s highest seasonal occupancy — delivered arrival and revenue data consistent with another strong annual performance. The major resort operators reported occupancy rates in the primary destination areas — Montego Bay, Negril, Ocho Rios, the south coast — that were competitive with or ahead of the comparable Q1 2018 period, reinforcing the full-year trajectory that was building toward what would ultimately prove to be a record annual result.

The structural investment in Jamaica’s tourism capacity that had been underway through the mid-decade period was contributing to the sector’s ability to service a growing visitor base. New hotel openings and major refurbishments in the western parishes had added quality room inventory that allowed the destination to accommodate more visitors while maintaining the per-room revenue levels that operators needed to sustain the investment case for further development. The pipeline of new resort investment — projects in various stages of planning, permitting, construction and imminent opening — was visible in the construction activity of the resort corridors and was creating the near-term supply addition whose arrival would coincide with the tourism boom’s continuation.

Residential Market: January Through March

The residential property market’s Q1 2019 activity reflected the improving confidence of a market that was benefiting from better underlying conditions than it had operated in for most of the preceding decade. Transaction volumes in the Kingston and St Andrew market — the primary market by value in Jamaica’s property landscape — opened the year ahead of the comparable Q1 2018 pace, driven by the combination of improving affordability from the BOJ’s rate easing and the growing confidence of buyers who were reading the economic signals correctly and choosing to act rather than defer.

The price environment through Q1 2019 was one of modest appreciation rather than sharp movement. The supply of residential property in the established Kingston and St Andrew residential areas — the suburbs of Cherry Gardens, Havendale, Constant Spring and their surrounding communities, as well as the longer-established areas of Mona, Liguanea and Barbican — was constrained by the limited availability of land at these locations and the long timeframes that residential development in established areas requires. The demand side was improving with the economic conditions. The result was a gradual price appreciation dynamic that was providing sellers with improving market outcomes without creating the affordability stress for buyers that the much sharper appreciation of the boom period would later introduce.

The Urban Apartment Demand Signal

One of the defining characteristics of the Q1 2019 residential market that would become increasingly significant in the years ahead was the visibility of an urban apartment demand that the existing housing stock was not servicing adequately. The Kingston metropolitan area’s growing population of young, educated, mobile professionals — many of them in their twenties and early thirties, employed in the financial services, business process outsourcing, creative and professional service sectors that the post-programme economy was generating — was expressing a preference for residential product that the island’s predominantly house-dominated residential stock could not meet at accessible price points. The desire for a well-located, secure, professionally managed apartment with the amenities of modern urban living — gym, pool, common areas, covered parking — was visible in the rental market’s premium for the limited supply of quality apartment product that existed, and in the enquiry data of estate agents who were fielding requests for units that their existing listings could not satisfy.

Developers who were reading this demand signal in Q1 2019 were beginning to respond with project plans whose ambition would, by the time of their launch in 2019 and 2020, encounter a market that had moved significantly in the direction their analysis had projected. The planning approvals, NLA strata registrations and early pre-sales exercises that were underway through the first quarter were the foundational activity of a development cycle that would, over the next three years, transform the character of Kingston’s residential supply more significantly than any comparable period in the city’s development history.

NHT: Opening the Year

The National Housing Trust’s Q1 2019 operations reflected the improving formal employment conditions that the economy’s gradual growth was generating. More workers in formal employment, contributing regularly to NHT, accumulating entitlements at the rate the Housing Act prescribed — the Trust’s contributor growth was one of the indicators of the economy’s health that the annual reports tracked. The pipeline of qualifying applicants — contributors who had reached the entitlement thresholds for NHT mortgage financing and were actively seeking to use it — was growing in line with the contributor base’s maturation. The Trust’s Q1 approvals and disbursements reflected this growing demand while operating within the constraints of the affordable housing supply that the Trust’s own development programme and the private sector’s NHT-eligible product were generating.

Commercial Real Estate and Investment Property

The commercial real estate market’s Q1 2019 performance was characterised by the stability appropriate to a sector operating in an environment of modest but improving economic growth. New Kingston’s office market was experiencing healthy occupancy, with the financial services sector — the commercial banks, the securities dealers, the insurance companies and the professional services firms that served them — maintaining their established Kingston office presence and, in some cases, expanding as the growing economy’s activity increased the demand for financial services. Retail occupancy in the island’s established shopping centres was solid, reflecting the consumer spending of an employed population whose real wages were benefiting from the combination of modest nominal wage growth and the inflation control that the BOJ’s monetary framework had delivered.

The investment property market was attracting the attention of the institutional investors — the pension funds, the insurance companies and the securities dealers’ pooled investment vehicles — that had been progressively increasing their real estate allocations as the improving macro environment reduced the risk premium that they applied to Jamaican property assets. The yields available on well-located commercial properties in Kingston and the resort areas were competitive with the alternatives available in the Jamaican investment market, and the combination of rental income and capital appreciation that commercial property had delivered through the post-programme recovery period was building a track record that supported further institutional capital deployment in the asset class.

A Quarter of Foundations

The first quarter of 2019 is, in the context of the subsequent years’ events, a quarter of foundations. The economic conditions that Q1 2019’s data reflects — the fiscal consolidation’s results, the BOJ’s gradual easing, the tourism sector’s strength, the residential market’s improving health — are the conditions that a property market in recovery looks like when it is operating well and the macro environment is cooperating. They are not the extraordinary conditions of the boom that would follow, and they are not the distress conditions that the IMF programme years had required the market to navigate. They are the conditions of normalcy — a word that, given what was to come in 2020, carries more meaning than it did when Q1 2019 was being lived through.

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