Strategy for the Real Estate Market
Just as the Government has looked in depth at the future of the financial services industry and how both Government and the private sector can adapt to new challenges and markets, the Government has also reviewed direct investment in the BVI with the aim of implementing a range of initiatives. The appointment of Hon. Marlon Penn as Junior Minister for Trade and Investment, has led to a review of the approach Government has previously taken to investment, with a particular emphasis on removing red tape which has, in the past, deterred many potential investors.
Key will be the introduction of the Investment Strategy Act, which will also contain consumer protection legislation, which should be enacted during 2017. In addition, the Government is engaging with CAIPA (Caribbean Association of Investment and Promotion Agencies) which will eventually lead to the establishment of the BVI’s own investment agency. The BVI investment agency will be responsible for promoting the BVI internationally and assisting external investors locally, in much the same way that BVI Finance promotes the financial sector overseas. Part of the review will be the investment incentives open to overseas investors, both in terms of financial incentives and also status. The current annual work permit status is recognized as not providing sufficient stability to those looking to make significant investment in the BVI.
Already announced is the intention to reduce the red tape associated with immigration and labour processes in the BVI. Long seen as an impediment to investment, these processes will become part of “One Government” whereby companies and individuals will be able to access Government information on-line, including making applications available through relevant department web-sites to reduce the burden on both the applicant and Government with processing. A feature of 2016, has been the focus on local entrepreneurship, the encouragement of local business initiatives, both existing and as start ups. The Branson Centre of Entrepreneurs Caribbean, the MWM Start Up Programme and Entrepreneurial Forum plus the Trade Department’s initiative offering training to local businesses, have all opened the door for local businesses to pitch for training and awards, with a number of international entrepreneurs offering their time and experience to help these initiatives. With the opening of the Tortola Pier Park, many local business people have been afforded the opportunity to put ideas into practice.
It is notable however, that with all these initiatives, the policies governing the real estate sector have not been reviewed. With stamp duty at 12% (for overseas investors) and Hotel Accommodation Tax at 10%, there are opportunities for Government to increase revenues through encouraging investment in this sector.
Table 6 indicates the change in stamp duty revenues between 2010 and 2015, the majority of which are from property transactions. Previously, annual revenues from stamp duty averaged between $4M - $6M, but the sale of a substantial property in 2014 and the stamp duty revenues generated by Oil Nut Bay and Moskito Island, have seen annual revenues increase by 100% or more in 2014 and 2015.
The statistics we have reviewed above help to define the current state of the real estate market with some of the key points outlined below :
• Over 200 villas are on the market priced above $500,000 and yet there are on average only around 20 to 25 villa sales, or less, a year.
• The potential stamp duty revenue on the for sale villa inventory amounts to over $50M.
• Assuming annual villa sales increase to thirty sales per annum at an average listing price of $1.5M, the stamp duty revenues generated would be $5.4M annually.
• Stamp duty receipts at Oil Nut Bay and Mosquito Island have so far been in excess of $20M based on land sales. Both developments will continue to generate significant stamp duty and Hotel Accommodation Taxes as the developments are sold out and developed villas are sold in the future.
Overseas investors face a number of restrictions on the use of their properties which limit the investment appeal of property in the BVI compared to other Caribbean jurisdictions.
• In the BVI, overseas investors have no clear direction as to whether they can rent a property unless they acquire a property in a resort community where villa rentals are permitted. Purchasers of land are normally advised to apply for a trade licence to rent once they have completed their villa with no guarantee that permission will be granted.
• Having acquired a property, an overseas investor is limited to six month’s personal occupancy each year unless they are prepared to apply for annual residency.
• Having acquired or built a property, no changes are permitted to the structure without first applying to Government for a revised landholding licence to reflect the proposed change. This applies even to the addition of a bathroom or bedroom and this requirement has been sufficient to prevent many owners from investing further in their properties.
• Consent to sell is required from Government even if the property is being sold to a BV Islander.
