Commercial real estate is hot property
Published:Sunday | August 11, 2013 | 12:00 AM
Avia Collinder, Business Reporter
Commercial property as a source of rental income is now in high demand by investors, local realtors and valuation specialists say.
Investors are buying up commercial space despite a rise in the cost of acquisition to what the experts say is an all-time high of J$8,500 to J$11,000 per square foot on average, and J$13,000 per square foot for new buildings.
And it is happening even though rental rates have remained static in an economy that will be dependent over four years on balance of payments injections from the International Monetary Fund (IMF). At the low end, rentals are priced at J$500 per square foot and at J$1,500 per square foot at the top end.
Chartered valuation surveyor, Gordon Langford, says the Jamaican Government's debt swap in February, which reduced expected returns on Government of Jamaica (GOJ) bonds, resulted in the flight of cash from the safe harbour of government paper.
Instead, investors are chasing assets with greater potential for appreciation in value, and they are buying commercial real estate as a potential source of cash flow through rentals and leases, Langford indicated.
Under the national debt exchange (NDX), Jamaica's second debt default in three years, investors in GOJ bonds gave up an estimated J$17 billion in annual returns under a targeted debt-reduction programme extending to 2020.
One of the more high-priced properties that has been on the market for some time - the Claro building in New Kingston owned by Digicel - now has several potential buyers doing due diligence reviews, said an informed source.
PENSION FUNDS
Langford said it is chiefly pension funds that are driving demand.
His read on the market echoes comments previously made by Rezworth Burchenson, managing director of pension fund manager Prime Asset Management Limited, that real estate and stocks offer better returns, which tend to outperform inflation in the long term.
Real estate assets held by pension funds spiked by about J$3 billion to J$17.9 billion since last September.
"GOJ rates are now down (and) buyers find that they can get a better return from well-rented property -
particularly those properties rented in US dollars - than the return from GOJ securities. So with this interest, buyers, particularly pension funds and other property investors, are buying up these well-rented properties," Langford said.
Andrew Issa of Coldwell Banker Realty Jamaica said more deals are expected if overseas investors follow through on plans to do business in Jamaica.
"We are seeing overseas companies looking at possibly setting up operations here. If these deals clear, we are likely to see quite a bit of real estate moving," said the realtor.
"It is far from preliminary. Things are beginning to pick up in both commercial and retail," he said.
Langford, in the meantime, hints
that sellers might also be more willing to offload real-estate assets in
the current market.
"Sellers can get better prices
than, say, three years ago. A typical office yield three years ago was
9.5 per cent, and now it is 8.5 per cent. In other words, values are
rising. This means that for the same rental income, a buyer is having to
pay a higher price," the surveyor told Sunday
Business.
Edwin Wint, president and CEO of
La Maison Property Services Limited, said last Friday that while
fiduciary responsibility precludes disclosure of actual sales, the
increased level of demand for investment-grade commercial real estate
from institutional investors "shows a marked increase over
2011".
Property values, he adds, are also now
significantly above pre-financial crisis
levels.
"Appreciation in property values in 2008-2009
was flat for the most part, but in some locations, there was moderate
growth, for example, the Kingston 6, 10, and 5 areas, and Montego Bay;
however, from 2010 to 2013 there has been appreciation between five and
15 per cent each year, depending on the market appeal of the location,"
said Wint.
Among the properties now attracting deals
are hotels which have languished on the market post the 2008 crisis. The
uptick in sales began in 2012 and continued into this
year.
The Realtors Association of Jamaica says its
database reflects 27 deals for commercial real estate in 2012 and 18 so
far this year. It cautions that the database is only a partial
representation of activity in the market.
Issa of
Coldwell Banker says his firm has brokered more transactions this year.
The NDX and the IMF agreement, he said, paved the way for businesses to
put long- delayed plans in place.
"Plans are now
coming to fruition. By Christmas, you will see new retail stores
opening. Our figures are showing sales which are eight per cent above
last year. With the dollar stabilising, people are also more comfortable
in planning and can project where investments are concerned," Issa told
Sunday
Business.