by

Tobago Hotel Tourism Association
Trinidad Hotels Restaurants & Tourism Association
Tobago Chamber of Commerce
Trinidad Chamber of Commerce
Association of Real Estate Agents
(March 2007)

An ad hoc committee was formed comprising both the Trinidad and the Tobago Chambers of Commerce, the Trinidad Hotels Restaurants & Tourism Associations, the Tobago Hotel and Tourism Association and the Association of Real Estate Agents, to discuss the proposal by Mr. Orville London to the Prime Minister that a licence be required when any foreign investor wishes to purchase land in Tobago.
One of the first points agreed to among the various members of this ad hoc committee, was the need to properly analyze and to correct wherever possible, the data presented by the THA, so that the best understanding would be arrived at, based on the best possible information.

The following are the key facts that were obtained from the data. The data spans the 15 year period from July 1990 to June 2005.
• The data presented indicated that 479 transactions for the sale of land to foreigners took place relating to the transfer of approximately 678 acres. A number of the         transactions recorded in the data presented were double counted. Based on our analysis we believe the actual number of foreign purchasers over the 15 year period was actually 370. However, since we are unable to certify these errors, we have based our analysis on the original information presented. We believe that approximately two thirds to three quarters of all transactions were via an agent, more so in the past 8 to 10 years.
• The average size of land purchased was 1.4 acres although the majority of sales were for less than half an acre.
• The average number of sales to overseas investors during the period was 32 per annum, however for the last 5 years it had fallen to an average of 25 per annum.
• 70% or approximately 320 transactions were for property under 1 acre of land.
• 10% of the purchases were for 1 acre.
• 14% of the transactions appear to be for land between 1-10 acres.
• 20% of the transactions were for house and land. (This figure could not be verified and could be much higher.)
• 41% or 195 of the purchasers came from the UK
• 21% or 100 of the purchasers came from North America and Canada
• 19% or 93 purchasers came from Germany
• 6% or 27 purchases were for subdivision development, of which three can be confirmed to have started. We were not able to evaluate the others.
• The largest, Englishman’s Bay, has been mostly developed and sold.
• 83% of the land sold is located in the parishes of St Patrick (53%) and St. Andrew (30%).
• 10% or (48) transactions look as though they were resold to overseas buyers in a relatively short period of time (0-3 years), however, of these only 5 transactions amounting to less than 5 acres seem to be speculative in nature.
• This means that one percentage (1%) of all the land sold to foreigners might be regarded as speculative.
• We also did an analysis of the purchasing patterns by the amount of land purchased by various nationalities. British investors purchased the greatest amount of land at 45% (approximately 301 acres) followed by the Germans at 15% (103 acres) and the North Americans at 15% (99 acres). This means that the British on average purchased larger pieces of land than the Germans, who purchased far smaller pieces of land (1.1 acres).

General Comments
The data as analysed therefore gives a very different picture from the one that is now being publicly debated. Only 5 transactions or 1% appear to be speculative in nature, given the data presented.

In addition there are a number of transactions (109) recorded as foreign purchases, which are either double entries, Caricom residents, or mixed marriages where locals are married to foreigners. The actual total number therefore is estimated to be 370 individual transactions over 15 years.

Our Position
There was common agreement by all the groups represented, that we are against the imposition of any type of licensing regime, in any part of Trinidad and Tobago, for the purchase of land other than as specified in the Foreign Investment Act. We feel that this is a fundamental condition of any initiative to attract foreign investment into the tourism sector. The existing Foreign Investment Act was a bold initiative designed to thrust Trinidad & Tobago towards developed country status. To reverse this decision now because of five transactions, makes no sense

The long term ramifications of this move will be regarded as instability in the Government’s policy and will affect future investment by sending mixed signals to those who have already invested. More importantly, it will destroy what little investment confidence remains in the destination.

It is confidence that is the key to attracting future investment capital into the industry.
We feel that policies applied must be the same in both islands and cannot accept a different policy for Tobago. Any move to have the whole of Tobago designated an area requiring a licence is in fact a reversal of the country’s policy and will affect the entire investment climate on both islands, not only in tourism but in all sectors of the economy.

If it is that the local government in Tobago is concerned with the quantum or type of developer that is investing in Tobago, we suggest that a high-powered team comprising the Tobago House of Assembly, Tourism Development Company and the private sector of both Trinidad and Tobago be quickly convened to resolve the issue.

Their mandate should seek to do the following:
• A further analysis and correction of the data presented and the defining of what, if any, problems exist, with respect to the current Foreign Investment Act.
• Identify where our legal system is being abused and develop systems to improve enforcement of our laws and procedures. This should apply to both local and foreign investors.
• Visits to selected Caribbean neighbours to examine the pros and cons of licensing the sale of land to foreign investors, along with their systems for monitoring and control. We would be particularly interested in studying the Barbados model, which has one of the most successful records in attracting foreign investment into the tourism sector without a licensing regime in place.

