This year the challenge seems to me to be how to separate our feelings about the two segments of the residential real estate market that co-exist in Barbados but are on different paths.The local market and the foreign market.
We should start by giving a definition of each market. Such definition could take into account location, amenities, design, and price point. For simplicity we shall separate the markets on price and we shall make the break at US$ 1.5 million. Properties with prices below that level will be considered in the local market and prices above in the foreign market. For the record we recognize that this does not do justice to the south coast beachfront condo market, which generally comes under the threshold but is marketed to foreigners. This market will be discussed in a separate article penned by my colleague Hayden Hutton (News on the Beachfront).
The Local Market
When the world recession hit in 2008 you could not find any evidence of such in our local market. In fact through the first quarter of 2009 the local market was unaffected. But starting in mid 2009 we began to notice a softening in demand for land and longer exposure periods for resale houses. While technically the financial institutions had not changed their lending criteria and interest rates and terms continued to be favourable, it appears that the psychology of both the lenders and the borrowers had been affected. We certainly do not live in a vacuum and listening to what was happening around the world and indeed with our own tourism market, had an affect on our behaviours. The other reality was that businesses were not expanding, bonuses were curtailed, and some of the most affected businesses had to make cuts. Market confidence has been eroded while the fundamentals of supply and demand have remained steady. Some buyers may have delayed purchase decisions awaiting a renewed personal and market confidence – a phenomenon that was experienced around the world.
This trend is still rolling.Today we see a continued slowing in demand in the local market. Serviced lots in Barbadian neighbourhoods have seen modest price reductions of say 5 to 10 percent and if not that, certainly no price growth in the past 12 months. However, on closer analysis one sees an opposing force influencing the supply side of the equation. That opposing force is government policy vis-Ã -vis change of use of land from agriculture to residential. It is clear that the current administration is looking at such applications in a different light than past administrations certainly giving the impression that less land has become available or will become available for residential subdivision.While such a shift has not completely made up for the fall in demand it has dampened the effect of such.
Regarding Barbadian housing we have noted that the demand for completed homes in the US$250K to $400K range appears to have softened. The response to such listings would generally be overwhelming, it is now only sufficient to sell the product (there is no excess demand), and there has been little price growth in the past 18 months. Admittedly this may be as a result of a reduction in construction costs including developers’ margins. On the whole this market segment is still performing well but it is likely that the market will get softer before it improves.
To conclude on the local market it is our opinion that in 2010 prices will remain flat while the existing supply meets demand. Price growth will be more influenced by affordability constraints that it has been in the past. Beyond that period we anticipate a low growth economy with land supply and finance constraints leading to a situation of slow but steady growth. On the resale side for completed homes it is likely that exposure periods will lengthen and prices will be flat during the year. We anticipate that by the fourth quarter of 2010 the market will gain strength and will likely end at, or slightly above, the starting point for the year.
The Foreign Market
I think we are all glad to see the end of 2009! This was a year that likely marks the least transaction volume in comparison to the previous seven years. The transactions that did occur most often included a distressed seller looking to liquidate an asset based on a need in their home market. In addition some sellers during the period took advantage of the relative strength of the US dollar vis-Ã -vis their home market currency. But there is good news, the uncertainties that plagued the market from late 2008 through the summer of 2009 have slipped into the background and the focus is now on real value in a buyers’ market.
In the past several months we have seen confident purchasers making informed decisions to invest in vacation properties at the current price level which is as much as 20 percent below the peak levels of 2008.The last transactions with which we are familiar have all been at full asking price – no discount. This is indicative of a market that has found equilibrium. Sellers have found the point at which buyers are willing to make a decision. As I said last year I think I would have done better if I were a trained psychologist rather than a real estate consultant in 2009. Our role was to counsel both sellers and purchasers on how to find a deal.
The positive signs mentioned above may well be an “Indian summer” but I do not think so. I genuinely believe that confidence has returned to the market. Qualified purchasers can find today great properties at prices not seen since 2006. Last year we spoke of a “flight to quality” for real estate investors and there is significant evidence that the Barbados market offered that quality. It should be clear to all now that a prime market is prime, and a nearly prime market is in fact secondary. Not surprisingly we are also the first market showing signs of recovery in the region.
The recent launch of the Beachlands project is a testimony to the view that sophisticated developers are taking of the market. Add to that the recently completed Saint Peter’s Bay development, which was by design completed before any sales effort was started, and the launch of the Port Ferdinand development and one might even conclude that the recession is over in the foreign market. But there are other factors at work here.The market that has returned with confidence is looking for instant gratification. Beachlands will be three years in construction and Port Ferdinand at least that.
Purchasers are looking for completed product that they can enjoy right away.They are comfortable with the immediate future but waiting three years may not be for them.
The knock on effect of this change is also as we discussed last year related to the financial structure of these developments.The successful developers in 2010 and beyond will be well capitalized risk takers who have done their market research and are willing to build projects with the business confidence that the purchasers will be there in the future.The off- plan buyer-funded development model will not succeed in the future; meaning that supply of new product to the market will be restricted.The lead- time to market for a development runs between 18-months and three years with some taking even longer. Therefore the restrictions that this new business model will place on developers will not be felt immediately but rather after the current supply is exhausted, creating the real possibility that just as demand is increasing, our market will have a shortage of supply reintroducing rapid price growth in the market.
In conclusion, the “flight to quality” was real. We anticipate slow but steady growth in 2010, gaining pace into 2011 as supply will not have kept pace. With an improving world economy creating demand it is most likely that beyond 2010 we will see growth rates above our historical averages.
As always I could be wrong. It is only my opinion.