Cayman Islands Real Estate Blog
MARKET REPORT 2016 MID YEAR REPORT
2016-09-21 12:47:05 by JC Calhoun
An honest appraisal of the Cayman marketplace

Review
In our last Report we spoke of the increased activity in the last quarter of 2015. We noted this was occurring primarily on water- front properties and that we hoped it would translate into more activity across the board, but that would depend largely upon the absorption of Bank Forced Sales and no further bad news from countries like the US which influence our markets.

General Outlook
The activity over the last few months of 2015 was quite strong – at least compared to our previous recessionary years. That, plus the lack of inventory on 7 Mile Beach and in the favored canal communities, caused those of us with good listings to be working overtime and making sales. Based on that activity we might have expected 2016 YTD figures to be even stronger than 2015 but that has not happened. Almost every market category is down slightly for the first half of this year YTD over last year. There are a number of reasons for that which we will cover in each market sector below. We do this separately because each market sector really has its own economy and to generalize, while handy, will just not be accurate.

Condos
After our New Year Report, if there is any market sector which we might have expected to be strongly up in 2016 it would have been condos. And yet, statistically it was not. It was down 10% in # sales. But why??? Well the main reason is that CIREBA’s MLS figures link all condos together (ie: on 7 Mile and off 7 Mile; inland & waterfront; forced sales and open market). The fact is that 7 Mile Beach condos were, and are, in great demand (as mentioned in our last report). Many of our recent sales were cases where we had multiple bidders. So why lower activity? Because we just don’t have enough good beachfront inventory to satisfy the buyers appetite, not as many sales are occurring. But as a result of the excess demand over supply, sales will continue at as rapid a rate as supply will allow, causing prices to rise. Keeping things in perspective, the closing of so many high budget Watercolours developer sales in 2015 would be an impossibly hard act to follow in any year. So really, if we factor in these two issues, the 7 Mile Condo sector actually was, and is, extremely strong, YTD stats notwithstanding. Beachfront condos off 7 Mile have begun to take up the 7 Mile inventory slack and these properties are seeing stronger activity with prices in that sector now beginning to rise as well. That is good news as that sector has not seen price increases for many years. If we had a separate class for these types of condos their sales activity stats would be up without question.
The inland condo sector is a whole different ballgame. In the 70’s & 80’s Caymanians wanted to buy or build detached homes. Condos were for foreigners on work permits. In the 90’s and increasingly in the new millennium, local buying focus has shifted to condos. Why is that? Well, the increase in land prices and building costs are very important factors. But also, as our population has increased filling the roadways with more vehicles, the commute time (ie. distance) has become a significant factor as well. And the two above factors are connected in that the affordable land for sale has been pushed further & further from town so the single family home has become less and less attractive. As a result of the new demand for affordable condos close to town more & more developers, including many locals, have added more and more product. In fact we, in our market report, have warned about over building in this sector for many years. But few listened. The extent of the oversupply can be seen in the ever expanding number of inland condos which are now “Forced Sales” (roughly the Cayman version of foreclosure). The numbers are large, and are still increasing even though the interest rates remain low. Locals losing their homes has become a serious issue which is now becoming a political issue. Unfortunately, political correctness is just making it worse.
One of the tried and true basic rules of Real Estate is that “there is a buyer for every property out there – at a certain price”. Buyers of distressed properties are out there, but they are the most cost conscious of all. They are looking for a great deal and we have them coming into our offices asking for lists of “Forced Sales”. But guess what, there aren’t any lists of Forced Sales, nor is the MLS allowed to use the term “Forced Sale” in our marketing. Why not you ask? Well, the banks have been advised that to identify a property as a Forced Sale will not allow the seller to get the best possible price for this property. Please reread the bold statement above. That is how our free markets work. But when you tamper with a natural law like supply and demand you usually get an unintended result. How about: instead of getting a higher sale – you get no sales! Sadly, with these kinds of “solutions”, this sector of the market will take longer to recover. It is akin to pulling off a bandage: which hurts more, pulling it off fast or slow?