In the meantime, there are a number of other actions that can be taken that will offer the Tobago House of Assembly some level of control over foreign ownership in land.
• Seek to establish continuous open dialogue between all the key private sector organisations and the Tobago House of Assembly, on matters relating to land use, land prices, attracting foreign capital and resort development, so that we all approach future development in a proactive manner.
• Assist and support the Association of Real Estate Agents (AREA) in its current efforts to have its draft legislation passed to regulate and license real estate professionals, which would include a code of ethics that would allow those who breach the said code to be disciplined.
• Review the current Tobago tourism development plan as it relates to future new construction of resorts and of land use set aside to service tourism. Pay particular attention to the proposed size of the net proposed room stock, the placing and phasing of said development.
• Develop a long term land use policy that would identify areas targeted for resort development, where we want to encourage investment and ownership in villas, condominiums and hotels by locals or foreigners.
• Examine the Tourism Development Act with regard to the qualification for incentives. Work with the government and in particular the TDC, to direct these incentives so that they will only apply to areas targeted for resort development. These incentives should continue to apply to all types of resort development including hotels, guest houses, rental villas and condominiums. It should also include the service sectors that support these types of developments.
• Meet with Town & Country Planning Division to see if we could increase the building height requirements in resort areas, so as to minimise the need to build horizontally, making more efficient use of the coastal areas.
• Introduce a time stipulation on incentives with regard to the purchase and development of land, so as to minimise the risk of land speculation and encourage the building phase of resort development.
• Pay particular attention to the current difficulties and time delays being experienced at the EMA, T&CPD, Valuation Division and the Local Health Division, as it relates to these time restrictions.
• Make a detailed list of all guest houses or rental villas and have the Board of Inland Revenue demand a full accounting. This must apply to both local and foreign investors.
• If foreign individuals are found to be operating in breach of the immigration act, seek to regularise or enforce the current law as seen fit.
• Look at ways of registering all bed & breakfast, guest houses, villa and condominium rental properties, so as to ensure that all (both local or foreign) are operating at the country’s standard and that they all fall inside the economic net.
• Establish a relationship between the Valuation Division and AREA to determine the correct selling price upon which stamp duty is to be paid. Expand the number of valuators in the division to facilitate the speedy processing of stamp duty.
• Investigate ways in which affordable housing programs / property investment incentives can be introduced to promote and encourage citizens at the lower end of the investment ladder to remain active in the property market in parallel with foreign investors.

One of the key pieces of information that we were not able to determine was the total number of properties being purchase by both local and foreign individuals over the same period under review. We were however able to view the records of one of the newest large land developments that targeted both local and overseas investors. During the period February 2004 to August 2006, 121 lots were sold in this development.

The data is as follows:

Lots sold to foreigners                                                 1

Lots sold to locals married to a foreigner             11

Lots sold to locals only                                           109

The one foreign investor plans to start building his villa in January next year.

Land Licence Order

Caribbean Grid

Timeline Summary

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Property search

Now that you know precisely what your maximum purchase price is, you can go out and look at a broad cross-section of properties to get a “feel” for the market before committing. This will help you to determine which properties may be able to offer you value for money.

Making an Offer

Once you have found a property you like, the next step is to make your offer. This can be a little tricky as many vendors and real estate agents expect you to pay a deposit as soon as your offer is accepted. Sometimes this can be a very dangerous practice, as it is possible to lose your deposit if you are unable to complete the transaction. You should make your offer subject to a valuation report and perusal of your application by the lender. But, some vendors are not willing to wait this long, and some negotiation may be required. When you have the go-ahead from the lender, you are now ready to enter into an Agreement for Sale. This Agreement is the foundation document of your purchase transaction and should not be treated casually. It essentially outlines the terms and conditions of sale. You should get advice on this document before signing it. A typical agreement (there is no such thing as a “standard purchase agreement, as each vendor and purchaser have different requirements) details the amount of the deposit paid (very often 10 percent) and states the amount of time in which the completion must take place (usually 90 days).

Obtaining financing

If you are obtaining a loan to assist you with your purchase, now is the time to visit your lender or mortgage broker to start the application process. The broker would provide a list of documents required by the various parties in the transaction. Only after the lender receives all the information and documents required, will they underwrite the loan. If your application is successful you will receive an “Offer to lend” by the institution. After you have read, understood, signed and returned this offer, the lender’s attorneys-at-law would be instructed to prepare the deed of mortgage. The attorneys will require written confirmation that the property is free and clear from all encumbrances. These would include a WASA Clearance Certificate, WASA receipt for the last quarter, Lands & Building tax receipt, the existing lender’s redemption statement and the deed of release (once again, if you are using a mortgage broker, these documents will be obtained for you). They will also ask which attorney will be preparing the deed of conveyance. If you choose the same law firm to prepare both deeds, there is usually a discount on the fees for the second document.

