Adapting to the Future | The Outlook for Real Estate 2017

Economic Overview

Brexit and Trump: hardly the results one would have predicted at the start of 2016. But voters in the UK and the United States have spoken at the polls, with a backlash against the establishment. These pivotal choices will shape the politics of Europe and North America for the coming years, with no one quite certain as to the end result with either. Both the referendum and the election will have an impact on the Caribbean market in terms of investment and tourism. The BVI had its own defining moment with the release of the Panama Papers in May 2016. Adapting to change will be key to the future success, or otherwise, of the BVI’s economy.

As the UK starts to define its future relationship with Europe, the uncertainty over the nature of that relationship has led to a fall in the value of Sterling. Trading at $1.55 in October 2015, pressure on the pound increased in the weeks leading up to the referendum, before the pound plummeted to the low $1.30’s in the immediate aftermath of the Brexit vote. Currently trading in the low $1.20’s, pressure on the pound is predicted to remain while the EU and UK manoeuvre in the run up to Brexit negotiations in the spring of 2017. Critical to these discussions, will be the UK’s ability to retain access to the single market, while limiting immigration from Europe. “Hard Brexit”, the position favoured by the EU unless the UK concedes to free movement of labour, remains very much at the forefront of possible solutions, although the likely outcome is a hybrid solution somewhere in the middle. A “Continental Partnership” of controlled mobility of labour, while retaining access to the single market, which would leave the UK with a voice, although not a vote, in the EU single market process (see http://bruegel.org/2016/10/beyond-hard-soft-and-nobrexit/ for additional information on the options available to the UK). The recent signing of a free trade agreement by the EU with Canada, took seven years to agree and nearly failed at the last minute due to the complexities of the approval process within the EU. Negotiations with Europe will never be easy.

For the Virgin Islands, the relationship with the UK as an Overseas Territory will soon be the subject of a further round of discussions on the constitution starting next year, not least of which will be the UK’s own relationship with the EU and how this impacts the BVI. The BVI Government has recently signaled that self-determination as part of a new constitutional arrangement with the UK and a scaling back of the powers of the Governor, will be at the forefront of these discussions. While the question of independence has been aired on many occasions in the past, the move towards self-determination, devolving more powers to the BVI, has, in part, been triggered by the UK Government’s position on the BVI adopting a public register of companies, a move the BVI Government and financial sector have stated would have a significant negative impact on the financial sector. While the attack on multi-national companies avoiding tax in the aftermath of the 2008 economic crash and the implications of using off-shore vehicles to help them, was originally the focus of European and American ire, it was the release of the Panama Papers this year which hardened the UK’s position that a public register would be the solution to the vexing question of funds being hidden in so called off-shore tax havens.

In response to the increasingly determined efforts to stifle international financial centres, Dr. Orlando Smith, Premier of the BVI, created a task force whose remit was to implement the findings of the McKinsey Report which had been commissioned in 2014 to determine the future of the financial sector in the BVI. The Financial Services Implementation Unit, operating under the banner “BVI Forward”, is tasked with implementing the ten initiatives of the McKinsey Report, including simplifying the immigration and work permit procedures in the BVI and expanding the role of the financial services industry through value added business. BVI Forward “is the Government’s action plan for strengthening, diversifying and repositioning the financial services industry.”

In response to the changing fortunes of the financial services industry, the Government has looked to other sources of income to help shore up government revenues. In October 2016, the Government passed acts increasing Hotel Accommodation Tax to 10% and increasing duties on tobacco and liquor and is exploring other areas of increased tax revenue. While the private sector has criticized the increases, citing concerns on the impact of these increased taxes on the tourist industry, the Government remains committed to raising funds through other means apart from financial services.

In contrast, the BVI’s tourism industry has shown positive growth in arrivals as shown in Chart 2 which shows the ten year moving average for cruise ship and overnight arrivals between 2006 and 2016. Following the recession in 2008, the number of overnight visitors dipped, falling to 308,615 visitors in 2009 before recovering by 2015 to 392,302 visitors and continuing to grow in 2016. Overnight visitors in 2015 comprised hotel (30%), charter boat (51%), rented accommodation (10%) and own/friend (9%).

The importance of the charter industry to tourism in the BVI cannot be under-estimated, with the charter fleet the equivalent in size to several hotels. The industry benefits the BVI by creating business for smaller islands which would otherwise find it hard to survive independently. However boats operating within the charter industry (particularly crewed yachts) can choose whether they locate in the USVI or the BVI. Restrictive legislation on the number of passengers a boat can operate with in the USVI (the “six-pack” law), has been lifted, opening the way for many of these yachts to relocate back to the USVI, taking with them the additional income made through refueling and provisioning. The charter industry in the BVI is faced with operating challenges not experienced in the USVI with respect to labour, customs, immigration and trade licence regulations which makes it more difficult for American crews to operate in the BVI compared to home porting in St Thomas. Discussion of extending the hotel accommodation tax to the yachting industry has also been met with concerns by the charter companies. It remains important for the BVI Government to engage with this industry and understand the complexities of operating within the BVI.

Hotel visitors have shown modest growth, increasing by 17% between 2011 and 2015. Virgin Gorda has seen the closure of Biras Creek Hotel in the summer of 2015 and then the temporary closure for major renovations of Little Dix Bay Hotel in May 2016. These two closures total over 130 rooms and suites (approximately 10% of the BVI’s hotel room inventory) which has an impact not only on overnight arrivals but also on employment on Virgin Gorda.

With no significant hotel construction in the BVI since Scrub Island a decade ago, the Government is looking to encourage the construction of major tourism development in the BVI, whether a resort on Beef Island or a mixed used development at Prospect Reef Resort. The cruise ship industry, as shown in Chart 2, has seen the number of cruise ship visitors in 2016, pass the number of visitors that arrived at the height of the market in 2007/08.

As an industry that constantly reinvents itself with larger vessels, the BVI has had to make a significant investment in new cruise ship facilities which included a longer jetty to support larger ships and a shore side facility, Tortola Pier Park, which provides retail and tourism outlets adjacent to the pier. The rebound in cruise ship arrivals after the opening of the pier at the start of 2016 saw cruise ship arrivals increase from 378,083 in 2014 to 667,223 in the twelve month period to August 2016.

The UK’s changing relationship with the EU and the proposed discussions with the UK on the Virgin Islands’ constitution, combined with unprecedented challenges in the BVI’s financial sector, indicate that the direction of the Virgin Islands is being determined as much by external factors as internal processes. Adapting to these changing conditions will be the challenge for the BVI politicians as these new roles materialize. While the UK/BVI relationship will be defined in the coming years, the United States remains the dominant influence on the region. The election result, with President-Elect Donald Trump and the Senate and Congress both under Republican control, opens the door to implementing Trump’s vision for the future without the political impasse experienced by President Obama with a Republican led Congress. As no one is quite sure yet what this vision is, the potential impacts on the BVI and wider Caribbean are harder to predict. However, a harder stance against Cuba may result in a slowing down in the thawing of American/Cuba relationships but a Republican led government is normally more favourable towards international finance centres like the BVI.

The fall in the Sterling-Dollar exchange rate is likely to limit both tourism and investment from the UK, at least until some stability returns to the currency. While tourism and investment in the BVI have traditionally been dominated by the American market, there have been a number of significant investments made in the BVI by British, and European, investors. Ultra-high end investment may not be as affected by currency fluctuations as middle to low end investors, but the 20% reduction in value of the pound over the past twelve months will nevertheless impact British investment into the BVI.

Last modified onFriday, 17 March 2017 16:47

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