Single Family Homes
The Residential stats show a similar pattern to the Condo Stats. YTD # of sales figures are down 15%. Again, like condos, the 2015 sales were pretty good and thus hard to surpass. But the top end of the single family home market has been pretty quiet with only about 1 house/year selling at US$4.0M or over, the most recent being our listing on Old Prospect Point which we just closed and achieved that figure if you include all the furniture and extras. There are 24 homes now listed at over US$4.0M which can only be defined as oversupply. But there is also increasing inventory of lower priced and Forced Sale properties, which on its own doesn’t bode well for pricing in either category. However, in the luxury home sector, we could very well see an increase in activity. With the increasing violence in Europe and the US, people with the means and a lifestyle which permits them to live wherever they want, are increasingly doing so. We are seeing people even from previously favored areas such as Monaco choosing Cayman as their primary residence, and we expect this trend to continue and increase. In addition, it is difficult for people with excess capital to find safe investment vehicles these days, and Real Estate has historically benefitted during times like these. There is also some good news in the mid to lower Residential Sector. While our Tourism activity is also down a little in numbers, they appear to be spending more, which means local businesses are doing better. That “trickle down” should slow the flow of “Forced Sales” as well as increase the local purchasing power. But this will take a little time.

Development
The new Kimpton Residences which are for sale are being quoted at US$2,000/sq. ft. which is rarefied air. The usual superb Dart workmanship and Kimpton name notwithstanding, it will be interesting to see whether the full service high rise hotel concept will sell as well in Cayman as the quieter, lower density and secure luxury of Watercolours which has achieved US$1,500/sq. ft. The hotel tower will be open prior to the Christmas Season but the residences will not be completed until sometime later.

Apartments
The number of sales of multi-family complexes has remained about the same but the dollar volume is up over last year. As the bank interest remains negligible and other investments get shakier, investors are turning to apartment complexes for a return on investment. These 10 – 20 unit complexes are in demand, if they are in a decent location, in reasonable shape and have a rent roll which shows a reasonable return (“reasonable” meaning over 5% these days). If you have one which ticks these 3 boxes, give us a call as we have customers waiting.

Commercial
The appetite for Commercial space has finally begun to improve over the last 6-8 months. Camana Bay continues to build and does have vacant space. Depending on which building, rates are approximately US$68/sq. ft. (including CAM & Insurance) for vanilla space. Even at that high number there is continued interest. In George Town, newer buildings with waterfront views and good parking like Harbour Place have no vacant space. Central George Town is a different story with a number of buildings like Bermuda House with multiple floor vacancies. On the 7-Mile Strip vacancies are becoming harder to come by with Buckingham Square being one of the few with upcoming vacancies. They are asking US$44/sq. ft. including CAM and Insurance. The Law firms and accounting firms are expanding. They seem to be the ones benefitting most from the increasing bureaucracy, which is all but strangling other business here and worldwide.

Related Issues
Some other issues are effecting our market place in general. Over the last few years the time it takes to get a deal closed has increased dramatically. What used to take a couple of weeks to a month, now often takes several months. Some of the fault for this lies with the principals themselves, who get hung up on a position and are unwilling to compromise. We now have deals in which we work on inventories and punch lists for months before we ever even get to a “formal contract”. And as for waiting for a formal contract, these are much less likely to get done in a timely manner than they used to. And it gets much worse if there is a mortgage involved. Please contact us if you know a Banker who will consistently work to a contractual deadline, because I haven’t run across many lately. And speaking of banks, sometimes it feels as if they don’t really want to lend these days. Based on the research into the numbers of “Forced Sales” that we have done, we’re not sure we blame them. But having said that, it would be much more appropriate if they said they are going to be more selective and require more cash down instead of advertising like it is business as usual, and then not lending.

Dart & Britannia
Dart has just announced the closing of the Britannia Golf Course because it is “not financially feasible”. This is part of the planned redevelopment of the entire Britannia complex which they now own. The only trouble is that most of the existing Britannia property owners have the right to use the amenities like the Golf Course. It looks like the Grand Court will have the final say on this. Stay tuned.