Closing the deal

At this stage, the attorneys will calculate the stamp duty and any other out-of-pocket expenses together with any shortfall on the purchase price. On completion of the preparation of the deeds, and the receipt of all the final documentation, an appointment is scheduled for both the vendor and yourself (the purchaser) to sign the deeds. The attorneys will then send for the deeds to be registered and copies of the registered deeds will be sent to you a few weeks later.

The new threshold has been raised to $850,000 which will make a significant difference to closing costs, particularly since the Government has also adjusted the percentages of Duty paid on the sliding scale of charges.

The details of the new Stamp Duty calculations are included in the following document – Click Here

Owners are not willing to subdivide the real estate to sell. A number of these estates, however, have recently changed hands and quite a few projects came on stream in Tobago within the year, that would include sale of lands, townhouses, hotel sites.

Well-intentioned as they all were at that time, nothing ever seemed to take hold. In those days there were not as many properties for sale on the open market as is the case today. It was not a common to tradition move and upgrade homes. When you bought your home back in the 1930’s and 1940’s, inevitably you were probably set for life in that home. This is where the family grew up, went to school and eventually only left the roost to get married.

OIL BOOM

As the late sixties rolled in, and the windfalls of the oil boom (known as the oil crisis in oil-importing countries) started to filter in through the various communities, financial security improved in nearly all areas of the country, and the demand for housing increased. One inevitably saw a number of people jumping into the Real Estate business and acting as “Agents.” It was inevitable that among those that got into the business, there were going to be some who saw it as an opportunity to capitalize on the uninformed and in many cases, the majority of those who were badly hurt were the least able to afford it. Until the formation of AREA, there were no rules by which a Real Estate Agent was governed. Even the numerous well-intentioned and ethical agents were all playing by different rules. There were virtually no two agents who practiced in the same manner.

It was the context of this situation and the numerous complaints from the general public that it was felt that some sort of structural organization and direction was needed. Even today, anyone wishing to get into business of virtually any sort in Trinidad and Tobago can do so without the need for a license, regardless of whether they were qualified to handle that business or not. Additionally, with the number of agents growing, it was felt that if real estate agents themselves did not make an attempt to improve the situation, chaos was inevitable. In response to this, the Association met and an agenda was established. Some of the priorities that were listed were:

1. Standardise contractual forms, documents and agreements.
2. Set up a system for sharing information among Real Estate Agents.
3. Establish Educational programmes.
4. Establish legislative models which could be used to regulate the local industry.

When AREA was officially launched in 1990, the membership comprised 6 to 8 of the most active Real Estate Companies covering about 25 sales people. Today, there are more than 51 brokers, 30 sales associates and 18 corporate members. The multiple listing service includes hundreds of residential and commercial properties.

These investors have set up ammonia, iron carbide and methanol plants to rival the size of others all over the world. Most of the offices for these foreign investors are located in Port of Spain, with the petrochemical plants situated at Pt. Lisas, thereby creating a demand for office accommodation at Pt. Lisas and Port of Spain and for housing in the north-western peninsula and San Fernando environs of Trinidad. BPTT has completed the construction of a 60,000 square-foot office building in Port of Spain, that is owned by three of the Country’s largest finance companies who have made a determined thrust as real estate developers.

As a 34% shareholder in the Liquefield Natural Gas Plant (LNG) presently being constructed at Pt. Fortin, Amoco has also commissioned a 20,000 square-foot office building at Pt. Fortin. With this plant being established at Pt. Fortin, together with the mega plants at Pt. Lisas, we have finally seen an improvement in real estate prices in the south, due to housing needs for the LNG plant’s contractors. Market values have finally caught up with replaceable cost values, even though housing is still significantly cheaper than in the north west.

There has been a mini-building boom in the last three years in Trinidad, which has helped to steady prices even though the opening up of the economy has resulted in quite a demand for housing. This building boom was mainly as a result firstly, of a tax incentive implemented that would mean that all rent would be tax exempt, and all rates, taxes, mortgage interest and expenses deductible, once the property was constructed after 1993 and completed by 1996. Secondly, the demand for rental accommodation meant that the average Trinbagonians could buy, build and lease at a great return on his investment, having had the tax break. Thirdly, the entrepreneur was once again confident in the economy of the islands.

