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Real estate fallout seen as likely with rising interest rates

Condos that violate building codes and an increasing number of unsold apartments are being seen as possible manifestations of the downside of sustained interest rate hikes.

That’s according to a panel of experts that weighed the impact of the prevailing tight monetary policy stance of the central bank and its potential outcomes for the real-estate sector.

“It is not a question of if, but when the first apartment complex is demolished,” said attorney Gavin Goffe, a panellist at the launch of MoneyMasters forum and fund launch.

“It has become the expectation that real estate is safe. That is still the case, but we cannot take that for granted. We need to understand what is happening out there and make sure we invest with reputable people,” he said.

In the past year, the Bank of Jamaica has tacked on 600 basis points to interest rates in order to cool inflation, which was last estimated at 10.2 per cent.

The central bank has effectively increased rates by 1,200 per cent over time, since last year September, having adjusted the benchmark policy rate from 0.5 per cent to 6.5 per cent. It’s led to pricier loans and higher borrowing costs.

For Goffe, the higher cost of financing for developers will lead some to cut costs to maintain profit. He said developers will test the limits of the building codes within the context of “sympathetic courts”.

“Ever see ads for a one-bedroom apartment with two and a half bathrooms … why do you have so many bathrooms? Maybe the husband and wife do not want to share,” quipped Goffe, before explaining that additional bedrooms would force developers to meet higher minimum standards for rooms and parking.

Two more rate decisions are scheduled for this year.

Economist Dr Samuel Braithwaite expects the Bank of Jamaica to maintain course.

“By the time we are in December, rates will be at the 7.5 per cent range,” said Braithwaite, a lecturer in economics at The University of West Indies.

“Personally I am concerned about the real-estate sector, especially, since many of the buyers are based overseas,” he said.

The Financial Gleaner has previously reported that sector interests estimate that around 30 per cent to 50 per cent of buyers of trendy real estate properties are Jamaicans living overseas.

Consequently, Braithwaite said that a possible recession in developed metropoles will negatively impact on local sales.

Deborah Cumming, realtor and CEO of Century 21 HeaveHo Properties, who was also a forum panellist, said prospective buyers will find it harder to qualify for mortgages since the higher rates would increase their debt-servicing burden. She anticipates that condos in Kingston targeted at professionals will take longer to sell, but the overall real estate market would remain buoyant, given the demand for homes among Jamaicans, whether as a owner or renter.

“Prospective buyers may not be able to qualify under the higher interest rates, but those who can afford it may be able to get real estate at reduced prices,” Cumming said.

Mortgage rates have increased from roughly 5.0 per cent towards 7.5 per cent. The rise will reduce demand slightly, but don’t expect a crash as there’s still a huge undersupply of housing for various segments, said Colin Mitchell, MoneyMasters Limited’s chief technical officer.

Mitchell said that one needs only look at the lack of coastal development in the capital, comparative to other countries, to see untapped opportunities. There is a lack of condos on the waterfront, he indicated.

Wealthy Jamaicans have shunned the city coast, choosing instead to build mansions on virgin hillsides. In other economies, the coast tends to have the highest market value for real estate.

“But we have nothing to sell anybody,” added Mitchell, who is also an architect.

MoneyMasters Limited wants to capitalise its newly launched real estate fund with $1.2 billion from investors as it aims to generate returns slightly above inflation.

The fund will aim for 150 basis points above inflation.

With inflation at 10.2 per cent the fund, investors would expect a return of about 11.7 per cent, said Devrhoid Davis, equity and business analyst at MoneyMasters, at the launch on Tuesday night.

Co-founder and president of MoneyMasters, Claudette Crooks, said the fund would seek to offer medium to high-risk returns to investors, and should soften the negative impacts of the ‘quiet storm’ characterised by high interest rates and inflation.

“When you see a quiet storm, you have to put in mitigants to pass through this period of high inflation and high interest rates. At MoneyMasters we are looking for the opportunities,” Crooks said.

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