Problem with Cayman real estate

The problem with Cayman real estate is that it was driven by a tax-free wealth preservation and speculative marketing structure. Most non-resident buyers purchased property with the expectation that it would either increase in value or be paid for by rental returns. Since their investment was offshore, any equity growth or value appreciation would remain tax-free until it was repatriated.

Since no one likes to pay taxes the wealth captured here was seldom repatriated; it was either land-banked (sic) or rolled over into more expensive properties.

The strength of this recession changed attitudes a lot. Foreign private owners are not only cashing out because they need the money but also because of tax treaties and new opportunities -- the world is saturated with great deals and great places to live. Even our Caribbean neighbors are getting their act together; just look at the homes in Caribbean lifestyle magazines or at St Kitts and Nevis, where they throw in a new passport for a purchase over $350K.

Our once powerful and unique sales pitch resulted in the continuous expansion of property investment, development and price increases, a self-fulfilling prophecy that encouraged more foreign buyers. The residential population and expatriate worker also dove into real estate investment with a passion. Most local wealth in Cayman is now buried in real estate.

This once powerful investment message is worn out, the bubble has burst and we don’t have a sales pitch to fit the new reality. If you remove speculation from the equation, the only justification for purchasing real estate is income producing, lifestyle improvement and basic housing needs. Hence the hope expressed above that the new economic development projects will soak up the inventory currently on the market. Besides residential real estate, what are we going to do with the huge glut of empty commercial property in Cayman? When government moves into its new building we will have nearly half a million square feet of vacant office space in Cayman. Think about that for a moment.

Unfortunately inventory and market activity are interlinked: if the market expands our inventory will also expand, especially in Cayman where we have so many big investors, experienced developers and freelance contractors sitting on all those land banks, investment funds and planned projects.

As more land banks are liquidated at distressed prices the cost of new development is reduced, which makes it more competitive to develop. This just-in-time, price sensitive, manufacturing capacity will anticipate any market growth and our inventory will expand before demand does. When you consider that there is also an overhang of property waiting for the market to improve, it is unlikely that we will return to the exciting appreciation led market growth of the past.

Our only solution is real economic diversity and expansion. Cayman is no longer unique in this new global marketplace. If we want to move forward we need new industries, new active business investors and more people living and working here. While we attempt to work those socially sensitive issues out, our competitors are aggressively inventing new opportunities.

The best bet for our real estate industry is to switch from selling market appreciation and focus on selling value within the current marketplace. The sooner that happens the quicker the industry can reboot.