Real estate agents often say that renters only have rent receipts to show for all their years of tenancy. It has also been said that renters are simply too busy or lazy to bother with home repair and maintenance. The home owner must grit his teeth and prepare for a lot of tap repairing, lawn cutting and other disagreeable tasks, which the landlord supplies to the renter. However, as a homeowner, the sense of pride he exudes on the accomplishment can be second to none, and thus one can readily understand the meaning of the phrase “a man’s home is his castle.” A home also satisfies a basic psychological need.

It is something we call our own, relate to, fit up, decorate, add to, play with, even love. Be it ever so humble, or so proud, there is no place like home. But home ownership is not always the proverbial bed of roses. The cost of buying or building is rising and so is the cost of maintenance — and rates and taxes. Perhaps the strongest reason for buying a home, and buying it now, is that housing is not going to get any cheaper. A home is an investment in every sense of the word, and it is an investment even better than stocks and bonds. A recent newspaper advertisement by a bank urged residents to put their savings in deposits. The advertisement showed a man investing $10,000 in the stock market and after 10 years of ups and downs he was right back where he started. The tag line was “There’s gotta be a better way.” Well, the best way for most of us is to buy a home. No other investment equals a home of your own — tax benefits, hedge against inflation, and long term safety.

In addition, the value of the house will certainly increase over the years. For most of us, it is the single biggest and best investment we would make in our lifetime. A house is a true investment. Unless you made a very poor choice, your house will increase in value every year. With reasonable maintenance, houses normally appreciate about 5 percent annually, homes in choice neighbourhoods can rise by 10 percent or more. The concept of equity is one that should be fully grasped by anyone considering home buying. The build up of equity in a home is the biggest single reason for the financial attractiveness of home ownership. Equity build-up come not only from the gradual reduction of the mortgage, but more from the appreciation value. As long as the home is not in a deteriorating neighbourhood or allowed to disintegrate, the inflationary forces at work in the housing market will make your home increasingly valuable. Thus, if you buy a home for $200,000 with a $20,000 down-payment, it is not unreasonable to presume that your house will be worth $270,000 ten years from now. Your stake in the house is now $90,000 instead of $20,000. Add to that the principal repaid over the ten years, say about $15,000, and you have a reasonable nest egg. And as the years go by the equity increases even faster.

In 25-30 years when the payments are completed, the home purchased for $200,000 can sell for more than $400,000. Owning a home is not easy. The initial hurdle is to have the cash available for the initial costs — down-payment, valuation fees, stamp duty and fees paid to the mortgage institution. There is one argument against buying a home now — you don’t have the down-payment. Those who already have a house usually have enough equity for a substantial down-payment, but for the family that is looking for its first home probably will not. In spite of the considerable obstacles, saving money for a down-payment is not an impossibility. Once you become used to some time of regular savings, it is lot less painful, and can even be satisfying. Consider the renter and the home owner, where the rent equals mortgage instalment. At the end, what will the renter have — a mountain of receipts. What will the person who sacrificed to raise the down-payment have — an unencumbered home. Take your pick.

Petrocarbons and Public Expenditure

Budgetary adjustments due to falling oil and gas prices will have a knock-on effect for us all and for the real estate market in 2009 says Richard Saunders. “Oil and gas are the bedrock of the Trinidad and Tobago economy so any fluctuation in the price of those commodities is bound to impact the economy as a whole. “Oil prices today have been depressed significantly from above US$100 per barrel to the range of US$40. In addition to that you have a reduction in the demand for oil because the major developed and developing nations, which provide the demand, are all in some form of economic adjustment,” says Saunders, who is also managing director of property development firm Vicar Enterprises.

“Two things are hitting us: a) low price of oil; b) low demand for the product. We’re aware that the government is looking for alternative markets but it is still having an impact. Gas prices follow the oil prices and as such are on a similar downward trend.” Low petrocarbon prices are already having an impact on Government spending with the postponement of a number of major construction projects. And there are prospects for further cuts as Saunders explains. “Government spend regarding the budget was around TT$49 billion. At first it was down around TT$7 billion, which represented a 15% cut and that was when they were pricing oil at US$50 a barrel. It’s now in the 40’s and one would assume that there are some further adjustments that the Government will have to make.

“We did hear that the government was trying to keep spending at the same level it was at in 2008. Increases in the budget were in the order of TT$8 billion, so if they’re keeping it to that level then it is a budgetary cut of at least TT$8 billion that we’re looking at. “Also it’s not just that difference; because of inflation anything you are buying would be 10% more expensive, so you have to add in that inflationary component to get the real reduction of spend. “Really we could be looking at a reduction in government spending of 15-20% which will undoubtedly have a big impact. It would ripple through the entire system.”

