Many have the mistaken impression that real
estate is a passive investment and therefore needs little management. Although this may be somewhat true for
long-term net ground leases, it certainly does not apply to residential
properties, says Ginnie Gardiner, PhD, associate professor of Finance &
Real Estate at UCCI.
On Grand Cayman we have many condominium
developments which, in addition to the normal needs for management, require
additional efforts as they are at risk of decline.
For residents in condominiums who are
fortunate to have courteous neighbours and a strata with expert preventive and
repair maintenance regimes, management may seem almost non-existent. They may
not have to deal with, eg, occupants who think a home theatre system engineered
for a single-family residence is fine for a small condo with shared walls or
pet manure in common areas or septic systems that back up because a “flushable”
wipe product which is fine for large municipal sewerage systems but problematic
for many of our island systems.
They may not hear complaints stemming from
repairs as far back as Ivan. If there is a pool, they may think that merely
contracting a maintenance company is all that is needed and not hear of
unsupervised children or those who insist on bringing glass bottles that break
and are left to cut feet open. They may assume that none of their neighbours
are severely delinquent in strata fees or that garbage thrown at and missing
the dumpster is taken care of by people hired for that purpose. These and a
myriad of other physical plant, social, financial, and legal issues are part of
the ordinary management of a strata.
In addition, the current economic climate
is tipping some developments into decline. Newcomers to Grand Cayman may think
that paying nearly a quarter of a million US dollars for a small condo
guarantees that their neighbourhood will not fall into decline and sweep away
their life’s savings invested in it. Before addressing a primary indicator of
changing neighbourhood dynamics and methods to stem a decline, let us consider
the neighbourhood life cycle.
When a local economy is rising with
population and incomes, developers bring on new supplies of housing by
acquiring land, obtaining regulatory approvals and improving the site
(gestation period). As units are completed and sold (absorbed by the market),
we observe the neighbourhood taking shape (growth period). After all the units
are sold, we usually see decades of stability as a normal rate of turnover among
owner-occupants occurs (maturity). Eventually, however, location or physical
plant often becomes less desirable causing a decrease in values (decline). At
some point in the distant future, fortunate neighbourhoods may be revitalised
It is human nature not to invest time and
energy into assets from which we have no potential gain. Hence, occupants of a
motel room for a night are inclined to do no maintenance whatsoever. Tenants in
a vacation property for a month will likely clean the unit. Tenants for a year
in an apartment may do minor repairs or at least report problems before they
Owner-occupants, on the other hand, get the double advantage
of enjoyment from improvements (painting, replacing worn or obsolete items,
etc) and recapture some of the investment of time and money when subsequently
selling or renting the unit. For this reason, real estate professionals and
smart buyers of condominiums always want to know the percentage of
owner-occupancy in the neighbourhood and which way it is trending. When
owner-occupancy reaches a tipping point, the neighbourhood rapidly declines and
there is little hope of revitalisation without a future dramatic increase in
land values in the area.
It is important to understand that tenants
and owners may be identical but their incentives differ. Why should a tenant
who has an extra thousand dollars choose to have the walls repainted or better
carpeting installed over buying a huge music amplification system? Likewise,
why should a tenant remodel the kitchen and bath rather than purchase another
or larger vehicle to keep in the parking lot? Similarly, why should an absentee
owner spend time and energy travelling to the neighbourhood to monitor for
noise, upkeep, trespassers, monthly strata meetings, et cetera? This is a
classic example of what economists call agency costs.
Decline may be an inevitable aspect of most
neighbourhoods’ morphology; however, when local economic conditions deteriorate
causing more absentee ownership and shorter housing tenures among renters,
neighbourhoods that were mature may suddenly face a rapid decline. A property
tax system which takes the form of a one-time up front duty only exacerbates
the problem. It punishes owners who must relocate to find work elsewhere as
they may not recapture the duty upon re-selling their property.
newcomers will take the risk of buying in this economy with such a large sum
due the government up front. This causes upward pressure on renting versus
owning and downward pressure on rents and housing tenure. This, in turn,
creates greater risk for ownership and less stability to neighbourhoods. As
owners exit the neighbourhood (island), there are fewer residents who have the
incentive to maintain its physical, legal and financial robustness.
Is there anything owners can do to battle
against this decline? Yes, but it is difficult and costly. You may have noticed
that we attribute a life cycle to neighbourhoods akin to ourselves. Both
require a great deal of expenditures during the growth stage and to prevent
decline ending the maturity stage. Indeed, at a time when owners are frustrated
and disheartened as they watch values decrease, even more energy and resources
are required to prevent larger, lengthier losses in the future. Rarely will
enough owners be willing or able to safeguard their investments in such times.
The condominium complex tips over into decline never to recover its former
value even after the economy returns.
On Grand Cayman, these years of pressure on
many existing condominium communities will become evident. Those which defer
maintenance, keep strata fees too low or uncollected, fail to enforce noise and
other regulations, lose owners taking an active part in strata governance and
drop rents to attract more transient tenants, will definitely result in many
owners losing on what is often their largest investment. On the other hand,
those that are able to avoid most of the above and actually improve their
neighbourhood will avoid the decline experienced by others and its owners will
be rewarded with a normal return when the economy improves.