As published in the Caymanian Compass – Wednesday, August 6, 2014

Residential homes, SMB condos drive market increases

Coming off of what has appeared to be a very active high season for real estate in Cayman, we can take the time to more closely analyze the sales figures. Based on property listings tracked by CIREBA, total market transactions were up 36%, while sales dollar volume to the end of June showed an increase of 69% compared to the same period in 2013. As at the end of June, the total number of pending sales transactions was also up 20% and pending sales volume was up 106% versa last year.

The overall market increase was driven significantly by 2 sectors; Seven Mile Beach condominiums and Residential Homes. As the US and Canadian housing markets continue to rebound, the majority of the Seven Mile Beach condominium sales were by overseas customers buying vacation homes that are not just for their enjoyment but also property that makes good investment sense. For these buyers, once the factor of warm climate and beautiful beach has been satisfied, the most important factor is that the property will hold its value and Cayman Islands real estate has proven itself to be a very stable market, with property values holding even during the global down turn. With Cayman’s stable government and continued infrastructural development, Cayman is becoming more attractive to a global investor with disposable income to purchase vacation homes.

The second sector driving increased sales in 2014 was that of residential homes. With recent changes in the immigration law and as more people find the security of a longer term stay in Cayman, more people have made the decision to purchase family homes.

Sell Government owned leasehold land to boost real estate industry

I want to put to you an idea to inject new vibrancy into Cayman’s real estate market and at the same time tremendously improve Government’s finances as well.

The idea I propose is not new as it has been debated in the past by Legislative assemble but is a controversial one and can be argued by both sides. There is currently a large swathe of land covering hundreds of acres that exists around Government House on Seven Mile Beach that stretches right across to the North Sound and encompasses the area north of Government House as well as properties such as Safehaven and Lime Tree Bay, that is still under leasehold with Government. I propose that Government give up ownership of this leasehold land and sell it as freehold. While some may argue that Government needs to control the ownership of some of these large parcels of land for the protection of the local population and businesses, there is the other argument that the revenue that can be gained by making this property freehold is exponentially greater than that gained from leasehold agreements.

I believe that it’s time for Government to give up the ownership of this land because in reality it is unlikely that they will ever get the true value for the land as they have committed the land to a 99 year lease. One can argue that once a lease period begins to near its end, the lease period can be extended, for a fee which does bring some revenue to Government. However, I believe it would be a far better idea to release the land from Government and use the proceeds to bring down its debt and strengthen Cayman’s economy in the process.

The concept of a leasehold property is not generally understood by buyers. In truth, the fact that this land is under leasehold is stifling salability of properties on the land and reducing the desire to buy by would-be purchasers. I would say that approximately 90-95% of interested buyers immediately shy away from a property as soon as they know it is leasehold. Buyers of residential property in particular are looking for property that they can pass on and that will appreciate, especially if there is similar freehold property to choose from.

This lack of interest also pushes down the price of raw land. If properties and land cannot sell or appreciate in value, Government loses out on stamp duty on the possibility of a sale and on the potential appreciation in price. If we take a fixed term and compared the sale of two similar properties, one being freehold and the other leasehold, I would estimate that the freehold property would change ownership at 3 times the rate than the leasehold property, generating 3 times the amount of stamp duty income for the Government than the amount of duty generated upon renewing the lease.

Other immediate streams of income generated by selling leasehold land such as immediate construction and other job creation also cannot be ignored.

There are some properties however where other characteristics help minimize the leasehold factor. Leasehold developments along Seven Mile Beach have done and continue to do fairly well. For example, the lease period for The Villas of the Galleon had come down to thirty-something years, and was given an extension a few years ago, bringing it back to the 99 year lease period. In this case, being beach front helps to mitigate the fact that it is leasehold. The length of ownership also tends to be much shorter for vacation condos than on residential property. As buyers expect to sell the property in the short-term, they are willing to entertain buying a leasehold property and look more at how the property is maintained. While this property has done fairly well, it is disadvantaged, as there are still buyers who decide against it because it is leasehold.

For commercial ventures, the fact that land is leasehold is also not as great of an issue, as a developer knows that they can get a return before the end of the lease. The largest limitation is for residential property where a home owner would have to pay additional tax to extend the lease. Property at Safe Haven is an example of residential lots and condominiums that have attracted very little interest and remain unsold.

My advice to Government, therefore, is to sell remaining leasehold land as freehold thereby bringing in tens of millions to Government’s coffers, allowing the land to be part of Cayman’s general free-flowing, unrestricted real estate market. It’s a sensible, winning solution all round.
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