Individual Earnings and Unemployment

The effect of reduced government spending is all pervasive and will be felt throughout 2009 adds Saunders. “People at both ends of the spectrum are having problems,” he says. “Businesses are saying they have to adjust and tighten the belts; there are also cutbacks in government projects which means there is less work out there and therefore less money circulating in the economy. “We are looking at a reduction in real demand, it might not have hit all of us yet but that is what is happening out there. “Unemployment is going to rise and that is because the level of economic activity has reduced. The construction sector, which employs a lot of unskilled labour, is under real pressure. The government has also cut back on its social programmes such as URP (Unemployment Relief Programme) and CEPEP (Community Environmental Protection and Enhancement Programme) and all of that unfortunately is because it doesn’t have the money.

“So we will see a rise in unemployment and the consequence of that is that the spend of that group will be reduced. Generally the retention of money within the URP and CEPEP bracket is short-term, it turns around very fast, so if those projects are scaled down, a lot of businesses, especially smaller ones, will feel it.”

Investors

A significant proportion of real estate demand within the past decade has been fuelled by investors; especially those looking to turn a quick profit from buying in at the commencement of a development and selling on completion. These investors are being more cautious now, a fact which will lead to a decreased volume of real estate transactions in 2009. “Investors have been very circumspect and are saying at the moment that if this market is supposed to be going down a bit I’m going to wait until it gets to the bottom and then purchase. “The time for me to buy is when it bottoms out so that is causing some reduced activity as well,” explains the AREA President. “They were jumping on every good deal they saw but now there is a much more wait-and-see approach. “It is another factor that will influence our market and slow down the volume of transactions going through 2009.”

Supply

The plethora of developments that sprang up in response to high real estate prices and demand meant that, as things slow down, there is now excess supply in the market. It is something which could take years to be taken up says Saunders.

“You have One Woodbrook Place, which is a major project bringing about 400 high-end units onto the market; there’s also La Renaissance which is another project bringing high-end. That supply will take years to be absorbed. During that time it’s also going to have an affect on the market.

“If I was an investor in One Woodbrook Place and I had a situation where I couldn’t find a tenant I would look to attract one at almost any rate to ease those mortgage payments. Say I have a TT$20,000 mortgage and I could get a US$2,500 rent from someone who is currently paying US$3,500-4,000. I will offer him that rental of US$2,500 and probably get it because this is a brand new apartment I’m offering.
“But the affect of that is that it’s going to disrupt the market. You’re going to have a situation where those that were getting US$3,500-4,000 will have to drop because otherwise they will lose their tenants. This might be good for the tenant but it actually drops the whole system down and reduces the amount of money circulating.”

And how long does Saunders anticipate it will take for this property surfeit to be sold? “All of these things will take a good two to three years to run through because of the amount of plant being brought on the market. Once we go through this little phase then things will begin to pick up again.”

Demand and Prices

Though Saunders expects real estate demand to remain relatively high in 2009 he does foresee a drop in prices. “You have to look at affordability when looking at demand because many people will be either losing their jobs or getting much less work. This will shift the number of people, at the low-end, that were looking at coming into the market, back out of the equation again, purely on the basis that they can no longer afford it.

“The demand will stay relatively strong throughout 2009 but I think there will be some reduced costs of the property available in order to move that property. There is evidence that prices are falling right now. We’ve seen HDC (Housing Development Corporation) already making offers to try to sell some of its slower moving product. They’ve dropped prices in some of their developments, so that’s already visible.
“Adverts for high-end properties are saying ‘price negotiable’ or ‘call for price’ which is an indication that there is room for manoeuvre; they want to get a dialogue going to see if any common ground can be reached. Before it was a case of ‘this is the price and that is what I am selling at’.”

Construction costs could also come down in 2009, good news for those looking to build. “Prices will go down across the board,” says Saunders. “Construction costs, such as that of steel, are going down and now you can get a craftsman whereas before you couldn’t. “Labour, even the craftsmen, have to be a little more price conscious now whereas before they could pretty much name their own price and say take it or leave it. “With the high demand before it had pushed construction prices way out of line.”

Interest Rates

Republic Bank Senior Economist Dr Ronald Ramkissoon says the prospects for interest rates in 2009 are hard to predict with any certainty but the overall trend is downward.
“The major body that dictates interest rates is the Central Bank (CB). If the CB feels comfortable that inflation is continuing to decline, then you can expect a decline in domestic interest rates.
“I think inflation will continue to come down and therefore given the Central Bank’s monetary policy, interest rates will come down as well. But this will not be to the low levels of developed nations. Caribbean rates tend to be high, both for deposits and loans.”

There is reason for optimism though for those seeking loans in 2009. “Inflation has begun to come down of late and this was reflected by a slight decrease of the Repo Rate recently by the CB.
“The Repo Rate is the CB’s signal policy rate and we have seen a small decline in that which was reflected by commercial banks reducing their prime rates. “What is important is the direction. Our inflation rate had gone to 15% and we are now around 11% so it is heading in the right direction.”

