By the end of the first quarter of 2015, the economic roller coaster recovery continues with almost as many downs as ups. There is now clear air between the recovery of the economy in America and the more languid performance of the European markets. As the Federal Reserve finishes its own QE (Quantitative Easing) programme and may be looking to raise base interest rates during the year, so the European Central Bank is just starting its own QE, somewhat late to the starting gate, with its purchase of bonds.

Continued improvement in employment data in the United States has helped boost the Dollar against other currencies, while the lowest fuel prices in six years has reduced manufacturing costs and helped industrial output. Growth has generated more demand for cash to fund investment, another pointer to a raise in interest rates sooner than later. However, as the US economy grows and the US Dollar strengthens against other currencies, exports will be impacted which in turn may delay decisions on interest rates.  Investors and borrowers alike will be waiting for the next step from the Federal Reserve, but all signs at the moment are pointing to a raise this year.

While the US looks set to enjoy a period of growth, the European QE programme will drive down borrowing costs even more, although the weak Euro will allow export growth in foreign markets which will eventually help stimulate productivity within the Eurozone. The divergence of the American and European economies can be summarized by the following key economic data showing changes over a 12 month period :

Brent Crude Oil                                 $53 per barrel                    (March 2014 = $108 per barrel)                  %Δ  -51%

Dollar Euro Exchange Rate           $1.06                                     (March 2014 = $1.38)                                      %Δ  -23%

Dollar Sterling Exchange Rate     $1.47                                     (March 2014 = $1.67)                                      %Δ  -12%

The Caribbean markets are greatly influenced by both the North American and European economies, with changes in these economies having an impact on both tourism and direct investment. As the European currencies (both the Euro and Sterling) weaken against the Dollar, investment and tourists from those currencies will be reduced as Caribbean currencies are pegged to the Dollar.

Within the British Virgin Islands, our northern Caribbean location dictates that our greatest sphere of influence is from North America, with over 74% of our tourists coming from the USA or Canada in 2012 compared to 19% from Europe. Likewise, direct investment in the BVI, mainly through the acquisition of land or houses, is generally dominated by American investment which has picked up as the US economy improves. With the US Dollar as the local currency combined with tax advantages for investors (no exchange controls, capital gains taxes or estate taxes), the BVI has remained a popular destination for North American capital and those seeking a second home.

The development pace in the BVI has naturally been slow as successive Governments have had the benefit of revenues generated from a healthy financial services sector, resulting in the BVI being able to choose lower density development over mass tourism. However, a slowing down in the growth of company formations in the BVI, as external pressure on international financial centres from Europe and America takes hold, has led to concerns that long term revenues from this sector may be under threat. The BVI Government is therefore looking at alternative sources of long term income should revenues from the financial centre decline significantly.

The Government has embarked on a number of infrastructure projects in the BVI, both as a means of stimulating the economy and as a way to support tourism and other sectors in the future. The development of the cruiseship dock, with an extension to the dock and development of a new retail and office park adjacent, commenced in 2014 and is slated to be ready for the start of the 2015/16 cruiseship season. Other major infrastructure projects include improvements to the roads throughout the Territory and the commencement of a new water and sewerage project for Tortola by an independent company. Critically, the Government is looking at access to the BVI and has committed itself to the extension of the runway at Beef Island Airport in order to accept direct flights from North America. With an election due within the next twelve months, it is all go here in the BVI!

Private sector development in the BVI has been focused on the North Sound area of Virgin Gorda where three major projects are in the course of development at Oil Nut Bay, YCCS Marina and Moskito Island. These developments have established North Sound as a luxury destination in the Caribbean where mega yachts frequent and luxury homes are in the course of development. The low density development projects have not created major impacts on the area which was already well established as a sailing destination.

Elsewhere in the BVI, Nanny Cay is about to embark on a new phase of development with the construction of a marina basin located on the east side of the Cay and a further 56 town homes constructed on an enlarged breakwater creating the marina. This project will build on the already successful marina, hotel and residential development at Nanny Cay.

The data on residential villa sales graphically shows the performance of the residential sector in the growth period prior to 2008, the crash and subsequent start of the recovery. We track residential sales in the BVI over $500,000 and the graph at Figure 1, showing the value of all villa transactions over this threshold, is representative of this cycle.

Figure 1

At the height of the market in 2008 (representing contracts signed prior to the crash which took time to close due to the land holding licence system), there was a total of US$46M in transactions, dipping to $11.5M by 2011, a fall of 75% in revenues. However, the subsequent recovery shows revenues from sales increasing to $27.5M in 2013 and $32.5M in 2014.

In terms of the number of sales, a similar pattern emerges as seen in the graph at Figure 2, with a total of 29 sales completing in 2008, falling to 9 in 2012 before rising back up to 21 sales in 2013 and 2014 respectively. However, the median sale value has remained relatively steady ranging between $620,000 (2003) and $950,000 (2012) when two of the nine villas sold that year were in excess of $4.0M. In 2014, the median villa value was $700,000 compared with $800,000 in 2008.

Figure 2

In terms of price category, the market is dominated by sales under $1.0M which represents 66% of the total number of transactions since 2003 as shown in the graph at Figure 3. The remaining sales are divided between sales from $1M - $3M at 28% and sales over $3M at 5%.

While the statistics for total sales volume and number of sales show evidence of a recovery, there remains a large inventory (currently in excess of 200 units over $500,000) on the market. This will continue to create an imbalance between supply and demand while annual sales are currently between 20 and 30 units per year.

As the US economy continues to grow, we can hope to see increased interest in real estate in the BVI from this market, however the large inventory of homes available for sale will continue to hold back prices until balance is restored between demand and supply.

BIO…

Edward Childs is a Director of Smiths Gore BVI Limited and a Member of the Royal Institution of Chartered Surveyors (MRICS). An Economics Graduate of Newcastle University in England he has over 20 years experience working in the Caribbean across a wide range of valuation and consultancy services. He has specialist expertise in the purchase and sale of islands. His work takes him all over the region. He can be contacted at Smiths Gore Ltd in Tortola by telephone 284 494 2446 or by email at Edward@smithsgore.com