Article
28 May 2009
Barbados
Andrew W. Mallalieu, Managing Director
A Market in Transition
The question on everyone’s mind is “Where is the market going?” As valuers we have to answer the question of market value every day. While an opinion of value is not a prediction of the future, many of the trends and variables that we study can give us guidance for the market performance in the future. The following are some brief comments on trends that we are seeing. As always this is only an opinion.
The local housing market – There continues to be significant demand for middle market (Bds$400K to $750K) housing in central locations. The effects from the weakened economy in Barbados have not yet shown up in this market but we suspect that before the end of the year there will be some softening in demand. The business model in the completed homes market is likely to change from a pre-sale, stage payment model to a model where developers build for their own account creating stock for sale with shorter delivery times. We have seen some rationalisation of wish pricing, with prices adjusted for the market. Within the land sale market we have already seen a slowing in absorption rates which is a combination of weaker demand and a growth in supply. Low supply and high development costs have been the two largest factors contributing to increased land prices over the last 10 years. Systemic delays in the planning process (both regulatory and physical) have contributed significantly to the cost of all new developments. We believe that the current level of value for land is likely to be maintained through the current downturn and we do not anticipate a fall in value for vacant land lots.
The South Coast Beachfront – In total today there are 173 units available from developers in the new projects on the South Coast. The majority of the supply is in two developments in St. Lawrence Gap. Sales absorption in these multi-unit developments has generally followed the pattern of 50% pre-sales, 30% during construction and 20% at or just after completion. With a significant reduction in demand resulting from the decline in the UK market and the value of the Pound Sterling, the pre-sales have all but evaporated. Purchasers are looking for completed product or significant discounts from list prices. However, there is no substitute for the right location and the right product. Bad product may sell in a great market but in the current market only the best product, in the right location, at market price will sell. We have not seen a fall in prices below the Bds $1,000 psf level for the best product on the coast but we have seen significant discounts from developers who have excess stock at incomplete developments. There is not enough volume of units on the South Coast to make one generalized statement about the market as a whole other than to say that demand is less today (by as much as 50%) than it was at the peak of the market. We anticipate that one or two of the developments will be carrying excess stock for up to 3 years post completion. We do not believe that this will be the general experience of the market where we still see demand in the prime locations.
The West Coast Beachfront - As the world economies went into recession this segment of our market felt the effects first. Interestingly it was the developers that reacted before the consumers. The reasons for that would need a separate newsletter but suffice it to say that when the capital in the world banking system evaporated so did funding for speculative developments by under capitalized developers. Supply on the beachfront is quite limited today although the addition of St. Peters Bay by the end of the year will be significant. Nowhere has the disinclination to trade been more pronounced with both sellers and buyers preferring to stay out of the
market. Some developers have moved product at fire sale prices as the market seeks to find equilibrium. The statistics show that there has been little growth in retail prices (psf) on the beachfront over the last 18 months. On its own this has provided an 8 to 12% correction. Added to this, with some discounting that the buyers are demanding, it is likely that prices on the west will be 15 to 20% below their peak when the market turns positive. There are some signs of movement on the part of the buyers and sellers with reports of transactions picking up over the last 8 weeks. Whether this trend will hold through summer is yet to be seen. We believe that the market may have over corrected in terms of beachfront supply and pricing growth may return to the market as early as this winter. The troubles at the Four Seasons project will have a negative impact on our market especially with our perception as a safe haven in a storm.Hopefully a resolution will be found in the near term.
West Coast off-beach – This section of the market includes the “themed inland projects” as well as the smaller developments that are either in walking distance to the beach or have a view of the water. To find the real effects of the global down turn you need look no farther than this segment of the market. The demand has fallen to almost zero for units in these locations. Completed product that is available immediately has seen some demand with a few transactions in the last few months, but the off plan sales are non-existent. The larger projects surrounding the golf courses have feared better but still the demand here has fallen by more than 50%. Apes Hill certainly bucked the trend in the later part of 2008 and we anticipate that with the completion of the golf course and facilities, demand at Apes Hill will return, but maybe not to the 2007
levels when the project was first introduced to the market.
It should come as no surprise to anyone that the real estate market is performing at levels below what we had grown accustomed to be the norm. Supply and demand are the true drivers of price and as long as we have an over supply in product it will be difficult to see price growth. The good news is that we have not seen irrational corrections in prices and most investors in real estate will actually do better than the average returns from other investment types. Look at the fundamentals of location, design and quality and purchasers
can find great investments in the current climate.
