Investment in global property markets is rising, after years of neglect. But it is not clear what impact this will have on the Bahamian economy.
News reports point to flourishing real estate investment trusts in the United States, surging property values in Europe, and a recovery in Hong Kong’s commercial market following the SARS epidemic.
The US property market has been buoyed by low interest rates aimed at boosting economic recovery following the recession that began in 2001. Although rates are now edging up, private market property deals are set to reach $160 billion this year – double the recent historic average.
With economic fundamentals improving, property markets are being roiled by fierce competition. On both sides of the Atlantic, analysts say, too much capital is chasing too few good opportunities. So…can the Bahamas expect to benefit from this investment upturn? Well, that’s a big question mark, experts say.
“We are so close to the US, so easy to get to, with such a good climate and environment,” a top realtor told Tough Call recently. “But is this a good place to invest in property when the government puts up so many hurdles and expects people to jump through all the hoops every time?
“Frankly, our market is teetering. Almost every deal we are involved with has to go to the Foreign Investment Board. And the way the applications are handled is causing a great deal of frustration and ill will. It is almost intolerable… in some cases it is.”
This is quite a different picture from the one that government ministers present. They are constantly touting the “billions of dollars” in the pipeline, the existence of a “master plan” for Family Island development, and the benefits of a “transparent and streamlined” approval process.
Real estate development has been closely linked to economic growth in the Bahamas since at least the 1920s, when H. G Christie got its start during the land boom that spilled over from Florida. There are now some 700 licensed real estate brokers in the country – more than 30 in Abaco alone.
As a matter of fact, the 1920’s saw one of the country’s earliest large-scale investment projects – the lease of 430 acres on Grand Bahama to anglo-american developers who, however, failed to proceed with plans for a deepwater port and network of roads at West End.
And rapid growth in the 1950s and 60s was accompanied by a surge in property development throughout the country which produced much of what we are familiar with today. This included the most spectacular real estate success of all – the privately-owned, purpose-built city of Freeport.
There are really two distinct property markets in the Bahamas, realtors say. The domestic commercial/residential market, and large-scale resort/residential developments spearheaded by foreign investors.
The commercial market in Nassau and Freeport is currently depressed. Very few new retail facilities are being built and more than 100,000 square feet of office space is vacant on New Providence alone – mainly because of regulations the government enacted in 2001 to fight money laundering, which led to a contraction in the offshore finance sector.
“The changes in the banking laws had a major impact,” according to Larry Roberts of Bahamas Realty. “As many smaller offshore banks closed and their executives left the island, there were more properties on the market, causing a glut in the high-rent office sector and the residential rental market.“
Confirming this, one large investor told Tough Call that he wouldn’t touch commercial development today “with a 10-foot pole… you just can’t rent it. And I’d be leary about retail too.”
During the economic boom of the 90s, the real estate market flourished and investors spent millions on posh new out-of-town office blocks. But most of the lateral moves to these new spaces have been completed. Activity is confined to a few well-to-do firms like Higgs & Johnson or Klonaris & Co that are building their own premises.
Upscale office space out west or at Montagu can provide a 10 per cent return when fully rented at $30 or more per foot. And older space downtown can rent profitably for under $20 a foot. But it depends on the state of the market. For example, Goodman’s Bay Corporate Centre was built five years ago at a cost of $16 million but its 80,000 square feet have only just been fully leased. Ironically, analysts say lower-cost space downtown may be a better investment.
The stock market deflation and the 9/11 terror attacks caused a significant downturn in investment worldwide, and brought economic growth here to a standstill. But, paradoxically, there were some positive impacts on the Bahamian economy.
The volatility of stocks meant that property began to be seen as a prudent investment again. And feelings of insecurity led to an increase in second home demand in safe areas like the Bahamian Out Islands – relatively remote but with reasonable infrastructure and communications.
“Wealthy foreigners continued to invest in second homes here where they felt safe,” one realtor who specialises in Out Island sales told Tough Call. “ Waterfront property in the right location is doing well. You can’t find waterfront property in South Florida for less than $1.5million, but you can find it here.”
This second home market was largely created in 1993 when the newly-elected Free National Movement administration repealed the restrictive Immovable Property Act, which required cabinet approval for the purchase, transfer or inheritance of real estate by foreigners. It was replaced with the more permissive International Persons Landholding Act.
Under the 1993 law, approvals are automatic for residential deals involving less than five acres on a single island, except where the property constitutes over half of the land area or involves ownership of an airport or marina. Buyers of undeveloped land get a two-year property tax exemption if development begins during that period.
This de-regulation was one of the new government’s responses to a shrinking economy in the early 1990s, when widespread corruption, official mismanagement and unfriendly policies reduced foreign investment to a trickle. The FNM set about reversing this trend by advertising the Bahamas as “open for business”. And their efforts were helped in no small measure by the longest postwar economic expansion in American history.
“The Bahamas regained its image as a destination of choice,” a leading businessman said. “The government was investor friendly and for the most part, sensitive to, and willing to try and meet the needs of foreign investors.”
