This could be one of those rare moments: The salespeople and the surveyors, the people who value real estate on a business-to-business basis, agree the market is strong and likely to remain so.
Land supply, particularly in premium coastal areas, is healthy and the construction pipeline is strong. The U.S. economy is chugging along, and the political climate surrounding President Donald Trump seems to cut both ways: He will either spark domestic growth, putting more disposable income into American pockets, or spook investors, driving them out of the country and – with a little luck – into Cayman real estate.
“I’m no political expert,” said Sotheby’s International Realty Cayman Islands owner Sheena Conolly, “but, either way, people are encouraged to look at Cayman.
“They may be unhappy with our due diligence requirements, which are stringent,” but, she said, the islands boast a stable environment and an improving economy.
Matt King, senior valuer for Bould Consulting, consultant for sister commercial and residential property expert Avata, and an eight-year member of the Royal Institution of Chartered Surveyors, agrees, but not without caution.
“The Cayman real estate market is overall performing well,” he acknowledges. “Prices have been increasing in some areas through 2016 and into this year in areas around Seven Mile Beach, and South Sound condos in particular have seen large value increases, and there are other pockets of increases, mainly for beach or sea-front properties, plus canal-front land and homes.”
President Trump and new deregulation policies could drive the market either way, he suggests. “Given Trump’s real estate background, it is unlikely the property industry will be one of those that suffers.
“Deregulation measures will likely assist lenders to be more liberal,” even inspiring “non-traditional lenders to enter the market,” King said. “However, should he decide policies at whim and go after the offshore hedge fund market, then he could have a devastating impact on the Cayman Islands economy.”
President Trump has said little about offshore finance, while Treasury Secretary Steve Mnuchin described during Senate confirmation hearings at least one Cayman company he created to shelter his Goldman Sachs clients.
James Andrews, senior managing director at property valuer Integra Realty Resources, offers a measured response, agreeing with Conolly that he is no “geopolitical expert … but there are several potential outcomes.
“For example, he may lower U.S. corporate tax rates, which may encourage corporations to relocate operations and capital back to the U.S., which could be a negative for Cayman’s offshore industry.
“On the flip side, he is anti-regulation, so coupling this with Brexit may mean that there could be less regulatory restraint on the offshore financial industry.”
Neither would necessarily affect the hedge fund industry, the chief driver behind Cayman’s financial services, Andrews said. The key to the local real estate market is the old question of population growth, and that “will be more affected by local politics and the election outcome in terms of what they decide to do with immigration policies.
“In addition, companies need to have financial incentive to stay or move here and to grow; and the cost of doing business in Cayman is quite high.”
Economic growth in Cayman
In a Feb. 15 speech to the Alternative Investment Conference at the Kimpton Seafire, Premier Alden McLaughlin said little about immigration and permanent residence policies, but much about economic growth.
Observing an “age of uncertainty,” McLaughlin said Trump had been elected “on the promise of radical change, and four weeks into his term, his approach to politics and governance would tend to suggest that indeed we are living in … exceptional times.
“The impact of his administration and its yet-to-be-articulated policies with respect to jurisdictions such as Cayman is still very much in question. But there can be little doubt that an unpredictable future is ahead.”
Brexit, he said, was a “glass half full,” and called the Cayman economy “by far the best in the region.”
The islands, he said, had “avoided the ravages of spiraling debt, unsustainable deficits, high unemployment and economic stagnation.”
His government had “grown our economy, reduced unemployment, accumulated fiscal surpluses [and] paid down debt,” improving stagnant 2013 growth of 1.5 percent to a forecast 3 percent in 2016 – accompanied by the lowest level of poverty in the Caribbean and unemployment of less than 4 percent among the entire workforce – and 5.6 percent, down from 10.5 percent, among Caymanians in 2016.
Conolly described the outlook for Cayman real estate as “extremely buoyant,” saying only a few beachfront condos remain available under $1 million, while “the higher end is selling quickly.”
Only one unit remains at Seven Mile Beach’s WaterColours, while South Sound condo development is “extremely busy.” A single-family unit, she said, runs between $3 million and $4 million, and her Sotheby’s Global Network is seeing an uptick in residential enquiries.
South Sound development continues unabated: 56-unit Vela Phase II is 90 percent sold – with another 56 units in Phase III in prospect; Cayman Crossing Phase III is scheduled for completion in late 2017. Naul Bodden will soon complete 24 units at Tides; additional projects by Stephan Baraud and mainland China’s Dating Group will bolster supply; and another 36, $1.3 million homes comprise Fin, which launches an 18-month construction schedule this quarter.
Andrews said “a significant number of pre-sales in projects under construction” had “also lower[ed] the market share for existing units.
