Caribbean Property & Investment Review — September 2009: Assessing the Damage and Spotting Green Shoots

Publication coverage: 3 August – 2 September 2009. Caribbean tourism sector takes stock; 2009 arrivals tracking 8–10% below 2008 for the year; property markets remain distressed; global recession showing tentative stabilization; hurricane season 2009 tracking well below normal; green shoots of recovery beginning to emerge.

Morning Briefing

• Caribbean tourism arrivals for 2009 tracking 8–10% below 2008 full-year; summer collapse worse than anticipated; autumn recovery prospects modest but improving
• Global recession showing tentative stabilization signs in August-September; US unemployment beginning to level; stock markets recovered modestly from lows; credit conditions easing slightly
• H1N1 pandemic fears receding as vaccination campaigns accelerate; airline and tourism industry travel protocols normalizing; psychological barriers to Caribbean travel diminishing
• Caribbean property markets remain distressed but showing tentative stabilization; some distressed sales emerging; valuations appear to be finding support; investors assessing late 2009 opportunity
• Trinidad & Tobago energy revenues stable; oil trading near $70/barrel supports T&T fiscal position; energy-dependent Caribbean economies showing relative resilience
• Jamaica and Barbados moving forward with IMF programs; fiscal adjustment underway; currency stability improving; debt service capacity recovering

Assessing the 2009 Tourism Damage: Full-Year Impact

By September 2009, the damage to Caribbean tourism for the year was becoming clear. Full-year 2009 arrivals were tracking 8–10% below 2008, a decline of historic proportions. This represented a loss of hundreds of thousands of visitor-arrivals across the Caribbean region and billions of dollars in tourism revenue. For island economies where tourism generates 40–70% of GDP, an 8–10% tourism decline translated into 3.2–7% of total GDP lost to the region. The summer of 2009 had been catastrophic, but critical to understanding 2009 impact was recognizing that winter 2008–2009 and spring 2009 had also been weak due to recession and H1N1 fears. The damage was region-wide and year-spanning, not merely a summer phenomenon.

Jamaica’s 2009 tourism arrivals tracking 10–12% below 2008. Barbados tracking similar declines. The Dominican Republic, larger and more resilient, tracking declines of 8–9%. Smaller islands, dependent on tourism for 50–70% of revenue, were tracking declines of 10–15%. In monetary terms, the 2009 tourism revenue loss across the Caribbean was estimated at $2–4 billion, a massive sum for economies with combined GDP of $300–400 billion. The human impact was severe: unemployment elevated across tourism-dependent sectors; household incomes down; consumer spending contracted. Real estate markets, directly dependent on tourism-generated income and real estate investment, suffered cascading effects. By September, it was clear that 2009 full-year tourism revenue would be the lowest in at least two decades.

However, a critical shift was underway by September. Global indicators suggested the worst of the recession might have passed. US unemployment, which had peaked near 10% in October 2009, appeared to have stabilized by September. Stock markets had recovered substantially from 2008 lows. Credit markets, while still tight, showed signs of gradual normalization. H1N1 pandemic fears were receding; vaccination campaigns were accelerating globally. These developments suggested that the demand destruction that had devastated Caribbean tourism through summer 2009 might stabilize and gradually recover in Q4 2009 and 2010. Tourism bookings for October, November, and December were showing signs of improvement compared to summer months. Occupancy rates at Caribbean hotels, which had bottomed in July-August in the 20–30% range for major destinations, were beginning to show tentative signs of recovery toward 35–45% by mid-September.

Hurricane Season 2009: Below Normal Is a Gift

One significant positive development in August and September 2009 was confirmation that the 2009 Atlantic hurricane season was tracking well below normal. The National Hurricane Center’s August update called for substantially below-normal activity for the remainder of 2009. Only four major hurricanes were forecast for the entire season, compared to a normal average of five. The impact of below-normal hurricane activity on the already-devastated Caribbean cannot be overstated. A major hurricane in September 2009 would have destroyed tourism infrastructure in affected islands, compounded economic crisis, displaced populations, and created massive government expenditure for relief and reconstruction. In the context of the worst tourism year in decades and acute fiscal crises in smaller islands, major hurricane damage would have been catastrophic. The below-normal hurricane season was a stroke of fortune for the Caribbean in 2009—perhaps the only major piece of good news in an otherwise bleak year.

