Getting our house in order

The recent recession in the US has been
described as the deepest since World War II and the impact for Cayman has been
felt by a stalling of the real estate market while US investors pull back,
waiting for the upswing that will inject positivity into the markets and
therefore get them spending again. Should the Cayman Islands be looking toward
this month’s US mid term elections (in both the House of Representatives and
the Senate) as the possible catalyst for the upswing or should Cayman focus
more on strengthening its own economy first and foremost?

A leap of faith

Toni Paolini, managing director of CaRe
(Cayman Real Estate Company) sits in his brand new bright red offices on the
waterfront in George Town and says he is delighted with his decision to make
the leap to invest in the real estate industry as it stands right now.

“People say that I am mad to put money into
the industry when it is in the doldrums, however I firmly believe that the most
money to be made is when the market is at its lowest,” he says.

Paolini is actually quite satisfied with
business at the moment, having enjoyed a modest succession of sales in recent
times.

“I am a believer in working hard for your
money,” he states.

“Years ago it used to be like a lottery. But gone are the
days before Ivan when we as real estate brokers could just put our signage up,
sit back and wait for buyers to simply walk through the door, wanting to
purchase multiple listings. Nowadays you have to think creatively and
energetically go out and get the business. We also need to educate sellers so
that they understand the realities of toady’s market and price their properties
accordingly.”

Democrats get a vote of no confidence

Paolini worries about the current US
administration, believing that Obama’s policies have caused a deep sense of no
confidence for US investors:

“They are simply hiding their money under the
mattress,” he says. “There desperately needs to be a setting of economic rules
so that Americans can feel more confident about investing overseas in places
such as Cayman.”

He anticipates that the Republicans will
win the House of Representatives majority and this will mean an end to Obama’s
healthcare reform programme with the knock on effect being that Cayman will
eventually benefit from a strengthening of the US economy. Re/Max owner/broker
Kim Lund agrees, saying:

“The consensus seems to be that there is no question
that it would be a positive, for both business and the US economy, if the
Republicans get in. They feel the Democrats, under Obama, are villainising
business in the US. Before any of these investors buy back into Cayman, they
need to get their own house in order and regain their confidence by finally see
a sustainable recovery taking hold.”  

Economist Dr Richard Rahn, former director
of the Cayman Islands Monetary Authority concurs with Paolini in that he too
believes the Republicans will win, but is more hesitant that the outcome will
be positive for Cayman because of the dichotomy of a Democratic President and
Republican House majority.  

“The Republicans are very likely to take
control of the US House of Representatives, and there is approximately a
one-third chance they will also take control of the Senate,” he says. “The
Republicans will have a difficult time repealing any of the Obama programme,
given that President Obama can veto bills coming out of the Congress. There
needs to be a two thirds majority vote to over-ride a presidential veto – which
is very hard to get.”

Rahn says that if the Republicans take
control of the Congress they will, however, be able to restrain or even stop
much of the spending – which would be good news for the economy, he says.  

“The Keynesians have had it all backwards,
and that is why there has been very little economic growth,” he states.

The big worry, though, is taxes. 

“The big unknown is what is going to happen
to taxes. If the scheduled tax increases are allowed to go into effect this
would likely drive the US back into a recession. The Democrats have now put off
this decision until December  – which is
most irresponsible,” Rahn states.

He furthers: “Cayman of course is very
dependent on what happens with the US economy. If the Republicans take Congress
it will be a small plus for economic growth, but it will probably not be until
the year 2013 before real pro-growth policies are put in place again (which
assumes a Republican with good policies wins the White House). Pity Cayman.”

Timothy Ridley, former chairman of the
Cayman Islands Monetary Authority has a similar “no real change” view for the
immediate future: “I think the US November elections will have little or no
short term impact on the local economy or the financial services industry,
whatever the outcome. Neither the Democrats nor the Republicans have the
answers to the US economic problems, and the reworking of the financial
regulatory framework has pretty well been done.”

