Market Report - Mid year 2005

As you would expect the supply of properties for sale dropped after the storm by about 10% but in the last 6 months we have recovered 20% of the loss and now supply sits at 8% lower than last year. The average listed price of available properties has risen about 8% for homes and 3% for condos over the past year.

In terms of sales volume year to date we are down nearly 50% over last year. But much of that occurred in the first 4 months after the storm. Over the last 6 months we have made significant strides so that sales in June of ’05 are only 30% off June ’04. The overall trend is a positive one. A market which in 2004 was a strong Sellers Market with not much supply, lost more supply after Ivan. Much of our market is normally fuelled by visitors. In the most recent month recorded (April 2005) the air arrival figures are still down over 50% from last year. Yet even with lighter demand, prices remained firm. There was some “dumping” of damaged properties right after the storm to neighbors and tenants at bargain prices but sales of undamaged or repaired properties have been at higher prices than pre-Ivan levels for the most part.

We are still not out of the woods with a significant number of condo insurance claims not yet settled. This has required same creative solutions within sales contracts to allow transactions to close. But capable agents are able to fashion deals which are practical and also fair to both sides.

Considering the condition of our infrastructure since Ivan it is quite remarkable that there has been so much demand for properties. We can talk about how Ivan was such an unusual and unprecedented occurrence, but the proof that the public accepts this, is the amount of current consumer demand. Having said that, there is also huge demand for hurricane windows so we are not ignoring the possibilities of further storms!

Residential
AThe turnover of people who left the Islands immediately after Ivan with those now replacing them has given new energy to the residential rental and sales markets. Cayman, although wounded, is still unique in many ways and continues to draw people from the North who want to live and work here. These people didn’t know pre-Ivan Cayman and seem content with what we have right now before the islands are fully restored. We have enquiries daily which bodes well for the future. This coupled with the short supply can’t help but keep prices up.

Condo sales are creating new highs in many developments. For example: a Palms 3 bedroom for US$900,000, a Harbour Heights 2 bedroom for $560,000, a Discovery Point 2 bedroom for $690,000. New projects like Water’s Edge and now Caribbean Club are underway and have only a few units left. Pre-construction projects like Renaissance and Sea Breeze are now being sold. The new Dart Project, Camana Bay is also underway and many of these developments will be completed at around the same time that Cayman begins to look like its old self once plants and trees grow back a bit.

Many customers seem confused about why they have to pay more for properties now than they did before Ivan. That is a subject worth exploring further. Pre-Ivan we were 1 year into an already strong sellers market. Prices had been rising since 2003. Since 1978, our previous sellers markets have lasted 3, 5 and 7 years respectively within each market cycle. While there are often different reasons for fluctuation in supply and demand, the fact remains that it is the relationship between these 2 factors that dictates market value. Our prices were rising because of increasing demand and decreasing supply. After Ivan, the offshore demand dropped off but the supply also decreased significantly. The relationship between supply and demand remained the same but at a lower volume. However, the local market then kicked in and residents began to buy properties to replace what they had lost or to upgrade their property holdings. This has further increased demand and created more upward pressure on prices.

In addition, other types of investments have low yields right now. Even first class Government Bonds are only returning an average of 4%. Cayman Real Estate returns that much on an annual basis through rentals, allows you to personally enjoy it, and historically has provided great appreciation.

With regard specifically to condos on Seven Mile Beach, there is another factor to consider. With beach prices escalating past $55,000/ft to $100,000/ft in some cases, the product which a developer can produce must be priced in excess of $1,500,000. Every new condo from now on must be in that range or higher to make it profitable to develop. The average buyer is still looking to spend $300,000 - $750,000 and there is no new supply in that range. Resales of existing units are the only option and it is unusual to find more than 5 – 10% of the units in any complex for sale at a given time. So why are resales of units in older complexes rising in price? Because there is a greater demand than supply and because they are under valued compared to the new offerings. If you want a 3 bedroom on real good beach your choice is a new preconstruction unit of 2000 sf for $1,500,000 or an older unit of say 1700 sf for $900,000. Even though that price is the highest ever paid in that complex, which is the better deal? And with 2 bedroom units this argument is even stronger because none of the new developments have 2 bedroom units! So the next time you are concerned about paying the highest price ever in a complex, take a look at what is happening in the overall market before you determine whether or not you are making a good investment. Real Estate should be considered a long term investment and in the long term it always goes up.

Commercial
The new cruise ship facility is under construction and starting to take shape. Hopefully this new facility will also help alleviate some of the congestion in downtown George Town on cruise ship days. Perhaps the new Government will also look at the number of ships coming on a daily basis. While the previous government’s attitude was “the more the merrier”, it really wasn’t merry for anybody on days when there were more than 3 ships in port. How many of those cruisers who arrived on days when 5, 6 or 8 ships were in port will ever come back here? We are willing to bet the shops do not do proportionally better either when more than 3 ships are in town. Downtown night life should improve with the imminent opening of Senior Frogs. Another daytime eatery within walking distance will be popular with local professionals.