Tobago

The prospects for the sister isle in 2009 are not encouraging says Dawn Glaisher, with a number of factors feeding into a gloomy forecast.
“Diversification, represented by the Cove Eco-Industrial and Business Park, is a potential that will take time to actualize so we need to continue our efforts to refocus the government and local private sector investors on tourism.

“This means more fiscal incentives; a re-investment programme for the accommodation sector, which is now sub-standard; investment in infrastructure, especially the new airport terminal and hospital; encouragement of large investors in top quality hotels, because without good beds, the airlines and tour operators will soon stop sending tourists here, except on cut price package deals that will contribute nothing to our sustainable future.”

Glaisher says the removal of the controversial land licence, which requires all foreign investors to obtain a licence before investing in property, would make little difference.
“Even if the land licence were to be removed this month, nothing much would happen as the visitors are down to 1995 levels, local investors are afraid to take a chance, prices are still high, crime is increasing – which has a direct impact on real estate/tourism – and confidence is gone,” she says.

“The outlook for 2009 is bleak therefore, unless we seriously refocus, ignoring the negativity of the credit crunch and pushing forward with an eye on the future. There is always money to be had if you look for it. The credit crunch has not stopped industry on the whole, the world will continue and the upturn will come. “We have to position the island for that day or Tobago will remain 20 years behind its regional neighbours in quality and service. That would be a crime because the natural assets of the island far outstrip some of the other small islands. “We need to foster an environment of private sector investment in partnership with local government and central government for fiscal incentives. We have to work with government, mobilize our talents and labour force and spend our money wisely.”

How Long Will the Downturn Last?

So what is the prognosis for the Trinidad and Tobago real estate sector this year and into the future? Saunders gives us his opinion. “Unemployment will rise, inflation will fall (to about 9%), prices will come down and a period of general economic adjustment will take place throughout 2009 and beyond,” he concludes. “All in all I think we’re into a period of some decline in activity and transactions that will take a year or two to work its way through the system. It will also be two to three years before all the high-end properties coming onto the market are absorbed. “After that we will begin to see some slow growth and seeds of recovery. I think it will take up to three years for things to begin to pick up again, so by 2012 we should see the market back on track.”

Oil, Gas and Government

Oil, and more importantly today, natural gas, are the foundation of the Trinbagonian economy and its wealth generation has led many to home ownership. But, as Richard Saunders explains, the industry’s importance can be both a blessing and a curse.

“The Trinidad economy is driven largely by petroleum revenues which are under the control of the government, so to a large extent the spend of the government is what determines the ‘energy’ in the economy.”
Trinidad has enjoyed a period of sustained growth and wealth creation in this area over the past 15-20 years. The money has filtered through the economy, be it directly as a result of those employed in the petro-carbon and related industries or as a result of increased Government revenues – through the state oil and gas companies Petrotrin and National Gas Company of Trinidad and Tobago (NGC) or as the result of industry taxation.

“It is the biggest economic factor in Trinidad,” says Saunders. “Oil and gas underpins everything that happens in the economy because the government is the major driver of economic activity. They have control of foreign exchange through the oil and gas and everything is really subsidiary to that.”

The government’s tranche of this money affects the entire economy, including social schemes such as URP (Unemployment Relief Programme) and CEPEP (Community Environmental Protection and Enhancement Programme).

As a result more people moved into the bracket of being able to afford property in recent years and house prices rose in line with the increased demand adds Saunders.
Of course in times of low oil and gas demand there is a corresponding contraction of the amount of money generated, and circulating, with resulting implications for people’s ability to purchase real estate.

Tobago and Government

The sister isle is similarly affected by oil and gas revenues as its annual budgetary allowance, from central government, is necessarily determined by how much money is available. However, local governance, in the form of the Tobago House of Assembly (THA), has also had a major affect on the housing market.

In 2007 the THA intervened directly, on the premise that house prices were outstripping the ability of locals to afford them, and implemented a land licensing system. This meant that all foreign investors were required to obtain a licence from the central government before being allowed to purchase land or real estate. The system has been clouded in confusion and to date no such licences have been issued. Dawn Glaisher says it has had a huge impact on an island dependent on the tourist dollar and which had an excellent balance in terms of foreign exchange.

“The decline in tourism was self-inflicted in 2007 with the introduction of the land licence,” she says. “This signalled to visitors that their welcome in Tobago was not wholehearted and they began going to other islands with their investment dollars.

“Take a look north and you will see Grenada, St Kitts, Dominican Republic, St Lucia and other islands thrusting forward as we slowly decline. It is difficult to explain the apathy of government/THA towards tourism in Tobago when it is universally acknowledged as the major private sector employer on the island.

