The first three months of the year were unprecedented in many ways for the Cayman Islands real estate market (2022 Cayman Real Estate First Quarter Review). I expect to see a continuation of growth through the second quarter of the year as the island continues its COVID-19 pandemic recovery and visitors return to our shores in even greater numbers. However, one key factor could impact the market. The big outlier for 2022 Cayman real estate is interest rates.
Cayman’s market continues to boast historic demand, a trend that will not change anytime soon. However, earlier this year, the US Federal Reserve announced several planned interest rate hikes aimed at stemming inflation and cooling consumer activity. In fact, according to Bloomberg, those hikes may come sooner and more aggressively than first announced. The goal is correcting the economy in the United States, and the result will have a trickle-down effect felt by the Cayman Islands’ real estate industry.
Many, if not all, Cayman Islands lenders use the US federal prime rate as the foundation for their rates. That means borrowers in Cayman can expect to see interest rates rise in step with those in the United States.
Impact of Increased Mortgage Rates
There are two sectors, in particular, where we may see behaviour change as a result of increased lending rates.
First, this will affect consumers in the lower end of the market; young professionals, first-time buyers, individuals requiring financing and looking to be as efficient as possible with their investment. Higher inflation rates make borrowing more expensive and could deter potential buyers from purchasing.
Similarly, it also could preclude some consumers from even qualifying for financing. Banks have very specific thresholds when it comes to a potential borrower’s income and debt ratio. As interest rates increase, it becomes harder to meet banks’ financing requirements.
Secondly, I think we’ll see an increase in developers and landowners starting to build on parcels they already own. Developers I talk with have three, four, maybe even five projects in the pipeline. So I predict as interest rates go up, we’ll see less land acquisition and more construction, especially with such a strong Cayman rental market. Developers and landowners can be confident in the future return on their investments.
I should caveat this by reiterating that I do not expect interest rates to cool Cayman’s market across all sectors. Much of the growth we’ve seen in the marketplace has come in the high-end luxury market, particularly within the traditionally strong areas like Seven Mile Beach and communities like Vista Del Mar. Those investors will not baulk at an increased interest rate of a few percentage points. For high net worth investors, Cayman’s overall product offering will trump any mortgage rate increases.
Taxing the Rich
The current discussions in the US to review and change the taxation of high net worth individuals will only drive their interest to protect their wealth. And as we know, real estate is a time-tested vehicle to do just that. So the talk, and it is only talk at this point, of increasing the Capital Gains taxation structure in the United States will only further interest from the north in the Cayman Islands.
Under the new proposal, households with net wealth over US$100 million would be required to pay a minimum tax rate of 20 percent on unrealised capital gains. In other words, households would owe taxes on capital gains each year, even if the underlying asset had not been sold, and amounts paid would be treated as prepayments of future capital gains tax liability. There is a lot more to it but it has certainly hit a nerve for the wealthier Americans. Have a read: https://www.mondaq.com/unitedstates/corporate-tax/1177676/notable-tax-takeaways-from-president-biden39s-budget.
2022 Cayman Real Estate Supply and Demand
Generally speaking, the second quarter for the 2022 Cayman real estate market tis going to continue exactly as the first quarter did. There’s going to be more demand and less supply. We will see more record-breaking numbers in terms of inventory lows, as well as record sales prices in record time, in key locations. For the outer districts not currently seeing the extraordinary demand, worry not. Town is growing, roadways are expanding and reaching further and further out, so investments past prospect to Lower Valley, Newlands and Bodden Town will benefit in time. Watch this space.
(Source: CIREBA. Please note that this is a broad analysis of the overall market. Please reach out for a more bespoke detailed report tailored to your personal property journey).
Cayman Real Estate is a Sound Investment
Geo-political events have caused a lot of instability in the capital markets. And right now, there are very few investments more sound than Cayman Islands real estate. As more visitors arrive on our shores, the rental market is strengthened, investors are attracted, and consumer confidence goes up overall. This is especially true in the condominium and apartment sector. Individuals are always looking for somewhere low risk, with a potential for a healthy return to invest their money. A property that caters to short term vacation rentals, as well as long term resident rentals or one’s primary residence, is a safe asset. Plus, a condo as a short-term rental investment in time becomes the perfect hideaway for retirement. That’s the long term mindset.
Lacovia Seven Mile Beach
The Lacovia redevelopment project is slated to begin this year, and this is going to make a significant impact on the Seven Mile Beach condominium sector.
The fifty-five units currently in one form of rental or another are going to come off the market. This will drive a surge in demand for the remaining two and three-bedroom units along that stretch of Seven Mile Beach and the corridor.
Lacovia is already 70% sold, and units are starting at US$5.4 million. The start of construction will spur even more consumer confidence, and we know what happens when demand increases and supply decreases! That’s right, upward pressure on pricing. Interested parties holding off because they want to wait until construction begins will be exposed to the next of a few planned price increases. Take advantage now.
Real Estate Opportunities
Market patterns and trends always repeat themselves. Seeing historical market reactions to cyclical, seasonal and predictable impacts gives insight as to what is around the corner. With this, you can strategise your individual property plan. No matter where you are on your property journey, there is always an opportunity to take advantage of. You just need to invest the time to plan now and let it unfold. So let’s plan together.