Market Report: The Caribbean
Mark Hempshell reports
Conjuring up as it does dreamy images of palm trees, deserted sandy beaches and rum punch, the Caribbean is the quintessential overseas property market. But how does it stack up as a practical property investment location?
There is no doubt the Caribbean, at least with regards to foreign buyers, is mainly a high-end market. The idea of most buyers being cash-rich individuals is not that far from the truth. This made the market here vulnerable in the early stages of the economic crisis, as these buyers put a break on their spending plans. Now that the crunch is showing signs of easing this might, perhaps, prompt the market to start moving again. Additionally some Caribbean nations are tax havens and so could perhaps benefit from an exodus from the new UK higher tax rate band.
Most Caribbean markets are characterised by brisk demand and limited supply, helping to support prices, rents and yields even in tricky times. Most islands have limited areas of land which are utility serviced and accessible and zoned for development. The recession has also caused a number of off plan projects to be postponed further restricting supply.
Nevertheless, the region has not been immune from falling property prices. Many parts of the Caribbean saw falling property prices in the first half of 2009, with some properties losing up to 20% of their value, according to a recently published Knight Frank’s Wealth Report.
This analysis was confirmed where in an interview with property website Primelocation, Walter Zepherin of the regional specialists 7th Heaven Properties, suggests that prices had fallen -15% across the region and -20% in some lesser-known islands. Zepherin adds that the middle market – which here means apartments in the £400-600,000 price bracket – is stagnant at the moment.
He adds: “Typical UK buyers are now stockbrokers, executives from the FTSE 100 companies and company directors, and they are still buying here because they believe there are bargains to be had. They are usually after medium-size beachside villas for around £2m but they’re hard to find at the moment so demand is outstripping supply. But you can approach a seller of a £1m property and offer £800,000 and there’s a good chance it will be accepted.”
So where else might demand be coming from now? While several commentators point out that demand from the USA is uncertain they point towards increasing interest from Russia (Roman Abramovich bought a £54m estate on St. Barts last year) and also from Canada. The Caribbean has always been a popular winter refuge for Canadians but the strength of the Canadian dollar against the US dollar, which many Caribbean properties are priced in has stimulated interest. The Caribbean dollar now has parity with the US dollar, having been worth only 62 cents back in 2002. (The Sandals & Beaches Resort chain reports a +200% increase in holiday sales in Canada over the last year.)
Other factors that limit the demand here are transport links: few locations other than Barbados have year-round daily flight schedules to the US and Europe. Some well-known destinations, such as the British Virgin Islands, cannot handle large aircraft, maintaining exclusivity. British Airways launched new flights from London to Grenada and St Kitts via Antigua last year. Also, although it does not affect cash-rich millionaires, finance also constrains some markets. For example, in Barbados borrowers will normally pay about 3.5% over US interbank lending rate and be restricted to 50-70% LTV.
Barbados is well established in the regional market with historically strong demand from British buyers – according to Knight Frank International around 90% of UK buyers looking at the Caribbean are looking to buy here. It is still the most accessible Caribbean island with daily connections to Europe and North America and the economy is more diversified than most islands.
Despite its upmarket reputation the Barbados market has not been immune from the recession. According to a report by Totally Barbados, after a surge in sales early in the decade, only 285 new holiday apartments were sold in 2008 – 110 less than 2007 – with some vendors offering 25% discounts. They estimate supply fell by 30% in 2009, although expect the market to rebound in 2010. According to one recent (December 2009) estimate, a typical three bedroom property costs US$1,164,784 and a typical four bedroom property US$2,202,672.
Antigua benefits from an established tourist industry yet has been hampered by a ‘less fashionable’ image than Barbados. The island experienced a surge in property prices between 2006-2008, which may have been due to buyers who had been priced out of Barbados, although recent low sales volumes make it difficult to estimate current values. However, a recent report suggests the average price for a three bedroom house is US$328,932 and a four bedroom house is US$984,667.
