Where Have We Come From – Where Are We Going?
By Andrew W. Mallalieu on 10 Oct, 2011
Certainty is what we want; uncertainty is sometimes what we get. Making real estate decisions in times of uncertainty requires good research, experience and courage. We have seen courage paying off in the past six months; and we have seen weakness punished. My father told me that the best time to buy something was when you did not need to buy, but the vendor needed to sell. The reverse is also true.
These elements come together when an overleveraged vendor offers a property in a market that is in decline. In Barbados we have been lucky not to see many of these situations. Generally speaking our Barbados property owners have significant equity invested in their property and while they may have lost value they have not found themselves in a situation where they have to sell. We have the strong influence of the Canadian banking system to thank for this situation in large part. But this has also helped to mask some of the problems that the local market is facing.
We do not see numerous foreclosures; we do not see “fire sales”; we do not see short exposure times and quick deals; The Barbados real estate market is insulated from some of the harsh truth. The reality is that property prices have fallen on average in the region of 20 percent from their peak. As I am asked every week, “Where are the deals?” “Why are we not seeing them?” And the answer is if you do not have to sell you do not. Our society is not mobile as it is in the US and other large countries. If you lose your job, you do not have to move cities to find another one. If your first job was on the tip of St. Philip and your next one on the tip of St. Lucy you are still only facing a 45-minute drive – you do not need to sell your house and move.
This also means that there are no new entries to the Barbados real estate market looking to buy at the new prices. New entries to the market come from a wider prosperity and growth in the market – not seasonal moves or short-term market driven real estate transactions. Given these factors it is not surprising that the property recession in Barbados is marked by a reduction in transactions not by a fall in prices. For real estate agents who exist on transactions that news is not welcome! Agents make money when transactions occur – vendors holding fast on a price does not a transaction create!
For there to be an improvement in the local real estate market the local economy must improve. That is the simple economics of it. When will that happen? Certainly the amendments to the VAT rate and the removal of investment incentives and deductions for tax purposes will not improve the local economy, but rather these measures will cause the economy to contract. It seems that we are relying on the foreign markets to grow and hoping we will benefit from the trickle down effect.
The foreign market has shown some signs of recovery in the past six months. The recovery is not as strong as we had predicted (in last year’s edition of The Red Book®). The blame for the slower recovery can be placed squarely on the sovereign debt crisis in Europe, which took the wind out of our sails just as we were getting moving again. In a newsletter that we wrote earlier in 2010 we said, “Greece and oil are causing our recovery to slip”. This was a play on words as we had both the Greek financial crisis and the oil spill in the Gulf to contend with at the same time. As we go to press the financial collapse in Ireland is causing significant concern. In fact in Barbados we have a number of super wealthy Irish nationals who have invested heavily in the Sandy Lane and other areas. Certainty about Ireland’s future would also bring some peace of mind in Barbados.
We do have a view of the Barbados real estate market for the next 12 to 24 months and while it is clouded with uncertainty there is at least some evidence to support our conclusions. Broad based price corrections in the market have ended. Transaction volume has picked up. The Dollar to Sterling exchange rate has swung in favour of Sterling. Supply of new product has been reduced. Tourism traffic has improved. Forward bookings in high-end villa properties have recovered sharply.
For the Barbados real estate investor who has been looking for a property in Barbados either as a vacation home or as an investment, the market conditions have not been better in the last 36 to 48 months. There is finance available to non-residents at LIBOR plus rates that are competitive. Both local banks and international banks have competitive products in this area and are actively seeking deals. The Central Bank of Barbados is eager to approve Foreign Direct Investment, as always I would add. There are good properties on the market at market prices. Most of all the Barbados brand is very strong and has actually strengthened in the downturn. The peripheral markets that were getting attention when the world economy was booming have all gone silent. Choosing a location for a vacation home investment has come back to the basics – a beautiful island, with great service and products, no capital gains tax, and equal treatment for non-nationals in taxation matters, good infrastructure, safe and secure, and an enviable track record on financial returns.
We believe that we are through the worst. The future is much brighter today than it was a year ago. While the recovery is slower than any of us would have hoped, at least we are all certain that we are on the road to recovery. So while there is still uncertainty about the pace of recovery we believe that we can say that price appreciation and not depreciation is in our future in the foreign market. It is a great time to invest providing you have done your research, learnt from the experience of the past three years, and have courage to face uncertainty. How can we help?
Andrew W. Mallalieu, CPA MRICS
Managing Director, Terra Caribbean
extracted from: The Pink Pages – The Red Book 2011 – pages 97-98