An interesting trend has occurred in property development.
Over the last five years, an ongoing correction has taken place in the property development industry. Just prior to this correction, we had been on a three- to four-year period of strong development activity and expansion, partly to rebuild after Hurricane Ivan hit Grand Cayman in September 2004.
As the effects of the global financial crisis were starting to be felt in the Cayman Islands during 2008, our population began to decrease, as did tourism at the end of 2008 and into 2009. This had a noticeable impact on demand. Development activity started to contract. Less and less money was flowing through our economy after 2008 and we fell into a recession/depression.
The value of Planning Department approvals for new development (houses, condominiums, commercial, hotel, etc.) started falling off after 2008. During that year, planning approvals were $481 million. These values continued to fall every year up until 2012, when the total value for that year was $152 million, representing a 68 percent decrease in the value of planning approvals and corresponding construction activity over four years.
While that sounds devastating, it was a painful but necessary process that needed to occur for the health of our economy, in order for it to be able to recover. Development had reached an unsustainable level. New property inventory was not being absorbed by the end of 2008 and property prices were under pressure and began to decline.
It is only recently that the glut of inventory is being absorbed due to an increase in demand from an expanding population and tourism. Thankfully, development slowed when it did, otherwise it would have taken even longer to absorb the overbuilding.
Because there has been very limited new development, property supply levels have continued to fall and prices have firmed. Demand levels are now beginning to increase. 2013 or 2014 will likely show this negative trend in development has bottomed out and the building cycle is starting to turn upward, as demand starts to deplete most of the remaining supply.
Additionally, we are now seeing more diversification in development, which is a good sign for our economy. This broadens the base of absorption, versus having the development activity principally focused on one or two types of property, like homes and condominiums, which can easily become an oversupply.
Currently, the development activity consists of a couple of hotels with some condominium residences, a hospital and medical center with ancillary buildings, commercial buildings, and the usual homes and condominium/apartment projects. This more varied development can also create demand for other types of property construction, so it tends to be self-supporting.
As an example, the new hotels being built will feed demand — by supporting an increase in tourism — for resort condominiums and beach homes/property. New staff working at these hotels will need homes, condominiums and apartments. Commercial development will feed demand for residential homes and condominiums, as new businesses relocate or local businesses expand to fill this space and bring in new residents who need accommodations.
Our resident population has still not recovered to the pre-crisis total that we had in 2008, which was 57,009 residents. However, the population started recovering in 2011 and by the end of 2012, we were back to 56,732 residents. In 2013, we will very likely surpass the 2008 number of residents, especially now that government has committed to extending the rollover to 10 years, which puts us back at a pre-recession population and one that should continue to increase.
During the next couple of years, as property development starts reaching some critical mass, the result will be a stronger economy and better real estate market due to the increasing demand this development will cultivate. While this year and 2014 may show slow progress, there should be more of a pickup in economic and real estate activity within a couple of years or less. So, the outlook is positive.