Ridley believes that the recovery of the US
economy is going to be slow and take time. “Only when the excesses of the past
few decades have been wrung out of the US system, can an upward movement take
place,” he says. “That in turn will take some time to percolate down to the
Cayman economy through increasing numbers of visitors, more spending in our
economy and possibly renewed interest in second or third vacation homes in
Cayman.”

Knock on effect

JC Calhoun, owner/broker with real estate
brokers Coldwell Banker Right is placing a great deal of importance on the
election as far as Cayman is concerned.

“Right now, most American investors are on
the fence because of the economic uncertainty in the US which accompanies out
of control spending, unmanageable debt, rising taxes and growing government
involvement in the private sector. They are not in the mood to spend
substantial sums on items they don’t absolutely need.”

Therefore, he says, the mid term election
is “the most important US election in our lifetime”.  

Calhoun believed this because it will
determine the future course of the US, i.e. Socialism or Capitalism, he
says.  

“That chosen course will have a huge effect
on Cayman. Within current US policy there is nothing positive for our future –
except perhaps money fleeing here from the US. If the Senate and House go
Republican (which is now possible) damage control can begin and the mood of the
country will improve. Americans will know they now have a fighting chance to
solve their problems,” he believes.

Calhoun warns however that the election
result in the Republicans’ favour will not be a “quick fix” and it will be
painful, but, he says, knowing that it is possible will make a huge difference,
allowing for some optimism which is what is needed to encourage spending again,
and that spending will be felt in Cayman.  

“Not immediately, mind you,” he confirms,
“because the US has to dig itself out of a big hole before they – and we – get
back to real prosperity again. Right now the goal has to be: reverse the trend,
and that will be a big step in the right direction.”

Getting our own house in order

No matter what the outcome of the US
election, Ritz-Carlton and Dragon Bay developer Michael Ryan says that Cayman
needs to work much harder than ever before to encourage inward investment. He
says that the economic woes of the US will continue for some time in the future
and that Cayman has to aggressively market itself to stand out from the crowd
when it comes to being a viable investment opportunity.

“Well meaning but misguided attempts by the
current US administration and congress have only served to lengthen the period
before recovery takes hold and the mountains of additional debt that have been
taken on will be a drag on the US economy for many years to come. This means
higher taxes, a lower dollar, reduced expendable income and diminished growth,”
he says.

“Whether the Democrats can maintain a congressional majority or not
will have little real impact on the situation and if the Republicans gain the
ascendancy it is likely to only result in a fractious and ineffectual session
for the next two years.”

Ryan furthers: “The days where Cayman was
the obvious, and almost sole, choice for this type of investor are long gone.
Increased competition, regionally and internationally, has raised the bar of
what is expected. Couple this with a deterioration of the product Cayman has to
offer, through increased crime, costs to living and doing business and an
unfriendly environment to immigration and development, and you can appreciate
why it is a challenge for Cayman to attract these investors.”

Ryan believes that Cayman needs to take a
long hard look at its current product offering and compare itself to its
competitors, then aggressively promote itself in a coordinated fashion to its
target consumers.

“Part of Cayman’s offering is stability and
security and it is crucial that the finances of the government are seen to be
on solid footing, one of Cayman’s greatest attractions is its tax free status
and the security of property, we can not continue to endlessly be discussing
whether we are going to have to resort to taxation to meet out expenditure.
Cayman needs to project the sound, responsible and secure image it has had for
decades and which the foreign investor is so concerned about when considering
moving part of their wealth offshore,” he says.

“We also need to present a
clear and consistent package of incentives to investors and visitors/residents
so that they can see why Cayman is a good choice compared to others.”

Paolini adds: “The immediate fix for our
economy is to bring people (consumers) to the islands. This will increase
spending without depending on other economies to reflect on ours. More people
mean more businesses in all segments of our economy.”

In summing up, Ryan says there are real
challenges in the US, Cayman’s traditional market, the likes of which have not
been seen before. However, he states: “We hold in our own hands the opportunity
to take advantage of these difficulties and whether it is a Democrat or
Republican congress is irrelevant compared to what we decide to do, or not do,
at home.”

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Toni Paolini, Cayman Real Estate Company

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