Real Estate Court Decisions
Those of you who have followed this report will know that one issue that we have complained about for years has been the ability of the Cayman Islands Land Registry to determine market price in terms of what figure a Purchaser must pay their Stamp Duty on. The Law reads that a Purchaser “must pay Stamp Duty (at a prescribed rate) on the Purchase Price or Market Price whichever is the greater”. With all due respect to all concerned, what better way to determine market price than what someone has paid for it (assuming it was properly marketed)? Granted, two parties could collude to register a sale at a lower value to save on Stamp Duty. So to avoid that remote possibility, but more likely as a revenue producing measure, the Government built-in the option to appraise all property transfers and all too often would charge the buyers duty on a higher figure than what was actually paid. On top of that, the appraisers were often relative newcomers to the island who didn’t really know the market. The result of this was that purchasers could not with any certainty know the amount of their total transaction, even after the price was agreed!
We are overjoyed to report that all that is about to change! A local Purchaser challenged this practice, took the Government to Court and won! In a landmark decision, Grand Court Judge Alastair Malcolm ruled: “However great the experience or expertise (of the Appraiser) may be, the best evidence of the market value of a property is the actual price agreed!!” Besides the philo- sophical aspects of the case, think about the financial aspects. In this transaction the sum argued over was less than $100. How much do you think it costs the Land Registry to employ those work permit Appraisers? And worse, how much has been paid in professional fees and time by lawyers and realtors to argue over the larger differentials over the last half century? To be clear, in lieu of direct income tax, fees like Stamp Duties, duties on imports, and banking and corporate fees, are absolutely necessary and we would not like to see historical claims in this regard against Government. However, we can celebrate a rare victory for Common Sense and the free market!
Another interesting Real Estate related recent court ruling is the recent ruling against Thompsons Resorts which developed and managed Castaways Cove. In properties where Developers complete building a project but then stay on to manage the property, this can be like having a fox in the hen house. Developers/Managers and owners interests often conflict – especially in terms of finances and who pays for what. That does not have to be a problem in a condo format since decisions should be made by the majority. But in the case of Castaways, tucked inside the By-Laws by the Developer was a provision giving him an automatic majority in any poll. While this is reasonable during the development and early selling phases, it should not be that way in per- petuity. No doubt the recession played its part in the financial woes of the property, however, the fact is that the fees charged at Castaways were significantly higher than other comparable properties in Cayman and the budgets were pushed through using the Developers majority clause. Owners experienced annual net losses as a result, prices fell and units could not be sold due to the annual losses. Justice Mangatal ruled that particular By-Law provision was invalid and said the “law envisioned a democratic and inclusive process enabling majority rule and allowing the proprietors to make collective decisions”.
This certainly points out the need for all purchasers to read and understand the provisions of the By-Laws or Restrictive Covenants which apply to any property they are buying, before they buy. While some adjustments need to be made to the existing Strata Titles Law, different properties will require somewhat different arrangements which balance protection for all parties. Therefore, in our view it would be much better to continue to allow what is reasonably needed on a case by case basis, perhaps with some basic general restrictions, rather than trying to create a “one size fits all” template within the Strata Titles Law.

Sister Islands
Cayman Brac – Submitted by Irene Scott-Thornton
As Grand Cayman has been emerging from the recession over the past 10 months, we are now starting to feel a more positive vibe in the Brac. The number of purchases has not increased, but the interest has increased, and that is step one on the road to recovery. We hope and expect the trend to continue. Another bright sign is the appointment of Chevala Burke to the Board of Directors of the Cayman Islands YMCA. Mrs. Burke is the first Bracker to join the Board and will help oversee the first YMCA Summer Camp on the Brac.

Little Cayman – Submitted by Wes Dangerfield
With the news of Dart buying Paradise Villas and the Hungry Iguana restaurant in Little Cayman on top of their Point of Sand purchase a few years ago, local residents have expressed mixed but mostly positive opinions on the deal. Few will argue that when Dart does something, they do it well. Some might be concerned that a Developer who thinks on a scale larger than life has acquired an interest in the sleepy, slow moving island could end up being a bad thing and change the place forever. Are there going to be office buildings, 10-storey condo complexes and by-pass roads going in...? No. Could there be more affordable and a better selection of groceries, better airport access, another restaurant, bar and accommodation in the future of the island...very possibly. None of these things would change the island so much that it would lose its charm. In fact, if you own property on the island and want to sell, your investment might well end up being worth more and you might find someone who wants to buy it. If you want to purchase something here now, and ride on the coattails of the future...call me!

Forecast
Cayman Tourism is doing well and development is ongoing. The vibe island-wide is pretty positive. But Cayman, like everywhere else, is significantly affected by world events, especially in the US. With a US election coming up between two individuals in a close contest, who have totally different views of what the problems are and how to solve them, it is really impossible to make an accurate forecast.
What Cayman can do is to ensure our house is in order so that we are ready to benefit from whatever happens. For example, we need to reduce our deficits to manageable levels so as not to mortgage our children’s future or allow the UK to push us into direct taxation. We need to improve our islands policing to ensure crime does not become something that drives away investment or retiring residents. And lastly, we have to remediate the dump which is at best a serious eyesore and at worst a health hazard. If we can begin to deal effectively with all of these issues Cayman will remain an attractive place to live and visit, which will go a long way towards ensuring our social & economic stability for many years to come.