Below-normal hurricane activity meant that agriculture, already weakened by economic contraction, was spared wind and flooding damage. Tourism infrastructure, already stressed by occupancy collapse, was spared destruction. Governments, facing severe fiscal constraints, were spared emergency relief spending. Insurance companies, already carrying Caribbean exposure losses from 2008-2009 property values declines, were spared claims surge. For smaller island economies in the Eastern Caribbean (Antigua, Grenada, St. Lucia, Dominica), where hurricane risk is significant, the 2009 blessing of below-normal activity was providential. Had a major hurricane struck in August or September, several Eastern Caribbean economies might have faced debt default or currency collapse from emergency expenditure. The below-normal hurricane season thus became an indirect factor supporting Caribbean stabilization in late 2009.

Global Stabilization: Green Shoots Emerging

By September 2009, leading global economic indicators were showing tentative signs of stabilization for the first time since late 2008. The Nikkei and FTSE indices recovered substantially; US equity markets rebounded to pre-crisis levels in real terms. Housing starts in the US began to stabilize. Manufacturing indices showed stabilization or modest improvement. Credit spreads began to narrow. These developments, while preliminary, suggested that the global recession might be approaching its trough. If global stabilization continued, the demand destruction that had devastated Caribbean tourism would begin to ease. Families and business travelers would become more confident in taking vacations. Investment capital, which had fled risky assets and emerging markets in 2008-2009, would begin to rotate back into higher-yielding opportunities. For the Caribbean, this meant the possibility of tourism recovery beginning in Q4 2009 and accelerating through 2010.

The question for Caribbean policymakers and business leaders was whether the global recovery would be sustained. If leading indicators were merely a false dawn—a temporary relief within a prolonged downturn—the Caribbean’s pain would extend well into 2010. But if global recovery accelerated and spread beyond equities and developed markets into credit markets and emerging market investment, the Caribbean could see tourism recovery beginning by Q4 2009 and genuine improvement by mid-2010. The stakes were high: the timing of global recovery determined whether Caribbean fiscal crises would be manageable through IMF programs or whether structural insolvency would threaten. Smaller island economies were particularly sensitive to recovery timing: a sustained recovery by Q4 2009 could allow fiscal stabilization by 2010; a prolonged downturn would force deeper structural adjustment and potential debt restructuring.

Property Markets Showing Tentative Stabilization

Caribbean property markets, frozen through summer 2009, showed tentative signs of stabilization by early September. Transaction volume remained light, but motivated sellers and distressed properties were beginning to clear at lower prices. Investors with capital, having waited through summer, began circulating in September in search of late 2009 and early 2010 opportunities. Banks, recognizing that holding distressed properties on balance sheets was increasingly costly, began accelerating foreclosure and forced sale processes. This released distressed inventory into the market, but at prices that were beginning to reflect market-clearing levels rather than fantasy ask prices. Commercial properties (office parks, retail centers) showed weak fundamentals but some stabilization in valuations. Residential properties, particularly luxury properties, began showing asking price reductions toward levels that balanced-market participants considered realistic. Developer properties, held by sponsors with capital to wait out the crisis, began appearing at discounted levels to raise cash.

The Caribbean property discount relative to pre-crisis valuations remained steep: 25–35% below 2007 peaks for most property types. However, the rate of decline appeared to be slowing. This suggested that market pricing might be approaching support levels where long-term investors would find risk-reward attractive. Strategic investors began positioning in September 2009 to deploy capital in late Q4 2009 and Q1 2010, betting that property value declines were approaching bottom and that recovery would begin by mid-2010. For those with deep capital, dry powder, and patience, late 2009 and early 2010 offered potential entry points into Caribbean real estate that would offer substantial returns if the Caribbean economy recovered as expected in 2010-2011.