“Loss of real estate sales can be traced to the effect of the land licence, its knock-on effect on the local investor, and then in October 2008 came the global economic crisis and credit strangle-hold.”
The THA has also become a significant purchaser of land as Glaisher explains.

“Other than investment for tourism the State has been buying up land to meet the housing needs of the growing or more affluent population, as well as agricultural land to protect the future of food production. The state has also purchased to protect beaches, as with Courland Estate, or areas of national significance such as Pigeon Point and Goat Island.”

Individual Earnings and Unemployment

The rate at which people’s earnings increase and the number of people employed in the economy determines the number of people that will be in a position to purchase real estate explains Saunders.
“Every year there is a certain number of people that qualify to, or have reached a level of economic activity that will allow them to, purchase real estate.

“There has been a rapid increase at the lower end because we had almost full employment. A lot of people came into that bracket of being able to afford a property or to rent, or to begin planning to buy land or to build, which was not possible for them previously.

“It started from that low end and went straight through the system as wages have grown a lot over the period. For example a labourer is getting TT$200 a day which is TT$4,000 a month. It ripples through and you have more and more people that can get into high-end properties and afford mortgages of TT$20,000 a month buying a TT$2+million property, there are more people like that.

“Similarly more people at the low-end are coming in and creating demand in that property bracket.”

In Tobago, employment comes almost entirely from two sources – local government and tourism.

“Tourism is the only major private sector employer and accounts for at least 15,000 jobs,” says Glaisher. “The health of that sector reflects the wealth (disposable income and foreign exchange) of the island. Right now we are experiencing tourism arrivals that are minus 50% of our best year, 2006. This drop in arrivals impacts directly on jobs, banks, support industries such as food and alcohol, and real estate. You can track the losses into areas such as Stamp Duty and foreign exchange.”

The dependence on tourism is something which the THA is looking to address and the Cove Eco-Industrial and Business Park (CEIBP) is one of the answers. Prospective tenants for the 140-acre industrial park include light industries, a micro-entrepreneurial complex and an electricity generating plant, and it will also provide a liquified natural gas (LNG) hub for the Eastern Caribbean.
The success of Cove has the potential to determine thousands of future jobs for Tobagonians and the emergence of new industries on the island. Employment security within industries not as capricious as tourism will affect people’s decision-making regarding real estate.

“In Cove Estate, the THA has made an investment for the diversification of the island away from dependence on tourism,” says Glaisher. “This eco-industrial park planned since the late 1990s is still not a reality, but at least it is on its way and offers some economic potential that could survive independent of the tourism sector.”

Investors

House and land purchases are not simply for individuals or families that wish to buy a property in which to live, they are also for investment. The robust health of the Trinbagonian property market over the past decade spawned many property speculators and investors and there presence, or lack thereof, has become another driver of real estate demand and purchase price.

This phenomenon, as De Gannes states, helped force property prices to a point which excluded many young first time buyers. He adds, however, that the shrinking returns of the past two to three years had, even before the current economic downturn, seen a reduction in investor activity.

“The market has been driven a lot by speculators in recent years, buying in at the start of construction and then hoping to re-sell at a profit by the end of the development. It was the case that, say you have a development of 10 townhouses being built, investors would buy in at the start of construction and get a profit on completion. But, because of increased construction costs leading up to the end of 2008, speculators had effectively spent themselves out,” he says.

“Every step along the way, someone was making a profit so that the returns for the final investor were shrinking and hence that market has shrunk. If you’re building and labour costs have gone up by 20%, that’s cutting into your profit.

“Also there will only be so much speculator money out there and it will be tied up in a lot of projects. In Tobago, real estate investment is very sector-specific.

“The market is driven almost entirely by the potential of the tourism sector,” explains Glaisher. “Because tourism has been declining over the past two years local investors have slowly stopped investing in property, since the return is not likely to be there anymore.”

Supply and demand

Basic economics says the key components of price in any market are supply and demand and it is no different with real estate. Saunders states that there is a residual demand for housing in Trinidad and Tobago.

“There are over 100,000 people, based on Government forecasts, waiting to enter the housing market. I would say that is fairly accurate.”

However, he adds, even though people may want to buy a house other economic factors, such as employment and earnings, may restrict their ability to do so. In the past few years, housing construction had not been able to keep pace with demand but more recently, Saunders points out, some areas of the market have in fact gone into over-supply. “There are a number of high-end projects currently that will take some time to be absorbed into the market as the demand for them is just not there at the moment.” He added that this excess supply should soon be reflected in a fall in top-end prices.

Interest Rates

In the developed world, interest rates are seen as a key decision-making determinant for prospective purchasers of real estate. This is not the case in developing nations such as Trinidad and Tobago.
“I don’t think they make such a difference. Whether the interest rate is 7% or 9%, the main driver is purchase price,” says De Gannes.

