Real Estate Market Update 1st Quarter 2022

Background Economic Condition
The cost of many commodities have been increasing due to a breakdown in logistics
worldwide during the past 30 months. This situation has been exacerbated by the Russia/
Ukraine war. For example, in early March crude oil has reached its highest price in a decade
but has since been reduced.

High crude oil price will also push inflation due to the increased cost of transportation. It
should be noted that in Jamaica tax accounts for 40% of the EX-refinery price of fuel.
Several analysists are proposing a temporary reduction of these taxes as one means of
dampening the effects “cost-push” inflation. The increased cost of transportation and the
disruption of supply chains likely to lead to a surge in demand for foreign exchange leading
to devaluation and increase government debt that are dominated in foreign currencies. The
rise in the cost of oil and other commodities such as wheat will have a greater impact on
the poorer households

Inflation as at Feb. 2022 is 10.7% point to point compared to the targeted 4-6 percent. This
higher than expected inflation will adversely impact all sectors from real estate investments
to the disposable incomes of households.

In March the Bank of Jamaica increased its “policy rate” to 4.5%. A year ago this rate was
0.5%. The rationale is to dampen demand by increasing the cost of borrowing. This
objective is unlikely to be achieved because Jamaica is a net consumer of goods and
services and the financial sector continues to prefer lending for consumptions and motor
vehicles. An alternative view is that the BOJ should focus on stabilizing the FX rate.

The Ministry of Finance has announced an increase in minimum wage to $9,000 per week.
Social and political activists continued their calls that the minimum wage should have been
raised to $12,000. Conversely, other commentators claimed they understood the need for
the increase in the minimum wage but expressed concern about the potentially adverse
impact on employment opportunities on the most vulnerable “lower wage earners. “
The 2022-2023 budget includes $65 billion for capital expenditures which is an increase of
20% over the 2021-22 budget. There are concerns about the society’s/government’s ability
to procure and implement $65 billion worth of capital works within the fiscal year given the
endemic inefficiencies of the procurement and project management practices of the public
sector.

On Friday April 01, 2022 a local newspaper reported the following:
“THE Statistical Institute of Jamaica (Statin) released final gross domestic product
(GDP) figures for the fourth quarter of 2021 showing the recovery from the
pandemic-induced economic contraction is well underway.

The data show expansion in the fourth quarter was measured at 6.7 per cent. This was
the sixth-consecutive quarter of expansion since a 15.9 per cent decline in the first quarter
after Jamaica recorded its first case of the novel coronavirus in March 2020.

Statin said the growth was led by continued buoyancy in the tourism sector. The only
sectors dragging on the recovery were the mining sector which declined 60.7 per cent,
chiefly due to the shutdown of the Jamalco plant after last August’s fire and the
manufacturing sector which dipped by 2.2 per cent.”

Impact on the Real Estate Sector

Inflation and Market Returns
Examining historical returns data from North America during periods of high and low
inflation can provide some clarity for investors. Numerous studies have looked at the
effect of inflation on stock and real estate returns. Unfortunately, the studies have often
produced conflicting results. But, there are relatively consistent results illustrating that real
estate is the second best investments for investment horizon beyond seven (7) years and
often out-perform equities during periods of high inflation such as the double digit inflation
we now have in Jamaica. A major factor being the escalating cost of replacement.

With that reality in mind, the most important factor an investor must consider is timing.
How long does the investor plan to own the prospective property? If it’s for the long haul?
If the investor is looking at a shorter investment time horizon — then we should caution
“buyer beware.” Contrary to the “get rich schemes” that are often shown in the media, it is
prudent to view real estate investments with a long-term horizon.

Real estate prices in Jamaica have seen significant increases in recent years. Although that
may not be inherently concerning, it underscores the importance of understanding expected
investment time horizon and adjusting one’s plan accordingly.
1) Rental rates have stabilized in the US$ high-end of the market. This stability may
be short-lived as firms and foreign missions are expected to review and consolidate
their operations and staffing needs.
2) In the Corporate Area, we are now seeing the expected downturn in developments
catering to the upper socio-economic group. This market sector is saturated. The
resurgence continues of extensive refurbishing in downtown Kingston. New
commercial constructions and refurbishing continues in rural towns and in
unexpected locations. For example, Drax Hall in St Ann is evolving into an “upscale” commercial district because of the availability of land and a growing
professional/upper-middle class residential base.
3) We have seen reports of high-rise residential complexes that are planned for Ocho
Rios and Discovery Bay. These may be viable for the ABnB sub-sector rather than
occupancy by locals. Investors need to be careful in this market sector. We are
aware that several strata properties and associations are implementing By-laws
and rules that restrict rentals to short-term tenants.
4) Demand continues to outstrips supplies for residential units that cost less than
$25M. Given the scarcity and cost of land in the Corporate Area, this price point
will be seen primarily in rural areas. During the budget presentation in March, the
Prime Minister announced several changes to the policies of the NHT to assist
contributors. These improved benefits will be finalized and implemented in July.
5) The demand in the BPO sector continues for “move-in ready” facilities
commanding rental rates of US$18-24 per sq ft.
6) Warehousing spaces for the distributive and retail trades will continue to be in
demand.

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April 8, 2022