St Lucia only arrived on the international investment scene in 2007, partly thanks to the Cricket World Cup – The Cricket World Cup Incentives Act spurred a construction and investment boom and a spike in prices. Over 100 new property developments were initiated as a result. However, the economy has weakened since due to the fall off in construction activity and the recession. In mid-2009, according to the Global Property Guide data, a typical 150sqm house cost US$325,000 and a typical 400sqm house cost US$1.3m.
Trinidad & Tobago has also experienced a boom in property prices over the last 20 years. According to figures from the Central Bank of Trinidad & Tobago, property prices rose by +477% between 1991 and 2006 due to growth in petroleum, construction and tourism. However, values have declined since with prices falling -9% and sales volumes falling -20% in 2008 alone.
As one of the poorer Caribbean countries the Dominican Republic has not benefited from the buyer and investor attention of its more affluent regional neighbours. However, it now has an established tourist industry mainly catering for the budget market and with good transport connections to North America and Europe. One recent report estimates January 2010 property prices as being in the region of US$170,000 for a 120sqm house and US$340,500 for a 250sqm house (Puerto Plata).
St Vincent & The Grenadines’ popularity with the rich and famous belies a poor economy overly reliant on the banana crop. However, a great scarcity of beach front land and in fact much tourist accommodation at all helps to bolster rents and yields. A new international airport, expected to be fully operational in 2011, will improve accessibility and this may help to stimulate the property market.
Property prices in St Kitts & Nevis have increased steadily over the last decade but are still significantly lower than those in what seems to have become the regional benchmark, Barbados. Flight connections are limited despite the launch of a new direct service from London. However, buyers may have other reasons for buying here, as Zepherin comments: “St Kitts & Nevis is the best island if you want to buy your way into the Caribbean – if you buy for US$350,000 or more within one of the approved property developments on the island then citizenship is available for the owner and their family. Consequently, St Kitts & Nevis is a bit of a property hotspot at the moment despite the recession.”
Now let us take in some further comments from those involved in property sales in the region. Lisa Basire, marketing director of the Sugar Beach Villas development in St Lucia, tells us about some of the advantages of investing here: “St Lucia is very favourable for foreign investors with regards to tax. There is no VAT, Capital Gains, Inheritance or Estate taxes and the Stamp Duty of 2% is only payable on the land at Sugar Beach if construction has not started on your particular villa. The government has also granted buyers at Sugar Beach a 15 year holiday on Income tax and a 50% waiver on annual property tax for five years. Sugar beach is being sold on a freehold basis, which is extremely unusual in St Lucia as beachfront land is leasehold.”
She says that demand comes from a variety of sources: “Our buyers have been largely European…historically from Britain, with a larger number from Europe – France, Slovakia and Italy over the last few months. This has reflected the airline routes. Virgin fly direct four times per week from the UK and BA fly five times per week. In November 2009 Condor Airlines added a direct weekly flight from Frankfurt. WestJet and Air Canada provide five direct flights per week from Toronto and Montreal, which has seen a recent increase in good enquiries from Canada. We also have local wealthy businessmen and engineers that have bought.”
On current prices Basire explains: “St Lucia had seen an average annual appreciation of 15-20% over the past few years.
Prices for the hotel villas as Sugar Beach are currently from US$700,000 for a one bedroom villa and from US$1,210,000 for a two bedroom villa. There are some residences available outside of the rental pool starting at US$2,300,000 for a two bedroom residence going up to US$9,000,000 for a six bedroom residence.”
On yields for this particular development she concludes: “Sugar Beach is an absolute one off, not only is the location breathtakingly beautiful but it’s an existing hotel with 20 years worth of trading history. That’s why we are able to offer owners a percentage of the revenue rather than paying a split of the profit – we know what the running costs are and we know what the occupancy is. Owners are effectively buying into a going concern rather than a new business and once the US$100m renovation of the property is completed the returns are going to be even stronger. Owners are guaranteed a minimum 5% return from handover of their villa until the first year after the hotel re-opens and rental illustrations indicate a potential 7% return in year three.”
