Dudus Surrenders: Kingston’s Property Market Counts the Cost of the Tivoli Crisis — July 2010

Publication Date: July 3, 2010 | Coverage Period: June 3–July 2, 2010 | Category: Monthly Review

June in Brief

• Christopher “Dudus” Coke surrendered peacefully to Jamaican authorities on June 22, ending a weeks-long manhunt following the May Tivoli Gardens security operation.
• Coke was extradited to the United States on June 24, transferred to US Marshals custody in New York; the immediate security crisis is formally resolved.
• The May 24–26 security operation left at least 73 people dead, some 94 homes destroyed and an estimated 200 severely damaged in West Kingston.
• Kingston commercial and residential property confidence remains fragile; investors cite continued uncertainty about inner-city security conditions.
• The Bank of Jamaica held its policy rate steady in June as inflation remained elevated above 11%, constraining mortgage market activity.
• National Housing Trust loan applications reportedly strong in suburban parishes, suggesting demand has shifted away from Kingston’s inner-city precincts.

Housing Market Overview

The resolution of the Dudus crisis carries unmistakable implications for Jamaica’s residential and commercial property markets. For the better part of six weeks — from the launch of the security operation in Tivoli Gardens on May 24 through the extradition of Christopher Coke on June 24 — Kingston’s west and central precincts were effectively off-limits to normal commercial activity. Property agents operating in the capital describe a period of near-complete market paralysis: viewings were cancelled, transactions delayed and prospective buyers from the diaspora advised to defer travel plans.

The immediate relief at Coke’s surrender — described by the preacher who facilitated it, Reverend Al Miller, as motivated in part by Coke’s stated desire to end the bloodshed — has not translated into any swift recovery of buyer confidence. Real estate professionals caution that the reputational damage inflicted on Kingston as an investment destination will take substantially longer to repair than the physical damage to the Tivoli community. The broader market, they note, was already operating under significant strain: transaction volumes had fallen markedly in 2009 and the first half of 2010, commercial mortgage rates remain in the 11–14% range, and the Jamaica Debt Exchange, completed in February, has yet to generate the downward pressure on retail lending rates that analysts had anticipated.

In the upper segments of the market — residential properties above J$15 million in the traditional Kingston 6, 8 and 10 corridors — the months of May and June registered among the lowest transaction volumes in recent memory. Sellers are not yet willing to accept prices that reflect the distressed market conditions; buyers remain cautious. The result is a standoff that industry observers expect to persist at least through the third quarter.

Tivoli Gardens: Community Housing Damage

The human and physical cost of the May security operation in West Kingston is only now being fully assessed. Independent observers who gained access to Tivoli Gardens in the aftermath reported conditions that the Jamaican Council for Human Rights described as “appalling”: some 4,000 residents were reportedly arbitrarily detained during the operation, while the community itself bore significant structural damage. According to assessments compiled in the weeks following the incursion, approximately 94 homes were destroyed and a further 200 severely damaged — a housing loss of a scale rarely seen outside of natural disasters in Jamaica’s modern history.

The Housing Agency of Jamaica and the National Housing Trust have been engaged in preliminary discussions about the form that reconstruction and rehabilitation assistance might take. Community leaders and advocacy groups, however, have urged that any rebuilding programme be community-led and that residents not be relocated away from the area — a concern rooted in the historical experience of communities in Jamaica that have been dispersed under the rubric of urban renewal. The government has not yet announced a formal reconstruction timeline or funding commitment. The immediate priority, authorities have indicated, is the restoration of basic services, including water, sanitation and electricity supply.

Government Policy and NHT Activity

The JLP administration of Prime Minister Bruce Golding enters July in a politically weakened position. The Dudus affair — in which Golding acknowledged in March that his office had retained a Washington lobbying firm to resist the US extradition request — has significantly eroded his personal credibility and created substantial pressure on the government’s legislative programme. Despite this, the policy machinery around housing continues to operate. The National Housing Trust has maintained its schedule of loan approvals, and demand for NHT financing — with rates for qualified contributors ranging from zero to five percent depending on income — remains robust across the island.

NHT officials have reported that loan applications in the June quarter remained strong, particularly in the parishes of St Catherine, St James and Manchester, where suburban development activity has been more insulated from the disruptions in Kingston. The Trust’s capacity to maintain lending activity through the crisis period is a reflection of the structural demand for affordable housing finance in Jamaica, where a housing deficit estimated in the tens of thousands of units continues to underpin market fundamentals even as macroeconomic headwinds persist.

Construction Sector

Construction activity in Kingston metropolitan area effectively stalled during May and June. Contractors report that materials deliveries were disrupted, site security became a concern and several projects in western and central Kingston were temporarily suspended. The pipeline of new residential development in the capital remains thin: developers who might otherwise be bringing medium-density projects to market in the Kingston 11–14 corridor have held back, awaiting clearer signals on both political stability and the direction of commercial interest rates.

