Market Report - July 2009

AN HONEST APPRAISAL OF THE CAYMAN MARKETPLACE

REVIEW

We last forecast a continually slowing economy with more inventory coming on the market and prices continuing to fall. We also noted that our local market should continue to provide the bright spots

General Outlook

That is exactly what has happened. Supply is up - but not as much as we had feared which demonstrates the financial strength of those who invest here and also indicates a growing reluctance for people to liquidate their offshore nest egg. Prices have continued to come down but on average not anywhere near as radically as our neighbors up North. Those who need to sell and have been properly advised on pricing aggressively  their properties are selling. And the difference between those price levels and many of the listing prices is surprisingly wide.

RESIDENTIAL

Detached homes have taken the biggest hit on pricing. The number of sales has been static relative to this time last year and even 6 months ago. However there has been a 27% loss in value over a year and most of that (18.5%) has occurred over the last 6 months. So the sales activity is pretty strong - but the sales are occurring at lower price levels. The fixer uppers are being snapped up and the market seems interested in purchasing again at these lower price levels. The waterfront home supply is pretty small at the best of times and this contributes to the urgency of buying when the really good buys appear on the market.

CONDOS

Conversely, in the condo market the # of sales is off significantly - 30% over the past 12 months with 20% of that occurring over the last 6 months. However, the value levels are down only about 15% and that has virtually all happened in the last 6 months. If the volume of sales continues to drop, the sales prices will surely follow. But the volume of sales seems to be picking up this summer.

Despite several sales this summer, inventory in Brian Butler's pre-construction products is still available as they push to complete Renaissance. The best deal there is a 3 bed, 3 bath third floor beachfront unit of 2,002 sq. ft. at only US$1,595,000. This is quite an attractive development on the North end of Seven Mile, and brand-new. Due to market circumstances Frazer Wellon has postponed the start of WaterColours for the present. The most notable sale of late is a beachfront Ritz-Carlton unit resale which is contracted for US$800/sq. ft! Much lower than what the developer and many other hopeful resellers are asking.

There is no one development where the deals are abundant like they were in the Cayman Club last year. Now you have to search out the motivated sellers - but there is not always one in every project.

Very much a contemporary alternative and certainly new within the Cayman market, The Seaview Residences have taken much of their design inspiration for both building and interiors from Europe. Even within this challenging market and being off Seven Mile Beach, excellent sales have been achieved within a short period of time, with the development being embraced by a mixture of local and overseas purchasers, to the extent that only one or two units remain.

Commercial

It sounds like the Caribbean Plaza which has been on the drawing board for the site across from the Caribbean Club is back on the front burner. Always seen as a natural extension to the Caribbean Club, the Developer Joe Imparato, is creating a commercial centre of some 76,000 square feet split between retail and office space, anchored and dominated by financial service, attorney and trust industry tenants. Closely mirroring the style of the Caribbean Club the development will feature a bridge walkway between the plaza forecourt and the Caribbean Club. The development, set out largely in three separate buildings is likely to break ground by the fourth quarter of this year.

Another deal in the works which will very likely happen is The Cayman Office Campus, a 110,000 sq. ft. office complex to be built on the property between our two Coldwell Banker offices on West Bay Road. This is projected to be 3 Class A, energy efficient, hurricane resistant office buildings which will be done in 3 phases. Phase I will be approx. 37,000 sq. ft. over 3 floors with exceptional parking ratios and easy traffic access to the By-Pass and West Bay Road. Final details of the project are being worked out now, so if your company requires lease space which is highly visible, easily accessible, and reasonably priced, get in touch and we will give you more information.

RAW LAND

Raw Land continues to sell fairly well and there is some evidence that trend is going to accelerate. Buying and holding raw land in a place with no property taxes at a time when inflationary pressures on the US Dollar are increasing daily seems to be a very prudent play.

Sister Islands

Cayman Brac is well on its way to complete recovery with the opening of the new luxury Alexander Hotel. www.alexanderbrac.com With this much needed boost to tourist accommodations, the real estate market is sure to pick up speed with the affordable property in Cayman Brac. Cayman Brac has everything from beachfront condos to ocean front luxury homes, multi-family properties and of course great deals of bluff land. It will likely have a protected anchorage soon as well. With the Stamp Duty waiver and extra savings on duty free building supplies - now is the time to invest in Cayman Brac.

Tourism

Air arrivals are down YTD by just over 13%, cruise ship tourism YTD is also down by 10.5%. Surprisingly, this will be the 3rd consecutive year cruise passengers have declined. However, as our tourism is based on a traveler of better than average means, we are hopeful the negative impact of the US economy will be lessened - especially in the Winter Season. The Summer Season, however, will undoubtedly show a continued decline in tourist figures, both air arrivals and cruise visitors. This will lower return on investment numbers for tourist rental properties. But even with these declines, beachfront condos can still pay their expenses and provide a small positive return which is higher than bank CD rates. Considering the reduced prices of many properties, the future appreciation will provide savvy investors of premier properties with excellent long-term gains.

