Friday, December 05, 2008The Outlook for Real Estate

Edward ChildsPredicting the Future

Predicting the future has never been more difficult. A tumultuous year for real estate in the major developed economies has resulted in a melt down in the banking sector. Major institutions, once the formidable backbone of Wall Street, have succumbed to the financial crisis caused primarily by imprudent lending practices. Who’s next? Where will it end? The looming election in the States has become a sideshow as American politicians bicker about how best to save the most powerful economy in the world, eventually passing what has been billed as the Wall Street Bailout.

So, against this backdrop, how am I expected to predict the state of the real estate market in the British Virgin Islands six months, a year or even thirty days from now? Seen through the eyes of a North American or European investor, the future could not be more depressing. Seen through a pair of sun glasses sitting beneath a palm tree on a spectacular deserted beach here in the BVI – well, it all looks a bit different. A real estate investment in the British Virgin Islands has been a sound investment historically and while prices may stabilize for a while, we are not predicting a crash. Many of the factors impacting property in western markets (particularly rapid increases in values in recent years) have not played a part in real estate in the BVI where there remains a strong local market.

To better understand the future of real estate here in the British Virgin Islands, it is important to understand some of the foundations of the industry that have under pinned values over the years.

We have a US Dollar economy where North American investors do not have to deal with exchange control and, in recent years, European investors have capitalized on a healthy exchange rate to the US Dollar in which local real estate deals are transacted.

The link to the UK and Europe as a British Overseas Territory has maintained a stable political climate that has allowed the off-shore financial sector to flourish. The standard of living, on a GDP Per Capita basis, is one of the highest in the region, with only Bermuda and the Cayman Islands (also both British Overseas Territories) having higher standards of living on this basis.

A tax efficient economy means investors do not pay personal or company taxes, capital gains tax or inheritance tax. Property taxes remain very low compared to North America and Europe.

The landholding licence system, while bureaucratic and liable to slow down real estate sales, has prevented speculation in property over the past forty years which has benefited the islands through a lack of uncontrolled development. Only over the past five years have new developments been planned with only one development, Scrub Island, breaking ground.

Investors have become more sophisticated. Overseas investors have, for the most part, become cash purchasers despite real estate values following a steady upward trend over the past few years. Against this, there has been growth in the local investment market, as local business men and women have invested in commercial and residential real estate, mindful of the income this type of investment can generate, particularly once any mortgage is paid off.

The real estate market in the British Virgin Islands is small, really very insignificant compared to the massive markets in North America and Europe. While we bemoaned the slow pace of sales in the boom years to mid 2007, primarily due to the landholding licence system adopted in the BVI, the very fact that the local real estate market is not dependent on substantial sales targets has, to an extent, insulated the market from the excesses experienced in North America and Europe, first in substantial annual increases in values and now, just as rapid decreases.

With these factors in mind, the traditional real estate offering based on a house or home site in the hills or overlooking the sea, remains the main product available to purchase in the British Virgin Islands. We are not about mass condominium development where overseas investors seldom visit (although there have been some excellent small condominium developments at Old Yarde Inn on Virgin Gorda and at Nanny Cay on Tortola), but about the sale of homes for the personal use of the owners which may be rented out provided this is permitted by the Government. Investors are encouraged to visit, be part of the community and contribute to the economy. While development of the resort sector, and with it expansion of the available residential inventory, is important to the Government, there remain concerns that permitted development conforms to the historical development of the islands – low density, environmentally sensitive development such as that experienced at Little Dix Bay on Virgin Gorda.

While the latest turmoil in the market, experienced in the late summer months of 2008, has yet to make a full impact on the world economies at the time of writing this article, we expect the property market in the BVI to remain stable. The small number of sales reflects a lack of real estate inventory in the islands and even if the number of investors looking for property falls this year, demand is still likely to remain greater than supply.

Investment in the British Virgin Islands remains very much a personal acquisition, typically as much for enjoyment as for a return on investment. The islands remain a popular destination for tourists, many of whom choose to make the islands their second home. The islands have a slogan “Nature’s Little Secrets” – they are quiet, still relatively undeveloped and, above all, friendly.

While I do not have a crystal ball, I would still prefer an investment in the British Virgin Islands to North America or Europe. With a house in the BVI, I can still sit under that palm tree on that deserted beach and think about tomorrow – but perhaps not about the day after that.

Oyster Publications Inc, PO box 3369, Road Town Tortola, British Virgin Islands, VG1110