Outside Kingston, the picture is more constructive. Montego Bay continues to see interest from hotel and mixed-use developers tied to the tourism recovery; Portmore’s suburban expansion is ongoing; and Spanish Town and May Pen are attracting lower-income housing investment catalysed by NHT-assisted schemes. The divergence between Kingston’s paralysis and the relative dynamism of secondary markets is, in the view of several development economists, likely to prove a durable feature of Jamaica’s property landscape rather than a temporary anomaly.

Major Developments

The Coke extradition has closed one chapter of a crisis that began with the US Department of Justice’s request in October 2009. For the property market, the most significant near-term implication is the lifting of the state of emergency and the restoration of freedom of movement in West Kingston. Property agents now able to conduct site visits to Tivoli Gardens and surrounding communities report extensive physical damage but also — notably — that the underlying land values in the area, which had collapsed during the crisis period, may see some modest stabilisation as security conditions normalise.

The question of diaspora investor confidence is a more complex one. Jamaica’s real estate market is heavily reliant on remittance flows and diaspora savings — estimated at approximately US$1.85 billion annually — as a source of property purchase capital. Interviews with real estate agents who regularly handle diaspora-funded transactions suggest that the televised images of the Tivoli operation and international press coverage of the crisis have given pause to some would-be investors, particularly in the United States and United Kingdom. The consensus, however, is that diaspora buyers with long-term intentions will return to the market once the immediate crisis recedes from international news cycles.

Infrastructure

Infrastructure investments planned for the Kingston waterfront and the broader Urban Development Corporation zone have been effectively deferred during the crisis period. The UDC has confirmed that project timelines will be reviewed but has not specified how significant the delays will prove to be. Road network improvements in the Half-Way Tree and New Kingston commercial corridors, not directly affected by the Tivoli operations, continue on schedule.

In the broader national context, the government’s capital spending programme remains constrained by the fiscal framework agreed with the IMF under the Stand-By Arrangement, which limits the deficit and places a premium on recurrent expenditure management. Infrastructure investment in housing-related areas — roads, drainage, utilities — is therefore dependent on NHT and HAJ resources rather than central government budget allocations.

Investment Climate

Jamaica’s credit rating and investment climate assessments, already under pressure from the 2009 recession and the debt exchange, now face an additional reputational challenge from the Coke affair. Moody’s and Standard & Poor’s had already assigned sub-investment-grade ratings to Jamaica’s sovereign debt; the events of May and June are unlikely to improve those assessments in the short term. For property investors evaluating Jamaica, political risk has moved back up the list of concerns — a development that the business community, and particularly the Jamaica Manufacturers’ Association and the Private Sector Organisation of Jamaica, will be pressing the government to address urgently.

Diaspora and Remittances

Remittance inflows to Jamaica continue to provide a floor beneath consumer spending and, by extension, the lower-income housing market. The Bank of Jamaica’s data for the first quarter of 2010 showed remittances holding broadly steady compared to the equivalent 2009 period, a resilience attributed to the relative stability of Jamaican communities in the United States, United Kingdom and Canada — the three primary source markets. However, real estate agents note that diaspora buyers who had been tracking properties during the first half of the year have largely paused decision-making pending clearer assessment of the post-Dudus political environment.

Affordability

For the average Jamaican family, the affordability equation remains acutely challenging. With commercial mortgage rates at 11–14%, a J$5 million home purchase requires monthly payments that consume a substantial proportion of median household income. The NHT remains the primary vehicle through which working Jamaicans can access affordable home finance, and the Trust’s continuing loan activity is therefore critical to sustaining any semblance of market momentum. Inflation running above 11% is simultaneously eroding real incomes and complicating household financial planning.

Regional Context

The Caribbean region continues to monitor Jamaica’s political and economic trajectory with concern. Haiti’s reconstruction following the January 12 earthquake remains the dominant regional preoccupation, with CDEMA and international aid organisations coordinating a response that has highlighted the vulnerability of the region’s housing stock to both natural and man-made disruption. For property markets across the Caribbean, the juxtaposition of Jamaica’s political crisis and Haiti’s disaster recovery underscores the structural fragility of small island developing states and the premium that investors attach to stability and institutional predictability.

Looking Ahead

With Christopher Coke now in US custody, the immediate security emergency has passed and the conditions for a gradual normalisation of the Kingston property market are in place. The pace of that recovery will depend on several factors: the speed with which the government advances a credible reconstruction plan for Tivoli Gardens and surrounding communities; the trajectory of commercial interest rates in the second half of the year; and the degree to which Prime Minister Golding’s government can restore political credibility and legislative momentum following the damaging revelations of the Dudus affair. The Bank of Jamaica’s monetary easing trajectory will be closely watched — any reduction in the policy rate that translates into lower mortgage costs would provide meaningful support to buyer sentiment. For the third quarter of 2010, the market consensus points to continued caution, modest transaction volumes and a gradual, uneven recovery that will leave some segments and geographies well behind others.

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