Real estate withstands rate hikes

Real estate experts say a third to half of the residences in upscale complexes – particularly those outside of Kingston – are foreign-owned, but argue that rising US interest rates will not lead to a fallout in the market.

Jamaica’s private developers usually focus on the middle to high-income or luxury markets, which includes a fair number of persons seeking investment properties.

Money tends to follow where it gets the best return when adjusted for risk. Higher interest rates will make saving more attractive without risk, while the cost of borrowing for mortgages will rise. That seems to create key conditions for a local market correction, but that’s not the case, experts say.

“It’s not your Wall Street, hardcore investor buying our developments,” said CEO of Proven REIT Limited Aisha Campbell. “The targets are Caribbean nationals who want to own a piece of Jamaica.”

Campbell says rates would have to shoot up massively to make a difference. That’s because the overseas buyers are mostly Jamaicans living abroad, who want a second home for sentimental reasons, even more than for pure investment, she says.

“It is not 100 per cent investment; there is also an emotional element to it as well,” said Campbell.

She explained that Proven’s developments in Mandeville attract interest from the United Kingdom, and those on the north coast attract buyers from North America.

They want a place to stay outside of Kingston, she added. “We would not see a fall-off in demand any time soon.”

America’s central bank, the Federal Reserve, has signalled that it plans to start raising interest rates next month as a counter to rising inflation.

The current federal funds rate from which other interest rates are derived stands at 0.08 per cent, with expectations that it will initially increase by 25 basis points. The adjustment might seem small, but the anticipation has led to big swings in bond yields. For example, the yield on the 10-year US Treasury bill was hovering at 1.94 per cent at writing on Thursday, a 50 per cent jump over six months.

In Jamaica, the central bank has already executed a series of interest rate hikes – with its policy rate rising to 4.0 per cent since February 21 – to temper inflation. Bank of Jamaica’s policy rate is equivalent to the rate it pays to banks on their overnight deposits at the central bank.

An assessment of the policy rate on private market rates has found that the money markets tend to respond to the adjustments, whereas the banks’ response has been sluggish.

BOJ data for December, amid a 200 basis point increase in rates over the quarter, shows that the average lending rate shifted negligibly and remains within an 11.4 to 11.5 per cent range. Meanwhile, mortgage rates are still falling, averaging 7.19 per cent.

Presently, the appreciation of local real estate prices still outpaces movements in interest rates, said Julian Dixon, realtor and co-owner of the Jamaica Sotheby’s International Realty franchise, adding that over the past five years, local luxury real estate has shot up in price. It’s the result of a boom that rapidly increased since the pandemic with one-bedroom apartments now selling for $40 million in prime locations.

Dixon said that high-priced developments have always focused on overseas purchasers and expects that to continue, despite interest rate movements.

High-end developments are usually in demand by rich clients, with cash on-hand, who do not require mortgages, added Lyttleton ‘Tanny’ Shirley, CEO of a new development company called Stratosphere that is laying the ground work to construct what’s expected to become Jamaica’s tallest residential building.

“The net impact of high interest rates on purchasers is, therefore, not as impactful and is not a deterrent to purchasing high-end developments,” Shirley added.

He explained that cash purchasers start with an advantage over mortgagors, as they buy at discounted prices during the preconstruction stage of the project.

“The end cost of the property purchased gives the purchaser a high advantage of property value that would neutralise any high-interest rates,” Shirley said.

He added that along the north coast, overseas buyers may take up as much as 80 per cent of acquired residences.

Real estate investment company First Rock Capital, which is about to put one of the most high-priced developments on the market, says 30 per cent of its buyers are usually persons based overseas.

CEO Ryan Reid said that in a worst-case scenario, where rate hikes serve to dry up half of the company’s foreign demand, it would still leave 85 per cent of First Rock’s business untroubled.

During the pandemic, the construction sector turned out to be the most resilient, and still tracking ahead of the broad economy. The sector grew 6.4 per cent in the October-December 2021 quarter, whereas overall growth in gross domestic product was 6.0 per cent, according to preliminary estimates from the Planning Institute of Jamaica.

The planning agency declined to comment on the likely impact of interest rate shifts on construction GDP. The sector generates around $44 billion for the economy on a quarterly basis, Statin data shows.

business@gleanerjm.com