Simon Weir-Rhodes of Property Jigsaw International offers us his opinion on investment opportunities in the Caribbean at the moment. He says: “The Caribbean represents an attractive investment proposition as it is not prone to the same level of market turbulence as in many regions, it maintains an excellent image, has a wonderful climate, limited building and worldwide appeal.
“Right now, St Lucia stands out as an excellent investment opportunity. It is an island with a similar cachet to Barbados, yet prices are currently about 40% lower. This differentiation is unlikely to continue as canny investors recognise the additional value a likely price increases. This situation can be compared to what has happened in Europe when an East European country has joined the EU and adopted the Euro – property prices rise and eventually end up levelling.
“We have also found some very interesting land opportunities in the Cayman Islands. Everyone associates these islands with tax haven status and rightly so as there are virtually no taxes! Grand Cayman is highly established and prices reflect this, whilst the smaller islands of Little Cayman and Cayman Brac offer idyllic, tranquil and unspoilt opportunities at emerging market prices. Plots with planning permission are available from only US$55,000. Again prices will inevitably level in due course.”
On current levels of demand he explains: “Enquiries have picked up dramatically in the last few weeks and demand is extremely strong. The Caribbean has shown consistent price growth over many years as it benefits from a year round market and strict planning/building controls. Enquiries are increasingly coming from the UK and USA, but also from Europe and the Middle East, with one or two from Asia and the Far East.”
On current prices and rental trends Weir-Rhodes comments: “Prices have remained fairly stable, but some developments have halted due to lack of funding. We have noticed a strong interest in well located off plan resort developments due to the low entry cost, projected capital growth and guaranteed above average yields. There are a wide variety of properties available to suit all budgets – not all property in the Caribbean is exclusively the preserve of the wealthy with prices ranging from £100,000 to over £5m.
“Rental rates have remained strong throughout the Caribbean, due to the temperate year round climate and relative lack of property resulting from careful building controls. Whilst there has inevitably been some price discounting in the teeth of the recession, the Caribbean benefits from being perceived as a premium market and attracting less price sensitive clientele. We know of guaranteed rental returns of 10% in resort developments, which are likely to increase as the market gets back up to speed.”
Nick Griffin, director of Alexander James Properties Limited, outlines three locations which he believes offer good investment potential in this region. He says: “St Vincent & The Grenadines: the tourism aspirations of the government, construction of the international airport and the near completion of the first five-star resort which will start to provide documentary evidence of real rental returns. Barbados: thriving and established tourist industry, traditional command of higher property and land values in comparison to other islands which is unlikely to be threatened, and a continued steady increase in property prices despite the global downturn. St Lucia: stable political environment and a thriving tourist industry, with overseas investors benefiting from favourable tax concessions. St Lucia enjoys many of the same advantages as Barbados, but property prices are significantly lower and the island is still relatively unspoilt and undeveloped. The World Bank has also recently placed St Lucia in the top 30 countries in the world in which to invest…the only CARICOM country to make the top 30.”
On current levels of demand from buyers, prices, and financing, in the Caribbean he says: “We specialise in offering Caribbean investment properties as part of a balanced portfolio using either personal or SIPP funds, and on this basis demand has surpassed even our optimistic expectations.
“Even as an investment returns from traditional mediums start to improve, we find that clients continue to be receptive considering alternative asset classes and innovative investment models.
“Our buyers have been a totally diverse range. Clients with substantial investment portfolios; business owners and ex-buy to let investors, elderly couples investing for income; professionals looking for alternatives, SIPP investors with funds of all sizes, husbands/wives/friends and colleagues investing together personally or joining pension pots together – the list is endless!
“Purchase prices have ranged from £125,000 to £500,000 with 30% deposit paid and most electing to take up a 70% LTV mortgage on completion or 50% net asset borrowing capacity within a SIPP.
“These investment properties sit well in SIPPs, not only due to the well documented tax efficiencies for income and capital gains, but also because clients are able to take control of their own retirement funds and diversify into wider asset classes.
“Approximately 50% of our investors have purchased using SIPP monies over the last 12 months, and this route has become very attractive following a period of poor investment returns via traditional methods and low interest rates on cash deposits.”