The most visible results were the Atlantis mega resort and the multi-million-dollar redevelopment of closed or losing hotels on the Cable Beach strip, which rejuvenated our flagging tourism industry. But despite this record, more recent official attitudes towards foreign investment and real estate development have been mixed at best.
In fact, “selling out to foreigners” was one of the Progressive Liberal party’s top campaign themes in the 2002 general election. And, despite some rhetoric to the contrary, it appears that the new PLP government has returned to its roots. Privatisation (of anything) is stalled, difficult issues are stonewalled, new social entitlements are planned that will require major tax increases, and the old suspicion and dislike of “foreigners” (particularly legitimate ones) is reappearing, according to many observers.
In some respects, this attitude goes back as far as colonial days. Amusingly, one British governor voiced his objection to parting with Crown land for development projects in 1925: “Americans are buying every available inch of private land in New Providence and paying enormous prices for it,” he wrote. “There will soon be nothing British left except the flag.”
And now there are reports that a major revision of the 1993 International Persons Landholding Act is in the works to tighten up sales to foreigners, and some developers feel they are being deliberately stymied by government inaction. Realtors point out that high roller investors like to move fast and once they lose momentum, they often lose interest.
Most of the multi-million-dollar residential/resort projects planned or awaiting approval on islands like Rum Cay, Guana Cay, San Salvador and Eleuthera are carbon copies of the recently completed Winding Bay Resort in South Abaco or Emerald Bay on Exuma. A central clubhouse or villa hotel with a marina, golf course and other facilities to promote the sale of estate lots to wealthy second homers.
There are legitimate issues with this model, but most Bahamians see no option. To mitigate environmental harm, some are calling for a comprehensive zoning plan over the entire country – in addition to in-depth environmental impact studies for every project: “We should protect important areas like wetlands and coastlines before everything gets butched up,” one realtor told Tough Call. “This will make property more valuable in the long run while conserving our natural resources.”
The concentration of population in overcrowded Nassau is often cited by policymakers as a serious concern, contributing to the social breakdown we all fear. In this context, successive governments have spoken about the urgent need for Family Island development, but huge amounts of capital are required for that to occur.
“And it takes an unusual foreigner to invest here because outside of New Providence and Grand Bahama you have to create everything yourself…and how many Out Island developments have been successful over the years?,” one realtor asked. “A truly progressive government would seek to partner with investors to help develop the islands.
“But it is more than obvious to me, and many others, that this government does not realize the importance foreign investment plays in supporting our economy. I feel very strongly that any further restriction imposed by increased government regulations would have a very negative and possibly disastrous effect on the property market. This could very easily depress the Bahamian economy further than it already is. “
This widespread perception that the government is reluctant to accept foreign investment is even more puzzling when we consider that the prime minister has launched a master plan for the redevelopment of the city of Nassau and the relocation of the container port to the southern coast of the island.
“This will require a tremendous amount of capital,” one realtor said. “Where is it going to come from? There are not enough Bahamian developers to pull this off. We will need foreign capital. We will also need a healthy economy and commercial market to support all of the new businesses that are supposed to locate in these new developments…which we do not have at this time.”
Meanwhile, conversations with a variety of sources seem to indicate a growing disconnect between the freshman wing of the PLP and the old guard power brokers, who seem unable to break free from the politics and thinking of the past. Observers say that while this may not amount to a split, it does highlight the generational struggle that the party must come to grips with.
There is reportedly much concern over the stubborn power of traditional PLP’s who have long dominated the inner workings of the party. And observers say that many of these individuals are regarded by the prime minister as key to his objective of increasing the levels of Bahamian investment in the tourism sector – an important aspect of the government’s effort to differentiate itself from its predecessor.
The new PLP thinking was formulated during the 10 years of FNM rule, which sharply transformed the Bahamian mindset towards politicians and the political process. The PLP freshman are more creative, more open to new ideas and more pro-active than the party’s generally reactionary and dithering leadership. And, some say, they advocate opening up the economy and unleashing the private sector to create a more prosperous and stable society.
As one real estate source put it: “Investment drives our economy and we are not getting enough of it. This is what the country needs.”
The column ‘Tough Call’ by Larry Smith is published in The Tribune every Thursday and is reprinted here as a courtesy. Mr. Smith founded and successfully grew an advertising agency over 20 years. Under his direction Media Enterprises diversified into short-run commercial printing and publishing, and is now the largest non-fiction book wholesaler in the Bahamas. He has 30 years experience as a journalist and publicist and has contributed numerous articles and columns to the Bahamian press. A former reporter at the Nassau Guardian, local correspondent for Reuters and editor at the Bahamas News Bureau, he conceived and edited the Bahama Almanac (published 2000 by Media Enterprises), wrote the commentary for Mike Toogood’s Portrait of an Archipelago (published 2004 by Macmillan Caribbean), and edited the Bahamas Environmental Handbook (published 2002 by the government). In 2003 he took a year’s leave of absence from Media Enterprises to lead a transition management team at the Nassau Guardian after the paper was acquired by local investors. After leaving the Guardian he was contracted by the Tribune as online manager/editor and columnist. He has a degree in political science and journalism from the University of Miami.