Credit remained a constraint: mortgage access was limited, rates remained 9–10%, and lender risk appetite for Caribbean exposure remained depressed. However, the absolute scarcity of financing that characterized summer 2009 was gradually easing. Banks were beginning to re-engage with qualified buyers and developers. Private capital was beginning to substitute for depleted commercial bank lending. By September, it was becoming clear that credit markets, while still tight, would gradually normalize through Q4 2009 and into 2010. This normalization would be essential to property market recovery: without credit expansion, property valuations could recover only modestly, and transaction volume would remain suppressed. But if credit began to normalize, property markets could show genuine recovery by Q1 2010.

Caribbean Leaders This Month

Jamaica PM Bruce Golding finalizes IMF Stand-By Arrangement: Jamaica’s IMF Stand-By Arrangement is finalized in September 2009 after rapid negotiations. The program provides immediate balance-of-payments support, stabilizes currency expectations, and commits Jamaica to fiscal adjustment and structural reforms. The central bank’s foreign exchange reserves, which had fallen sharply through summer, stabilize upon IMF program announcement. The Jamaican dollar, which had depreciated 15–20% year-to-date, stabilizes. IMF support signals to credit markets that Jamaica’s external position, while challenging, is manageable with adjustment. Refinancing costs for Jamaica’s government debt begin to stabilize. Tourism and remittance recovery will determine whether Jamaica can meet IMF program targets, but IMF support buys time for global recovery to assist Caribbean stabilization. PM Golding signals that Jamaica is committed to long-term fiscal sustainability and economic diversification beyond tourism.

Trinidad & Tobago PM Patrick Manning consolidates relative advantage: With oil prices holding near $70–75/barrel through September, T&T’s energy-dependent economy continues to benefit from relative resilience versus smaller and tourism-dependent neighbors. PM Manning’s government continues employment support in non-energy sectors and positions T&T for rapid recovery once global conditions stabilize. T&T’s currency remains stable; credit conditions in T&T, while tighter than pre-crisis levels, are more accommodative than in Jamaica or smaller islands. Manning signals that T&T will emerge from 2009 recession in strong position for 2010 recovery, with growth potential resuming by mid-2010. T&T’s banking sector, facing Caribbean property and tourism exposure, remains cautious but solvent. By September, T&T’s position is substantially stronger than other major Caribbean economies.

Dominican Republic shows tentative tourism recovery: DR tourism board reports that October-December bookings are showing improvement compared to summer months. Room rates remain discounted 30–40% below 2008 levels, but occupancy recovery is beginning. The Central Bank of the Dominican Republic signals that growth projections for 2009 remain negative (0 to -1%) but that 2010 projections are being revised upward to +1 to +2% assuming continued global recovery. The DR’s fiscal position, stronger than smaller islands, allows modest stimulus extension through year-end. DR’s relative resilience and tourism recovery prospects position the DR for faster recovery than Jamaica or Barbados once global conditions solidify. By September, the DR is clearly emerging as the post-crisis Caribbean growth leader.

Barbados PM David Thompson implements IMF program adjustment: Barbados’s IMF Stand-By Arrangement, finalized in August, enters implementation phase in September with government spending cuts, public sector reforms, and revenue increases. The program is painful but necessary to restore fiscal sustainability. Barbados’s currency, stabilized by IMF support, avoids depreciation spiral. Credit market access for Barbados government improves modestly post-IMF arrangement. Private sector, facing government spending cuts, contracts modestly in near-term but gains confidence that currency stability will be maintained. IMF program signals to Barbados’s citizens and credit markets that tough fiscal medicine is being taken. If Barbados executes program and global recovery proceeds, fiscal crisis risks should subside by 2010. However, structural challenges—fiscal sustainability, economic diversification—will require years of adjustment beyond immediate IMF program period.

