Real Estate Market Update 1st Quarter 2023

Background Economic Conditions

In January The Statistical Institute of Jamaica reported that Inflation in 2022 was 9.4%. Earlier in 2022 the rate of inflation was over 10% due to higher freight costs and devaluations in the aftermath of the Covid-19 pandemic.

This welcomed return to inflation rate in single digit was impacted by a reduction in the rate of increases in several sectors, especially the heaviest weighted category – Food & Beverages which rose by 13.8 percent, ‘Restaurants and Accommodations Services’, which increased by 23.9 percent, while ‘Housing, Water, Electricity, Gas and Fuels’ increased by 2.8 percent. There was also a reduction in the transportation sector due to a reduction in the cost of fuel.

On Feb 21, 2023 The Planning Institute of Jamaica (PIOJ) reported the Jamaican economy grew 5.1 percent in 2022.

All subsectors recorded growth except Mining, Quarrying and Construction; a major negative impact was in the mining sector.

Hotels & restaurants grew 48.9%; Services 11.1%; Agriculture & Fishing 9%.

The annualized growth rate for the Jan-March 2023 forecast is 3-5%

The Real Estate Sector

As we have been reporting, real estate investors are likely to withdraw from the sector and invest elsewhere. In recent months we have seen short-term financial instruments being offered to investors that carry coupon rates of 10-11.25 percent. These are good rates of return for investors who are contemplating alternative options rather than the real estate market.

There has been a significant reduction in the demand for rental of luxury apartments and townhouses that are listed in US$ and rental rates have been declining since 2020
In contrast to conventional economic principles, developers continue to build for this sector and units are being sold. Our query at a new 300 units project at Richmond, St Ann (PARADISIAC Beach Club), illustrates that sales are being driven by:

1. Overseas residents and
2. Investors who believe the replacement costs and capital appreciation will be greater than other investment opportunities and with lower risks.

Demand in the so called “affordable housing sector” – $15-25M continues unabated. The critical factors remain:

1. Ability of developers to build profitably and meet the expectations of buyers in that price range.
2. Availability and cost of suitable land in proximity to the job markets.
3. The ability of prospective buyers to qualify for mortgages as the lenders increase their offer rates in response to the increases in BOJ base lending rates. As a result of completion among the mortgage lenders, we have noted that mortgage rates being offered have increased by 2-3 percent compared to the six (6) percent.
4. The cost and location of common infrastructure.

Unfortunately for the prospective purchasers who are the targets of housing units in the $15-25M price range, we are now seeing mortgage rates of 9.9-10.5 percent compared to 6 -7.75 percent two years ago. In a properly structured market economy, small increments in mortgage interest rates would lead to a significant reduction of demand in the real estate sector. However, given that an estimated 40 percent of the Jamaican economy is in the informal sector and coupled with the ongoing desire for Jamaicans living overseas to invest in real estate in Jamaica, the contraction in the residential sector has been tempered.

In an effort to ameliorate the effects of higher prices and interest rates, the government has announced that there will be increases in NHT mortgage loan limits and the number of members who may join to qualify for these mortgages. These changes will be effective on July 1, 2023.

As a result of the cost of land in urban areas, residential units in this price range are being developed in rural townships. We do not anticipate any change in this pattern.

Construction and demand continue for the BPO and warehouse/distribution subsectors. There is also demand for small and medium size retail spaces.

We have not seen any change in pattern in recent years and we believe this trend will continue.

April 14, 2023