“The average price of non-waterfront homes in the SMB area actually rose moderately, but based on a small number of transactions.
“In South Sound, the number of transactions actually declined in all categories except vacant land, with average prices increasing for homes and condos, both waterfront and inland,” he said, although noting his figures were based on Land Registry data, and excluded pre-sales of unfinished projects.
“New projects such as Shore Club, Vela Phase II, South Bay Estates appear to be selling well. We note that there are currently only 12 condos listed for sale in South Sound above CI$500,000, excluding developer pre-sales in projects planned or under construction,” he said.
Paul Pearson, director at Vela’s Davenport Development, repeated his 2016 assessment that South Sound is “on fire,” saying “it’s still on fire. We have seen new developments, the Kimpton [Seafire] and [Howard Hotel Group’s] Margaritaville hotels on Seven Mile Beach, some condo projects and then on South Sound there has been a number of projects started and some completed.
“As we enter 2017,” Pearson said, “Davenport is excited to continue with the next phase of Vela. We also have land on Crewe Road and Old Prospect Road that we are designing plans for.”
He indicated few worries about potentially volatile U.S. politics, suggesting they may work to Cayman’s benefit. Like Conolly at Sotheby’s, Pearson has seen an uptick in interest.
“If anything, we have seen an increase in enquiries from overseas (USA) since the election of the U.S. president,” he said.
“The market was quite soft for a long time, so we are seeing it corrected now.”
He is tight-lipped about new Davenport projects, saying that Crewe Road “is inland and smaller units, about 40 of them.”
He describes them as “starter homes,” priced upwards from $229,000. “We will start towards the end of summer and take about 12 months.”
He declined to name their location, and offered “no comment on Prospect yet.”
IRR’s Andrews said condo sales on Seven Mile Beach slowed in 2016 “due to the virtual sellout of WaterColours,” and a lack of new inventory.
“Because WaterColours was at the highest price point, the average price per square foot has dropped slightly,” he said. “since there were only three sales of those units in 2016.”
The newest alternative, 62 residences at the Kimpton Seafire “competes at the top of the price range,” Andrews said, “and is expected to complete in late spring or early summer and has reportedly sold about 25 percent of its units.”
Non-waterfront inventory down
Sales volume for houses and non-waterfront condos in the Seven Mile Beach area, he said, had slowed; “most likely due to a lack of new inventory and fewer listings than previously.”
Bould Consulting’s King agreed that supply had briefly declined “in the majority of areas,” bringing a kind of market stability, meaning “the outlook should be positive.”
Valuations would follow suit, he said.
“Most people who deal with residential properties focus only on interest rates because they have a direct influence on real estate prices. It’s hard to ignore that record low rates are likely bolstering values to some extent at the current time, and if investors foresee increased variability in future rates, this will likely put a downward pressure on property prices,” King said.
“However, the current low supply levels will certainly ensure stability in the short term and I see Cayman as continuing to be a safe haven in the Caribbean due the huge plans of the Dart Group and the ensuing high-quality development, infrastructure improvements and job creation through hotel development.”
Supply is not likely to remain long in abeyance, however.
Prospects for 2017
In February, Cayman’s largest contractors, McAlpine and Phoenix, proclaimed themselves “guardedly optimistic” about 2017 prospects, mostly in the residential market, particularly around SMB and South Sound, particularly on beachfront property.
“An improving economy means more business activity, which will require more employees, which increases the need for new accommodation for both expanding businesses, new businesses and employees of these businesses,” McAlpine General Manager Ian Pairaudeau told the Journal, while observing that an improving economy was never guaranteed.
“The pipeline looks very strong, long-talked-about projects such as Ironwood appear to be coming to reality and should the government agree to rock removal, the Four Seasons could even be under way before the year is out,” King said. “Add this to the infrastructure works Dart is carrying out, the new building at Cricket Square and the ever-increasing pipeline of South Sound condominiums. We are certainly bullish in this field.”
Tourism projects appear set to boom, he said, ticking off a handful of imminent investments in the wake of a record 385,451 air arrivals in 2016.
“New tourism developments include the planned Four Seasons Hotel in Seven Mile Beach; the Margaritaville Hotel; a 42-room business hotel in Seven Mile Beach (under renovation); a planned hotel by HHG Group on Pageant Beach in George Town; a proposed 49-room eco-lodge in Barkers Beach, West Bay; a 200-room hotel with 75 residential suites in the Beach Bay area [St. James Point]; and Ironwood, a $365 million 600-acre resort with a 27-hole golf course, 100 rooms, a clubhouse lodge, retail, restaurants and homes for 2,000 in Frank Sound.”