Andrew W. Mallalieu, CPA, MRICS
Managing Director
The local housing market – There continues to be significant demand for middle market (Bds$400K to $750K) housing in central locations. The effects from the weakened economy in Barbados have not yet shown up in this market but we suspect that before the end of the year there will be some softening in demand. The business model in the completed homes market is likely to change from a pre-sale, stage payment model to a model where developers build for their own account creating stock for sale with shorter delivery times. We have seen some rationalisation of wish pricing, with prices adjusted for the market. Within the land sale market we have already seen a slowing in absorption rates which is a combination of weaker demand and a growth in supply. Low supply and high development costs have been the two largest factors contributing to increased land prices over the last 10 years. Systemic delays in the planning process (both regulatory and physical) have contributed significantly to the cost of all new developments. We believe that the current level of value for land is likely to be maintained through the current downturn and we do not anticipate a fall in value for vacant land lots.
The South Coast Beachfront – In total today there are 173 units available from developers in the new projects on the South Coast. The majority of the supply is in two developments in St. Lawrence Gap. Sales absorption in these multi-unit developments has generally followed the pattern of 50% pre-sales, 30% during construction and 20% at or just after completion. With a significant reduction in demand resulting from the decline in the UK market and the value of the Pound Sterling, the pre-sales have all but evaporated. Purchasers are looking for completed product or significant discounts from list prices. However, there is no substitute for the right location and the right product. Bad product may sell in a great market but in the current market only the best product, in the right location, at market price will sell. We have not seen a fall in prices below the Bds $1,000 psf level for the best product on the coast but we have seen significant discounts from developers who have excess stock at incomplete developments. There is not enough volume of units on the South Coast to make one generalized statement about the market as a whole other than to say that demand is less today (by as much as 50%) than it was at the peak of the market. We anticipate that one or two of the developments will be carrying excess stock for up to 3 years post completion. We do not believe that this will be the general experience of the market where we still see demand in the prime locations.
The West Coast Beachfront - As the world economies went into recession this segment of our market felt the effects first. Interestingly it was the developers that reacted before the consumers. The reasons for that would need a separate newsletter but suffice it to say that when the capital in the world banking system evaporated so did funding for speculative developments by under capitalized developers. Supply on the beachfront is quite limited today although the addition of St. Peters Bay by the end of the year will be significant. Nowhere has the disinclination to trade been more pronounced with both sellers and buyers preferring to stay out of the
market. Some developers have moved product at fire sale prices as the market seeks to find equilibrium. The statistics show that there has been little growth in retail prices (psf) on the beachfront over the last 18 months. On its own this has provided an 8 to 12% correction. Added to this, with some discounting that the buyers are demanding, it is likely that prices on the west will be 15 to 20% below their peak when the market turns positive. There are some signs of movement on the part of the buyers and sellers with reports of transactions picking up over the last 8 weeks. Whether this trend will hold through summer is yet to be seen. We believe that the market may have over corrected in terms of beachfront supply and pricing growth may return to the market as early as this winter. The troubles at the Four Seasons project will have a negative impact on our market especially with our perception as a safe haven in a storm.Hopefully a resolution will be found in the near term.
West Coast off-beach – This section of the market includes the “themed inland projects” as well as the smaller developments that are either in walking distance to the beach or have a view of the water. To find the real effects of the global down turn you need look no farther than this segment of the market. The demand has fallen to almost zero for units in these locations. Completed product that is available immediately has seen some demand with a few transactions in the last few months, but the off plan sales are non-existent. The larger projects surrounding the golf courses have feared better but still the demand here has fallen by more than 50%. Apes Hill certainly bucked the trend in the later part of 2008 and we anticipate that with the completion of the golf course and facilities, demand at Apes Hill will return, but maybe not to the 2007
levels when the project was first introduced to the market.
It should come as no surprise to anyone that the real estate market is performing at levels below what we had grown accustomed to be the norm. Supply and demand are the true drivers of price and as long as we have an over supply in product it will be difficult to see price growth. The good news is that we have not seen irrational corrections in prices and most investors in real estate will actually do better than the average returns from other investment types. Look at the fundamentals of location, design and quality and purchasers
can find great investments in the current climate.
Andrew W. Mallalieu, CPA, MRICS
Managing Director