Eastern Caribbean Central Bank and smaller island economies activate recovery positioning: The ECCB, custodian of monetary policy for eight Eastern Caribbean economies, signals that September marks a turning point. Emergency liquidity facilities, extended through summer months, show improving utilization metrics as confidence begins to return. Member central banks report that foreign exchange reserve declines are slowing; some stabilization is appearing. ECCB communications emphasize that the worst is likely past, but that recovery will be gradual. Smaller island economies, many now in IMF programs or emergency multilateral support arrangements, focus on executing fiscal adjustment to restore market confidence. If global recovery proceeds and tourism recovers modestly, smaller Eastern Caribbean economies should stabilize by Q1 2010, though structural vulnerability to tourism shocks and climate risks will remain.

CARICOM leaders pivot toward recovery planning: CARICOM regional leaders hold ministerial meetings in September to shift focus from crisis management to recovery planning. Discussions focus on tourism industry positioning for 2010 recovery, real estate market stabilization strategies, and structural economic diversification. Regional leaders coordinate on climate resilience and climate finance engagement with international donors. CARICOM commitment to regional integration is reaffirmed; trade and investment facilitation mechanisms are promoted. By September, CARICOM discourse has shifted from “survival” to “stabilization and recovery.” This rhetorical shift, while subtle, reflects genuine improvement in near-term crisis risk assessments.

Caribbean property investors mobilize for late 2009 and 2010 opportunity: Real estate investors, developers, and hospitality companies with capital preservation through 2009 begin to mobilize for opportunity deployment. Investment conferences and due diligence missions to Jamaica, Barbados, Dominican Republic, and other destinations accelerate. Strategic buyers begin submitting offers on distressed properties. Private equity funds, particularly those with emerging market real estate focus, show renewed interest in Caribbean opportunities. The shift from crisis posture to opportunity posture marks a critical inflection point: the market is beginning to price in recovery. For investors who deployed capital at distressed 2009 levels and time exits correctly in 2010-2011 recovery, potential returns are substantial. By September, Caribbean real estate is transitioning from a “value trap” (seemingly cheap but deteriorating) to a genuine “value opportunity” (cheap AND improving).

Looking Ahead

September 2009 represents an inflection point for the Caribbean. The worst tourism year in decades is essentially complete; 2009 will end with tourism arrivals 8–10% below 2008. The summer of 2009, the deepest crisis point, has passed. Global indicators are beginning to stabilize and suggesting that global recession is bottoming. H1N1 pandemic fears are fading. Below-normal hurricane season is a blessing. Smaller island economies are stabilizing under IMF programs. Jamaica and Barbados, facing acute fiscal crises in spring 2009, have IMF support and stabilizing currencies by September. Larger economies (DR, T&T) are positioned for faster recovery.

The remainder of 2009 should show tentative recovery: autumn and winter tourism bookings improving compared to summer; property markets showing stabilization; credit conditions normalizing gradually; leading economic indicators continuing to improve. By year-end 2009, Caribbean economies will have survived the worst and will be positioned for 2010 recovery. However, the recovery will be uneven: T&T will recover fastest (energy support); DR will recover ahead of Jamaica and smaller islands (economic diversification and fiscal strength); Jamaica will recover at moderate pace (with IMF support); smaller Eastern Caribbean economies will recover gradually (more tourism-dependent, smaller fiscal bases). Structural vulnerabilities—tourism dependence, fiscal sustainability, climate risk—will persist and require years of long-term adjustment.

For investors and developers, the period from late 2009 through 2011 will offer exceptional opportunities: distressed assets available at deep discounts, credit conditions normalizing, and recovery prospects solidifying. But success will require patient capital, jurisdiction-specific due diligence, and accurate timing. Those who positioned conservatively through 2008-2009, preserved capital, and are prepared to deploy opportunistically in late 2009 and 2010 will be positioned for outsized returns as Caribbean recovery accelerates. The Caribbean crisis of 2009 will, like all crises, create winners and losers; disciplined investors with capital and vision will be among the winners.

Caribbean Property & Investment Review is published monthly to track regional economic, tourism, and real estate trends. This edition reflects conditions and public statements as of early September 2009.

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