Conolly also points to the eastern end of Grand Cayman, naming “a lot of activity” in Queen’s Highway, Colliers and Cayman Kai, including Sotheby’s Camden House, listing for $5.5 million.
“There are a few other large-scale developments such as [East End’s] Health City,” King said. “The plans include ancillary hotel, residential and commercial uses, and should this be successful, additional development of support services in the Eastern Districts is inevitable, especially with Ironwood seemingly going ahead.”
Inland development bore a more-modest promise; long-term development was likely to be slow, Andrews said.
“The East-West Arterial is badly needed and necessary to spur more development in the eastern districts,” he said.
Questions continue to linger regarding Ironwood and government demands the developer fund a multimillion-dollar arterial extension to Frank Sound. Andrews pointed out, “[They] are publicly saying it is moving ahead despite not having an agreement to move the road.”
“There is a great deal of buildable land including coastal locations in the eastern part of the island, but development will likely be slower in that area without better road access,” Andrews said.
King said the eastern districts are, in effect, a separate market: “You have only to look to areas to the east where prices are static and marketing periods are well over 12 months to see that Cayman comprises a number of different markets, each performing almost independently.”
While inland may face problems, Andrews observes it may provide affordable middle-class residential options.
“Unless we are talking about … land with canal or water views, inland will continue to struggle,” King said. “Only the sought-after commercial parcels are likely to perform well, and we don’t expect any major value increases east of Hurley’s roundabout in the foreseeable future – unless there are exceptional circumstances such as another invitation to provide a solar or wind farm for [the Caribbean Utilities Company],” a reference to the 21-acre solar array scheduled for Bodden Town’s Pease Bay Pond.
“Inland development has been strong on the west side of the island, as residents want to be close to all the commercial services of George Town and Seven Mile Beach,” Andrews said. “The inland lands in the areas further east will require better access (roads) in order for there to be significant development there.”
“Because of the flat topography and the resulting lack of ocean views from inland properties,” he added, “inland development will likely be mostly limited to domestic housing and related small commercial properties.”
What Andrews calls “non-waterfront residential homes,” typically sold to local residents, performed well in 2016. Sales grew more than 21 percent and average prices nearly 12 percent from 2015.
“Non-waterfront condo sales,” he said, were flat, “but there is a fair amount of new product under construction which may have hampered sales of existing units.
He pointed to strong sales in West Bay and both Spotts and Savannah as “conventional buyers” sought detached homes: “Given the lack of reasonably priced homes in SMB and SS, these three districts showed healthy price increases.”
Frank Sound’s Ironwood could also prove attractive – depending on the appeal of the Arnold Palmer golf course – and drive demand for surrounding lots, creating “an as-yet untapped market,” Andrews said.
Another inland development – boasting government support – is Cayman Enterprise City near Fairbanks Road, extending toward South Sound. Overseas companies, taking advantage of a range of concessionary fees and duties, can take space in 200,000 square feet of offices on the landscaped 70-acre site.
Conolly points to “loads of people” interested in inland developments “in the Grand Harbour area, on the canals, at The Shores – where there must be between 100 homes and 150 homes in the last three years – and at the Yacht Club and Salt Creek.”
The hothouse pace and glamour – and profits – of high-end residential development, especially in coastal areas, has left a quiet and strong commercial real estate market, although King indicates it is underserved.
“The commercial market is performing particularly well,” King said, citing his company’s interest in Caledonian House. “Buildings with a large tenant mix, smaller demises [leases] and flexible terms appear to be benefiting from relatively low vacancy rates at present, and rents within these building are more resilient.”
Compared to the larger Caribbean property market, Cayman has a significant commercial sector. It’s a complex segment, he said; values relate only to the returns produced and a frequent relationship with alternative investments, “hence the need for professionally qualified individuals for this specialized market.”
King decried the idea that the practices of residential real estate are efficiently applicable to commercial sales, calling it a “huge disservice to landlords and tenants alike.”
“Only a handful of valuers are able to conduct these to the necessary standard on island,” he said, calling on banks to improve vetting procedures and create “separate panels” for commercial and residential.
“Otherwise the commercial market will not only suffer from a lack of specialized personnel in sales, but will see a rise in credit risk issues,” he said.
New leases on top-quality stock in new buildings are forcing commercial accommodation to accord with international standards, he said, enabling Cayman to compete “not only with other Caribbean countries, but established markets also, whilst continuing to offer the many benefits of being a country with no direct taxation.”
Rentals, capital values and investment yields, he said, have been declining for years on secondary and tertiary commercial property, “heightened to some extent” by an unwillingness of landlords to refurbish older buildings and underlined by a planning system reluctant to allow creation of mixed-use schemes for existing properties.
