Cloudy With A Change of...Sunshine?
Words by Tully Cornick
Given the current economic climate, one could question whether investing in the Caribbean is a sensible thing to do. The short answer is: of course it is… but you will need to bring cash and tread wisely to avoid stormy weather.
The Caribbean, like most other regions on the planet, continues to face economic duress and a slow recovery from a severe global economic downturn. The region as a whole is heavily dependent on tourism and finance and, consequently, on the state of welfare of the Americas and Europe who account for many of the tourists and much of the invested capital. Data from the Caribbean Tourism Association shows some of the jurisdictions that have been impacted by the decrease in tourist stopover arrivals from 2007 to 2009. These countries include: St. Vincent and the Grenadines (16%), Montserrat (19%), Bermuda (23%) and Anguilla (25%). Across the region the number of real estate projects has fallen from approximately 125 in 2008 to approximately 60 projects today. Clearly, when the Americas and Europe suffer, so does the Caribbean.
As income from the Americas and Europe has diminished, Caribbean governments have been looking to prop up their economies with public spending, but many have found that they do not have the necessary headroom or access to capital to do all that they had desired. As governments struggle to address their current fiscal constraints, attracting foreign investment back to island economies has become an increasing area of focus. The benefits are clear: foreign investment in the Caribbean equates to jobs, fees for governments, opportunities to develop infrastructure and local prosperity.
While the Caribbean has, to an extent, relied on its natural beauty, attractiveness as a tourist destination and, in some jurisdictions, its tax legislation to lure investors, it is the real estate sector that has historically attracted and benefited from foreign private and corporate investors. The number of tourism development projects – hotels, resorts and mixed-use developments – and the secondary housing market throughout the region are evidence of this. The likes of Limegrove in Barbados, Camana Bay in the Cayman Islands and Punta Cana in the Dominican Republic are wellpublicised examples. Many governments are keen to see continued development of projects like these and in some cases they are providing assistance. In Barbados, the government has guaranteed a portion of the debt for the development of a Four Seasons branded mixed-use resort. In The Bahamas, the government has provided various concessions to the developer of Baha Mar, a multibilliondollar tourism investment project. In the Dominican Republic there has been significant spending on infrastructure to support Punta Cana. In the Cayman Islands the government will provide a 25 year Residential Certificate for Investment to those that meet certain criteria, such as, a net worth of at least US$6 million, investment of at least US$2.4 million in licensed, revenue-generating businesses that employ at least 50% Caymanian workers, and the investment must add to the economic life of the Cayman Islands, amongst others.
However, as one might expect, there are investments throughout the Caribbean that have not performed according to plan. A cursory investigation will reveal various developments that have not been completed or are in the hands of banks and administrators eager to exit the investment. This does not necessarily mean these projects, or new ones, are not worth pursuing. Indeed, those with access to cash or financing may find themselves one of the privileged few who can acquire assets at a fraction of their prior cost and benefit from the so called ‘second developer’ status; Baha Mar in The Bahamas and the Four Seasons in Barbados were both previously stalled projects. If one agrees with the view that the welfare of the Americas and Europe impacts the Caribbean, one can subsequently form a view as to when the West will come out of its current doldrums.
Earlier this year KPMG published the results of a survey with various lenders in the region who have a combined exposure in the Travel, Tourism and Leisure sector of US$2.58 billion. Lenders were asked about the key lessons learned over the past year. In general, the responses revealed that cash support from promoters would be key going forward as well as a back-to-basics return to a conservative, long-term approach to lending. In the view of lenders, the primary cause for failure has been unrealistic projections or forecasting. Other reasons cited included lack of cash equity, poor cost control and a lack of strong management and financial control.
What has become increasingly clear, therefore, given the current challenging environment, is the importance of doing one’s homework. Although the Caribbean is seen as one region, its legal and cultural makeup is incredibly diverse. It is crucial that one understands the local rules and regulations regarding foreign investment. Certain jurisdictions, such as the Cayman Islands and The Bahamas for example, require local partners/ shareholders to have a controlling stake if a company is to be established and do business there. In Bermuda and BVI the laws on purchasing land are significantly different to other islands. Using a reputable local legal or financial advisor can certainly help eliminate some of the risks. Given the desire by many jurisdictions to attract foreign investment, during this time of tight liquidity, as well as the number of assets for sale and projects that need funding, this may be an ideal time for investors. The lenders in the region remain cautious but are still here and still lending. Just make sure that if you have not yet secured funding, you have a solid investment plan, a strong team, some cash equity and that you have completed your due diligence.
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