The jury is still out on the success of the 2009/2010 residential property selling season. Winter is usually the time of year when the wealthier tourists are on island and usually when buyers are plenty and agents are at their busiest. Articles are written at home and abroad extolling the virtues of owning vacation home in Barbados and the articles are littered with celebrity spottings and investor testimonials, particularly the British ones. The British buy three out of every four vacation homes sold in Barbados so the emphasis on that market cannot be overstated; nor can the importance of this source of Foreign Direct Investment (FDI) to Barbados continue to be undervalued.
In the early part of the decade those buyers found themselves with substantial equity in their property portfolio, access to cheap funding and such confidence in the future that buying second home became an easy choice. In 2007, this phenomenon peaked in record year for property sales in Barbados.
Just year later, in the winter of 2008/2009 the Barbados vacation home market was hit by the “perfect storm”. The bad weather began building up in mid 2008 when housing prices started to crash in the UK and thereby reducing the value of equity in property portfolios. The bad weather became storm by the fall of 2008 when the world’s financial markets crashed; the storm evolved into hurricane when Sterling tumbled. The combination of these events led to the uncertainty of the investor and has prolonged the life of the perfect storm whose effects are still being felt on the shores of Barbados. The capacity of the British buyer to acquire US dollar denominated Barbados properties was hit by more than 50%. Consider the evidence:
|DECEMBER 2007||NOVEMBER 2008||MARCH 2009|
|USD/Sterling exchange rate||2.01||1.54||1.42|
|UK house price index||367.2||316.1||301.6|
|Combined reduction in wealth & value of Sterling versus Dec 2007||0%||(50%)||(57%)|
Combine this 50% reduction of the British buying capacity for properties denominated in US dollars with the loss of confidence from the hit to the global financial markets and the result could be reduction in the volume of property sales by as much as 70%.
So where are we now? Well the financial markets have recovered about two thirds of their losses; Sterling still hovers around US$1.50, approximately two thirds of its 2007 exchange rate; credit terms have tightened and deal flow has shrunk, so it is of no surprise that the Brits have not come flooding back to the market and winter 2009/2010 will end up as disappointing as 2008/2009 when the statistics are compiled.
This of course, has huge consequences for Barbados. There is general understanding of the importance of this inward investment to the country’s economy but the Central Bank statistics still do not adequately capture foreign direct investment (FDI) arising from development, sale, and operation of vacation homes. The last time Barbados paid for its imports with its exports (including tourism) was 1996. Ironically since then tourism receipts doubled, but unfortunately our import bill nearly trebled. Since then FDI has plugged the hole and the country prospered as result. FDI is now the life blood of the economy. We estimate that FDI from the vacation home market during the period 2000 – 2007 varied from US$500m to US$1.5bn per annum, comfortably in excess of the current account deficit. In 2009, cancelled projects and poor sales reduced the FDI to trickle.
Barbados can achieve consistent flow of vacation home FDI in the future but in order to do so we must work together to understand the value of this sector to our economy and to implement strategy for continued growth and competitiveness. Firstly we must start to accurately measure the economic impact of the FDI from development and the sale of vacation homes. With few small changes to how foreign currency flows are categorized at source, as well as to the time this date is captured, the vacation home market would be classified as the second most important sector of the Barbados economy behind tourism and ahead of the offshore financial services sector.
Secondly, Barbados’ competitiveness as destination cannot only be left to private developers. The government needs to continue to improve our infrastructural offering. So far we have been moving in the right direction: the airport and road infrastructure have been dramatically improved, the new boardwalks on the south and west coasts have been huge success, not just for those who walk them but also for the adjacent businesses, and plans are also being made to make the shopping experience in Bridgetown much more enjoyable. However, there is still need for major infrastructural improvements to be made to Barbados’ public spaces; they need to be transformed into safe, inviting, aesthetically pleasing experiences. This is the art of “place making” as well as the backbone to building healthy communities of Barbadians and visitors alike.
Next on the list is the seaport. The planned changes will separate cargo from cruise and create new environment combining retail and entertainment to be enjoyed by the hundreds of thousands that enter Barbados by ship. For the last four years, per capita cruise passenger spend has fallen which indicates that cruise tourists are spending more in other ports and this needs to be addressed. The government has commissioned “Coastal Master Plan” (CMP) which will set the vision for the are from Needham’s Point to Paradise Beach. This takes in four critical development sites including the Pier Head and the Four Seasons and the plan will be informed by private sector designs for these areas. The result of the CMP should be vision for ribbon of future development of Bridgetown and its conurbation.
Clearly the government understands the need for infrastructural improvement. Perhaps the greatest paradigm change that needs to be made is in the are of new business facilitation. Invest Barbados is doing great job but this needs to be supported by nimble, efficient and transparent approval process. When this happens we will truly have a Team Barbados’, and our position as the most desirable vacation home destination in the Caribbean will be assured.
IN CONCLUSION – THE VERDICT
- Barbados’ success thus far as second home market has been largely because of the positive attributes of Barbados as destination.
- In order to maintain our position in the second home market, Barbados must continue to improve its infrastructure and the experiences available to visitors.
- Financial markets are cyclical – when the pound rebounds Barbados needs to be in the best possible position to welcome new purchasers to our shores.
- New markets – airlift from Canada and Brazil may change the demographic of the second home buyer in the next decade.