• While the approval process for landholding licences has vastly improved from a decade ago when approvals would typically take longer than a year, there remain areas where the process could still be improved, particularly once Cabinet approval has been granted and the draft licence is being prepared for signature by the Governor.
It would certainly be encouraging if the Government were to review the policies relating to the real estate sector and formulate a land policy that favours investment. To kick start a discussion, the following issues need to be addressed.
• The ownership of land by foreign investors is a divisive issue in the BVI. The BVI Territorial Song contains the following words : “To preserve our beauty we devised a plan; to retain ownership of our precious lands!” and the alienation of land in the BVI is not to be taken lightly. However, once alienated, Government could enable the sale of property from one foreign investor to another to take place, subject to status, without some of the red tape which currently delays processing. It is interesting to note that neither the Cayman Islands nor the Turks and Caicos Islands, also British Overseas Territories, require landholding licences for foreign nationals to acquire real property in either jurisdiction. While the landholding licence process contains many benefits for Government (it helps prevent speculation, gives BV Islanders pre-emptive rights over land acquisition and allows Government to vet incoming investors), a sensible land policy would assist Government to plan for the future without upsetting the delicate balance of land ownership in the Territory.
• Once a foreign national is licensed to hold property in the BVI, why impose restrictions (of a bureaucratic nature) on further development? Planning policy is the correct tool to determine whether further development is warranted and the requirement to change a landholding licence prior to planning being obtained, is an unnecessary step in the process. This is particularly vexing for purchasers of land who frequently have not crystalized their plans for a home at the landholding stage, but are compelled to outline their development plans when making an application, following which it is difficult to make changes.
• The restrictions on foreign nationals being able to use their homes for more than six months a year, unless they apply for annual residency, will hopefully be reviewed by Government when they consider the Investment Strategy Act mentioned above. While immigration policy should not be altered lightly, restrictions of this nature on property ownership act as a deterrent to investment.
• The current policy on allowing foreign investors to rent is less than clear, unless the property is in a recognized residential resort development. If a property already has a rental history, and a trade licence, then a purchaser is also more likely to be granted consent to rent in their landholding licence, subject to also obtaining a trade licence. However, Government needs to look at the rental sector and decide if it is an industry it wishes to encourage or discourage. There are many advantages in encouraging villa rentals : the collection of hotel accommodation tax, the employment of staff, money circulating in the economy from car rentals, food provisioning, restaurants and day trips to name but a few. With significant risk involved in the development of new resorts, particularly on greenfield sites, the growth of the villa rental market could help increase the overnight tourism industry without placing a strain on the social fabric of the island.
By not encouraging the villa rental market, the Government is forcing many owners to leave their villas empty for much of the year. In much the same way that a successful marina needs to encourage activity through charter companies and overnight berths and minimize the number of long term berth rentals, so the Government should actively encourage investors to rent their properties, thereby making use of many additional rooms in the BVI to circulate money in the economy and raise accommodation tax. While resort development will be needed to provide a different type of destination vacation, the villa rental market is using already available rooms, thus limiting the impact of development. Resolving these issues is only part of the solution, but encouragement must be given to overseas investors to view the BVI as a place where property investment makes sense. The BVI possesses some wonderful natural assets which draw overseas investors to these shores, but a holistic approach to welcoming those same investors needs to be understood. Improved ports of entry with “nothing to declare” customs lines, better infrastructure (particularly roads and communications), welcoming service in restaurants and hotels and (my biggest gripe) less rubbish around the island, will go a long way to making tourists and investors feel welcome.
The future has challenges ahead, whether Europe, America or the BVI. While the recession is behind us, the economic recovery has been slow and unpredictable with the BVI facing uncertainty over revenues from the financial sector. The Government has identified many of these challenges and embarked on a range of initiatives to drive the economy forward, with a focus on broadening the economy and attracting investment. In twelve months’ time, it would be good to report on how the Government has also tackled investment in the property sector and reduced the bureaucracy which has generally limited investment in the BVI.