Under current circumstances the 2 most important factors in maintaining and increasing tourism are the cost of the product and the safety of the destination. As we own the Coldwell Banker Master Franchise for the Caribbean we travel extensively in our territory. We are finding a number of the other Caribbean Destinations to be more expensive than Cayman: i.e. Bermuda, St. Maarten, St. Barts, and Barbados, just to name a few. With regard to safety Cayman has a great reputation as a safe destination, and the new Government sounds serious about keeping it that way!

Construction

If you check the bookings of the Hotels and Condos and the tourism figures, the effect of the world's economic crisis is very evident. But if you drive around Cayman and look at all the construction and then hear of the new projects which are ready to go to Planning, it makes you wonder. It is a tribute to the resilience of our market place and the Capitalist System that allows it to flourish. Something the US used to know all about, but is rapidly forgetting.

Rentals and Property Management

The supply of rental properties continues to increase so it is no surprise that rental rates, especially Residential, continue to fall. We have been contacted often lately by tenants looking for advice on whether to renew at previous terms. There are other options out there but moving and refit costs are high for Commercial space. It might be better to renegotiate your current leases rather than move.

Government

Newly elected leader of Government Business Hon. McKeeva Bush has made it very clear that he will do everything in his power to encourage business in Cayman. Speaking recently to a packed house at a Chamber of Commerce function Mr. Bush admitted to the sorry state of Cayman's finances (a near US$600M deficit) and spoke of the many areas which need fixing locally to ensure Cayman is the place people want to "come, live, and spend money" He touched on Immigration, Crime, Planning, Education (technical training), Cruise facilities & shipping as areas needing immediate attention.

With regard to crime Mr. Bush said in essence, a criminal is a criminal... and tough measures are sometimes needed... the punishment must fit the crime... but the public must help with information". He announced a Skills Today; Jobs Tomorrow program at UCCI which would focus on retraining and also a technical initiative. He said if we want to stay in the forefront of Cruise Tourism, the cruise industry wants berths now - not in 3 or 4 years. He wants to adjust Immigration regulations to attract and welcome people who will spend money; eliminate bureaucracy which inhibits business; and consolidate all Government loans. He intends to open new investment offices in places like Emirates and Hong Kong to attract investors. He called for the Private Sector and Chamber to help in these initiatives and to come up with additional ideas. When prodded, he also pledged to do what he could to reduce the expenditure side of the ledger.

Mr. Bush can be very inspiring and he is a  leader. We believe with a combination of proper guidance and his natural charisma and energy, progress can be made in Cayman over the next few years despite the difficulty in achieving anything under current worldwide economic conditions. While the final results will likely not occur in the 3 - year timeframe Mr. Bush would like (because of his governments 4 year term), the changes he envisions are necessary to improve Cayman.

Recently Planning Director Kenneth Ebanks was promoted to the Ministry of Financial Services, Tourism  Development (Planning falls under this Ministry) with Haroon Pandohie taking over as the Director of Planning. We have worked with Haroon and found him to very reasonable and efficient and someone who works to get things done. We wish him the best of luck in this post which is a crucial cog in encouraging needed development in Cayman.

The Future of Cayman's Financial Industry

In an excellent article in the Cayman Financial Review, Richard Rahn describes what effect the world economic crisis is having on Cayman Financial Center and whether we are in trouble. The crux of the matter is that what is happening elsewhere -especially in the US and UK - is driving business offshore instead of stopping it. Not only is it driving business offshore, but now it is driving people offshore. Cayman is no longer dependent on private banking but has shifted over the last 10 years to institutional banking. All the mechanisms are in place to allow us to continue that unimpeded by international restrictions. In short - we have satisfied all the international requirements to pass any sniff test. Cayman's addition back to the White List will continue to help improvements.

Our real problem is the negative perception of Cayman internationally - and that is something we can rectify and are in the process of doing. Authors of fiction like John Grisham have not done us any good. It is time we became much more aggressive in rebutting the distortions continually perpetrated by the media and uninformed foreign politicians in the UK and USA. We have not been a place for criminals to stash ill-gotten gains for many years. We are a globally beneficial financial center wherein every resident pays substantial tax burdens by taxing consumption, which is the fairest way to tax. While President Obama plans to further squeeze US citizens through direct taxation to fund his vision, places like Cayman are bound to look more and more attractive. Cayman's economic freedom with protected property rights, no double capital income taxes and clear regulations can often be beneficial. Meanwhile, just having some assets offshore, say in a vacation property, is reassuring to more and more people.

Forecast

We see no light at the end of the tunnel yet and so expect more of the same for the next 6 months. If Obama gets much of his socialist agenda passed in the US, we expect to see many more American purchasers which will improve our foreign market. Locally, we expect continued slow growth with folks being increasingly careful with their purchases. So our forecast then is for continued cloudy skies with some sunny patches.