Hotels
The Mandarin Hotel looks to be a go on the Old Anchor Point Site on the North East Coast. That is one of the few sites off Seven Mile Beach with beach and depth good enough for a luxury hotel. The other great Destination Resort site is the 530 acres in Colliers. This site just south of Morritts is high & dry land over a water lense making it ideal for a golf course. The Colliers Pond shields it from the main road and it has a nice stretch of good reef protected beach adjacent. With lots of room for all sorts of facilities this should be the site of Cayman’s finest resort one day.

Raw Land
There is a ton of interest in raw land. Right now many people want to rebuild in a different location or in a more storm resistant manner. Good homesites are becoming harder and harder to find and as a result prices are rising.

Construction/Infra Structure
Cayman is going to look like a boom town for a good many years to come as a result of all the building going on. Income through contractors will be substantial and if it stays on the island will provide a big boost to our economy in many ways. One hopes we can somehow monitor the quality of construction at the same time. With so many new companies out there it is hard to know if you are getting knowlegeable people who will do a quality job. Traffic remains a problem on West Bay Road and all the new construction activity will not help matters. The By Pass must be pushed through the Hyatt and Ritz with all speed as we are facing gridlock during the Tourist Season again. Having said that, our infrastructure, though inadequate for our demand, is far superior to other Caribbean Islands and is being improved. Our continued success as a tourist destination is partly a result of this.

Sister Islands
The sleepy island of Little Cayman has long been a destination for divers, nature lovers, and those just really wanting to get away from it all. The island has also become a destination for those wanting a vacation home completely different from where they spend most of their time. With less then 200 residents on the island and no traffic jams to remind you of home, it’s no wonder more and more people are looking to the island for their real “home AWAY from home”. The new Tourism Minister Hon. Charles Clifford recently stated his intention to keep Little Cayman a low density destination which will ensure it remains a complimentary alternative to Grand Cayman.

Property on Little Cayman has been called a deal by many who compare it to almost anywhere else. A 2-bedroom beachfront condo for less then US $350,000? A luxury 3-bedroom condo with fantastic beach view for less then US$600,000? Deals like this are getting harder and harder to find even in places where your property doesn’t look out on the Caribbean Sea. Come for a visit – and learn how to relax

Kudos
In the past several issues we have been quite critical of the insurance industry. Much of this criticism has come directly from our clients who have lived through the insurance related disappointments and frustrations post Ivan. There are some obvious flaws in the system, one of which is that there is no time frame within which an insurance company must settle their claims. There are projects and residential customers out there which have still not had their claims settled. What are these people supposed to do in the meantime? We also hope that going forward the customer will ask for, and the Insurance Companies will provide, explanations about what coverage a person has and what he needs to properly protect himself. We certainly will expect that sort of service from our insurers. We think these comments, and those previous, are valid but perhaps do not tell the whole story. The magnitude of the destruction was so great and historically unexpected that it would have taken a company with an ultra conservative position to have not experienced some degree of difficulty. A local insurance provider described it this way: How would any industry have coped if 92% of its customers had been affected? That is pretty much what happened to the insurers. To present a balanced picture we feel it is appropriate to give credit to those firms which weathered the storm, and paid reasonable claims in a timely manner. So in the wake of Ivan we recognize Island Heritage, Cayman Fidelity and British Caymanian for maintaining their “A” rating and having done a reasonable job under most difficult circumstances

Speacial
As Cayman continues the rebuilding process essential services have suffered just as we all have. No different are the police force, the prison system and the judiciary. Due to all the sweeping under the rug that has gone on throughout previous governments, Cayman is developing a real crime problem. Now don’t get me wrong – relatively speaking we are still comparatively free of violent crime – but we now have drugs, guns and gangs in Cayman and where those 3 factors lead everyone knows. The Police Chief has just resigned providing an opportunity to set new standards and a new tone within the Department. The newly elected Government must make this their #1 priority. There is no greater threat to the continued attractiveness and therefore prosperity of these islands.

Tribute
We mourn the passing of another great Caymanian, Mr. David Foster. David was a man of courage, boundless energy, a big heart, and unquestioned integrity. He, and his surviving brother Steve, built the Foster Brothers conglomerate which includes Foster’s Food Fair, CICO Avis, Car City, Progressive Distributors, Priced Right, and Island Automotive among others. At the same time they were each busy raising families which today run the varied businesses. Even more than his business success is David’s (and Steve’s) more important and even more impressive legacy: the ability to raise a family embodying the wholesome values of old time Cayman when these virtues were rapidly dropping by the wayside elsewhere. The entire family should be an inspiration to us all and their Patriarch, Mr. David Foster, will be most sadly missed.

Forecast
Although we are all somewhat discouraged at the time and effort it is taking to rebuild, progress is being made. Our tourist arrivals are way down and tourism is said to be suffering from a “Hurricane Hangover”. But as mentioned earlier, new people with new energy have moved here and the engine of business, although not running on all cylinders, is running at high rpms. Although Cayman suffered physically, our reputation was not damaged and the demand for our product and services is strong. By the end of the year much of Cayman will have been rebuilt – at least in the Tourism arena and hopefully there will be enough rooms and airlines flights to accommodate the demand. All factors point to a strong Winter Season ahead and our economic forecast is for continued cloudiness but clearing throughout the Summer and Fall.