Camana Bay – celebrating its 10th anniversary this year – is beginning to rectify that, however, building a plethora of fresh grade-A space as part of its expansion toward Seven Mile Beach.
Declining returns on older property, King said, is because “simply, that Camana Bay was built – and tenants moved there. But the reality is the lack of grade-A space outside of Camana Bay, parking provision and overall master planning for these areas are just as much to blame.”
“We need an overall master plan for the areas that need regeneration” he said, “which usually includes elements of mixed-use.”
Government appears to have awoken to the issue, however, offering Planned Area Development for “potential regeneration sites,” said King, citing, for example, the long-discussed George Town revitalization, and similar urban renewal schemes for Eastern Avenue and Shedden Road. Already, such contemporary developments as Camana Bay’s Salt Creek, Cayman Enterprise City and East End’s Health City are PAD schemes, often generalized under a “mixed-use” rubric.
Other developers have previously tried – and failed – to integrate residential, office, retail and recreational communities. Now-bankrupt Atlanta-based developer Stan Thomas sought to create a mixed-use scheme in Salt Creek. A similar fate befell Ritz-Carlton developer Mike Ryan’s proposed Dragon Bay project.
“Commercial property lease rates will likely remain steady,” said Andrews, “and although a significant amount of office inventory will enter the market, lease rates are unlikely to decline.”
He speculated that new leases and increased rates could occur in George Town and SMB offices and retail, but acknowledged “concern that new buildings planned in Camana Bay and Cricket Square might flood the market with new inventory.
“The good news is that the developer of Camana Bay doesn’t need to discount the rates to lease the space, and can presumably afford to sit on it for as long as it takes,” Andrews said.
He said lease rates for class-A space office were holding steady at US$50-$60 per square foot and class-B between $38 per square foot and $45 per square foot. Retail rates, he said, are similar, and lower for the class-B and class-C “tertiary locations.”
Industrial rental rates were holding steady at an average of CI$23 for longer leases and better properties, while sale prices for commercial properties “are difficult to compare due to the low number of sales and the varying type of buildings that transact,” he said.
King expects more commercial development to support a growing residential sector. “Retail is the strongest commercial sector in terms of occupancy levels and also one that has been a little neglected in recent years – with the exception of Camana Bay – so we would expect to see further development in this sector.”
He also pointed to “a number of light-industrial projects in the pipeline, many including storage, which is an off-shoot of a growing residential market.”
Andrews said population growth is essential to a strong real estate market and hoped Cayman’s May elections might inaugurate long-stalled movement on immigration policies.
“The biggest factor is an uncertain future due to an immigration policy in flux, with respect to permanent residency,” he said.
“As long as developers are able to sell residential units such as condos in South Sound they will keep building, and there is optimism that the permanent residency dilemma will be rectified in the coming year; which would give more confidence to expat residents of the island in terms of buying property.”
While prices are likely to continue unabated, they are, for the moment, justified, although King warned that while “the Seven Mile condo market appears to be flying and value increases appear justified, you have only to look to areas to the east where prices are static.”
And while valuations needed to keep pace with rising prices, it is “critical for valuers not to be carried away with the speculators and realtors who will more often than not remain overzealous about the market,” King said.
Pearson acknowledged escalating prices, but said “the units are selling and the prices are more realistic. They are sustainable.”
He cautioned, however, there “will come a tipping point and developers need to be acutely aware of the area in the market. If standards slip and prices increase at an unsustainable level, that would tip the balance, I believe.”
One element that could drive prices to that “tipping point” could be land supply on Seven Mile Beach or South Sound. “We are seeing that land in the most sought-after areas such as Seven Mile Beach is becoming extremely scarce,” King said. “Land is finite and we envisage sustainable growth for the next couple of years unless a major land owner floods the market or the global market, in particular the U.S., suffers a significant setback.”
Andrews agrees: “Land is becoming more scarce, so land will likely continue to increase unless we see population begin to decline or level off,” he said.
“I would predict we may see some redevelopment of some of the older condominium developments on Seven Mile Beach in light of the lack of additional development land on the beach,” he added.
Conolly said prices were “quite affordable compared to elsewhere in the Caribbean, with condos starting at $250,000 or $300,000.”
More than enough land was available island-wide, providing “loads of opportunities for people to develop good product,” she said. As time passed, Cayman was likely to see “more affordable levels of housing” for a broader range of buyers.
“I’m seeing movement across the board of real estate properties,” Conolly said. While visitors are likely to seek waterfront homes, “there are always more affordable opportunities.
“Inland homes in good areas are selling. They just need to be placed at a more- affordable price point.
“There is a real need for that,” she said. “Hey … we can’t all live in million-dollar homes.”