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High-priced financing fails to slow construction

Despite rising interest rates and its knock-on effect on the cost of financing, the demand for loans in the construction sector has boomed over the past year amid a bullish real estate market.

Instead of shying away from the more expensive debt, developers are said to be been passing on the costs to purchasers of real estate.

Ever since the Bank of Jamaica switched its rate policy at the start of autumn of 2021, the price of commercial credit has meandered up and down, but has been on the rise consistently in the past six months ending February, from a low of 9.05 per cent to 9.44 per cent on average.

But as for the construction sector, “we’ve seen interest rate increases of up to four percentage points” in response to the central bank rate hikes, said General Manager of the Jamaica Mortgage Bank Courtney Wynter.

The sector, which happened to be the most resilient area of the economy when the health crisis forced the country into lockdown three years ago, has also remained a robust area of business for banks, then and now.

“The pricing of construction loans reflects the risk assessed and the cost of funding. Over the past 12 months this pricing has been impacted by policy rate adjustments by the central bank,” said First Global Bank in a canvass of lenders by the Financial Gleaner.

“Notwithstanding, First Global Bank continues to see high demand from the construction sector, which has resulted in 10 per cent growth in volume over the past 12 months,” the bank said.

Wynter says it is unlikely that developments will slow due to higher pricing for financing in the market.

“Obviously, financing cost is one of many input costs for developers. In addition to material and labour, we have seen interest rate increases due to liquidity issues arising from inflationary measures from the central bank,” the mortgage banker noted.

“The developers can either absorb these increases beyond the contracted escalation or increase prices,” he said.

Bank of Jamaica data shows that construction loan balances as of March totalled $58.2 billion, spanning 2,028 accounts. That’s up from $49.1 billion across to 1,836 accounts at March 2022.

In 2022, the most active construction area was the parish of St Andrew with 51 developments encompassing 1,016 residential units were approved, according to the Real Estate Board.

In the residential real estate sector, Wynter says developers have simply passed on the added cost of financing to buyers in a market for homes that remains bullish.

“Since the pandemic, the bank has seen a 17 per cent to 25 per cent increase in residential prices, driven by interest rate increases, as well as escalating cost of aggregates and finishes in the construction sector. In addition, many financiers, in a move to reduce the elevated risk in the sector, especially on the residential side, have tightened construction loan terms,” he said.

The BOJ notes that for reporting purposes construction loans include debt issued for the purpose of construction, repair and demolition of buildings, highways, and streets; the heavy construction of such projects as sewers and water mains; marine construction, such as dredging; airport construction; and all other construction, which includes the development of land for commercial, industrial, or residential purposes, as well as the acquisition of land for purposes other than agriculture.

JMMB Bank said this week that in response to the central bank rate hikes that began in October 2021 and paused at the end of 2022, it would be hiking its lending rates.

“JMMB Bank will revise the interest rate charged on all its variable interest rate loans by no more than 2.25 per cent, effective May 1,” said Country Manager for Corporate Client Partnership Alwayne Cousins.

In conjunction with the move, the bank will soften the impact by lengthening the loan tenure from 18 months to 24 months, but only on a case-by-case basis.

“We have seen over 20 per cent growth in our construction portfolio, year-over-year, although we would not wish to share the specific details of the value and volume of our construction loan portfolio, based on the sensitive nature of the information,” Cousins said.

Meanwhile, in service of managing the risk from construction loans, lenders have been adjusting the terms under which they provide credit.

“Financiers, as a condition, are now requesting up to one hundred per cent pre-sales of residential units with mortgage pre-approvals or commitment letters from purchasers. This, in addition to increasing the required equity percentage that a developer brings to the project,” he said.

“These conditions can be very burdensome for developers who borrow, as potential buyers are sceptical to sign contracts before construction has started.”

However, there is no sign that the new conditions are causing projects to be shelved.

Currently, the Jamaica Mortgage Bank itself is funding sixteen residential projects valuing over $9 billion, with three now completed.

“During the midst of the pandemic, the bank was funding a record 21 residential projects across the island, valuing over $12 billion,” Wynter added.

As to the uptick in price of residential real estate detected by the mortgage bank, Wynter laid out a few examples.

The average price for a 1,000 to 1,200 square-foot two-bedroom apartment in the Kingston 6, 7 and 8 areas prior to COVID were about $34 million to $36 million,” he said. “Today that same apartment ranges from $42 million.”

In 2022, a total of 92 developments were approved across Jamaica, offering 5,132 new units, with St Andrew, St Ann and St Catherine being the most active parishes, respectively. The number of approved developments was also 92 in 2021 but those projects incorporated 2,834 units.

In 2020, there were 84 development projects comprised of 2,255 units.

In its most recent report on economic growth, the Statistical Institute of Jamaica estimated the value of construction GDP at US$15.96 billion in the fourth quarter of 2022, up from US$14.57 billion in the third quarter.

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