As real estate professionals we are always looking for trends in the market to guide our predictions about the immediate future. Understanding such trends is important when advising developers, homeowners, new purchasers and financial institutions alike. By their very nature trends inform us of past performance but are never a definitive guide to future events. The following general trends may be helpful to the readers in evaluating the real estate market for themselves.
50 years of solid returns
This one is certainly hard to ignore. Over the last 8 years we have tracked property values as transactions occur as well as extracted data from historical records going back to 1957. Other than a few peculiar locations we have not found any property that did not hold or increase its value consistently over the period. In fact we have found that in comparison to the interest rate on bank savings, and the general return from an investment in equities, an investment in property in Barbados offers superior returns.
Beachfront is King
As a subset of the first trend we found that the returns on an investment in beachfront property were far superior to all other property locations. In fact the returns from property located on the West and (more recently) the South Coasts rival that of some of the best US equity markets. Increasingly it is more difficult to find opportunities to participate in this market as a result of the entry-level price. This is particularly true on the West Coast. On the South Coast reasonable value can still be found, for now.
Foreign developers follow foreign buyers
One could argue that the influx of foreign developers is not a new trend in our market. In fact Royal Westmoreland, Sugar Hill, Mullins, and Sandy Lane have all been developed by overseas developers, the emerging trend is at the smaller developer level. On the West Coast especially there are numerous small developments on the beachfront, or close to the beachfront, with under 20 units all being sponsored by smaller overseas developers. This trend is the cause for some concern as smaller developers generally have less resources and a much shorter event horizon. A small dip in the sales progress can translate to a huge event for the smaller developer. There are at least two projects on the West Coast today that while being offered from plan may never see completion. Depending on the sales structure for these projects some purchasers may be exposed to financial risk and this would not be in the best interests of the overall market.
Many investors chasing few opportunities
This is almost a textbook definition for a sellers market, and it certainly is true today. This trend can be found in the local and offshore residential market as well as the commercial development market. Many persons are remarking that you cannot drive 100 yards on the West Coast without seeing a development sign or a development under way. And this does not include the investors who are knocking on doors trying to find properties on the beachfront for development. Land on the West Coast suitable for development has risen in price from US$1.0 million per acre a few years ago to prices in excess of US$5.0 million per acre in recent months. BUT the danger here is to believe that this is a real market. It is NOT. Transactions at this level are very few. If we were in a North American market, appraisers would in fact throw out these transactions from the trend as anomalies. However, in Barbados they are the only transactions we have and history shows us (refer to the first trend) that property values have not fallen.
Construction boom...boom...booming!
According to the listed projects circulated amongst the BEAVA (Barbados Estate Agents and Valuers Association) members, there are over 200 condominiums under construction on the West Coast and a further 200 started or about to start on the South Coast. In addition there are various individual homes, hotels being renovated for World Cup, a prison to be built, the Kensington Oval to be virtually rebuilt, and some highway flyovers to complete prior to World Cup. It is certainly a good time to be an architect, draftsman, town planner, contractor, electrician, carpenter, etc... So what is the trend that we see coming from this building boom? Developers with existing relationships in the industry will be able to negotiate reasonable building costs, but external developers with small projects and the individual home builder will suffer with escalating costs.
Trinidadian investors looking and buying
Our friends to the South have a different appetite for investment. While many of our business leaders are looking to keep investors out of our market and as a result are focused inwardly on protecting their birth rights (?), Trinidadian investors are flushed with cash from the booming energy based economy and looking for opportunities externally. Within the next 18 months a new hotel will be built, the first brand name food franchise in Barbados since Kentucky will be opened, and a US style shopping mall will be built - all with significant Trinidadian interest. But the influence does not end with the real estate. Each of these developers comes with relationships in their home market. This can affect who operates the businesses, who supplies the businesses, or even what stores are in the mall. The investment attitude created by years of protectionism is hard to change, but we must.
Bridgetown continues to slip
Commercial office rentals in Bridgetown have all but disappeared in the last several years. Every month more commercial office tenants relocate to the more accessible areas of Warrens, Belleville, Collymore Rock, Worthing and Wildey. Soon there will only be retailers, bankers and lawyers left! The salvation that everyone is waiting on is the Pierhead development. Each year it gets closer to fruition but it has not yet started. There are still some unanswered questions on the impact of this development on the existing retail areas of Broad Street and Swan Street and we suspect that there will be some debate on these matters in the future. Overall the project could rejuvenate Bridgetown, which certainly is deserving of preservation.
Office market sluggish
In the last 12 months the only new A Class office space added to the market was the CGI Tower in Warrens. There is a 70,000 square foot building immediately North of the existing FirstCaribbean building that has just started but this will not add to the supply for 18 months. There is also a plan for a 10 storey building in the area of Simpson Motors but again 18 to 24 months from completion. The office rental market has been stagnant with little growth in space under lease. Many factors have contributed to this not least of which is the decline of the offshore industry in low tax jurisdictions such as Barbados. Without growth in the offshore industry we cannot expect to sustain significant growth in the A Class office rental market. Luckily our conservative developers do not build on speculation and as a result we will not see a glut of office space. On the other hand we will not see a boom in A Class office construction either. And that is probably not a bad trend considering all the downsizing, mergers, and work-from-home virtual office initiatives.
In summary the real estate market in the last 18 months has been driven by low domestic interest rates and a favourable exchange rate with the Sterling currency. The current construction boom is a reaction to this stimulus plus the World Cup infrastructure works. Basing our future on the trends seen in the past indicates that real estate values may have reached a temporary plateau, but they will not fall. Invest for the long term in real estate and buy something on the beach if you can!
Written by Andrew Mallalieu, Terra Caribbean
Reproduced from Business Barbados 2006 with the permission of Caribbean Business Publications.
|