But why should Trinidad and Tobago and other Caribbean nations buck the trend of the developed world systems? That they are ‘developing’ is one of the principal reasons explains Dr Ronald Ramkissoon, Republic Bank’s senior economist.

“Interest rates in T&T and the Caribbean have historically been high compared to developed nations such as the US or UK. This is because risks in developing countries, such as underlying financial structures, the framework of the system, risks of doing business, etc, are higher than those in the developed world, or were thought to be until recently,” says Ramkissoon.

“Secondly, Trinidad and Tobago specifically has been experiencing a period of sustained high inflation, double-digit in fact for some time. Our economy has been overheating and the Central Bank (CB) has sought to deal with that by raising interest rates.

“The US has a different problem in that it wishes to stimulate growth. If the economy is slowing and the inflation rate is low then a traditional method of doing that is to reduce interest rates, which is what we are seeing at the moment.

“The reverse is true of T&T because we are coming out of a period of overheating and our inflation rates remain high. In this case interest rates will normally remain high as well because you don’t wish to overheat the economy still further by releasing more money into the system.”

A third reason for interest rates remaining higher in the developing world is its dependence on imports.

“Expenditure by the Government, or significant expenditure by anyone for that matter, in the US generates a huge amount of domestic demand. The reverse is true of developing nations because we are small and dependent on imports.

“If interest rates should fall too low in Trinidad and Tobago, and therefore drive credit expansion, it then means that your imports are going to rise and you would stand to lose foreign reserves at too rapid a rate. This is not the same in the US.”

Stamp Duty and Government Taxes

In some countries government taxes on property transactions can be a significant deterrent, not so in Trinidad and Tobago says Saunders. “Definitely not those on the low end because Government has reduced the tariffs and widened the bands so that you get zero and low amounts on less expensive properties. “Also our property taxes here are low, especially when you look at what is paid internationally. In fact I think the government will have to revisit that because it’s way out of line with what you would pay in the US for example. “It’s not realistic when you look at some of the older bigger properties that would sell for many millions and they are paying taxes in the hundreds, not thousands, annually. I have heard that the government is acquiring new software with the intention of revaluing properties for taxation purposes, so it sounds as if something is in the pipeline.”

Downpayment and Closing Costs

Downpayment and Closing Costs can be a limiting factor argues De Gannes, an AREA member for 10 years who runs his own Town Planning Consultancy Business in Newtown.
“Downpayment and closing costs combined can be around 20% of purchase price,” he says. “On a TT$2million property that’s TT$400,000 you need to be walking around with in cash. Not many people have that in their back pocket.” He says it is one reason why house prices have been coming down. “People say the market is slowing down but I would say that rather it is adjusting itself.”

Lending Criteria

The recent economic downturn has shown the folly of a lax lending culture that was pursued seemingly without regard to its potential consequences.
It has led to a thorough examination of the financial sector and, with regard to real estate, the terms by which mortgages are extended. In the UK this has meant many banks greatly increasing the initial deposit required, reducing the earnings per loan ratio and significantly tightening other areas of their lending polices. It is not a process the Trinbagonian banking sector has had to undertake.
“In Trinidad lending criteria are already fairly tight because the banks here don’t have that sort of system where bankers are trying all means, special offers, etc, to get people to take on loans that they cannot sustain or support,” says Saunders.

“And the banks are fairly conservative here in the way they handle mortgage transactions. In fact a lot of banks have increased the equity participation of the purchasers when it’s a high-price property, it’s not 10% now they want more like 30-40%. “All of that is to minimize their risk and that if they have to sell in a depressed market they could at least reach a breakeven position.”

Inflation

Trinidad and Tobago is, unfortunately as Dr Ramkissoon has stated, no stranger to double-digit inflation and this impacts the real estate sector in two significant ways. Firstly, if the costs of items you purchase on a daily basis (such as food) are rising at a greater rate than your earnings you are, in real terms, getting poorer. There is less money left in your pocket at the end of each month for mortgage payments, hence the mortgage you can afford is lower and you drop further down, or off, the housing ladder. More directly, inflation means the cost of constructing a property, both materials and labour, may rise beyond your financial reach.

The construction costs trend had, until the first three months of 2009, been upward and as De Gannes explains, this has affected the affordability of property. “The million dollar apartment is an extinct animal for the last two years so let’s say you buy for TT$2 million and you’re borrowing. You have to be earning 1% of the sum you’re borrowing, that’s TT$20,000 a month. It’s roughly three times, so the combined salary has to be $60,000 a month qualifying income. How many people can do that? “It’s expensive and the reason a lot of younger people are being priced out. What you find in some instances is that parents may help out.” Since the start of 2009, inflation has started to fall back but all things are relative and Saunders says he does not expect it to fall much below 9%.