Real Estate in Cayman
The problem with Cayman real estate is that it was driven by a tax-free wealth preservation and speculative marketing structure. Most non-resident buyers purchased property with the expectation that it would either increase in value or be paid for by rental returns. Since their investment was offshore, any equity growth or value appreciation would remain tax-free until it was repatriated.
Since no one likes to pay taxes the wealth captured here was seldom repatriated; it was either land-banked (sic) or rolled over into more expensive properties.
The strength of this recession changed attitudes a lot. Foreign private owners are not only cashing out because they need the money but also because of tax treaties and new opportunities — the world is saturated with great deals and great places to live. Even our Caribbean neighbors are getting their act together; just look at the homes in Caribbean lifestyle magazines or at St Kitts and Nevis, where they throw in a new passport for a purchase over $350K.
Ouronce powerful and unique sales pitch resulted in the continuous expansion of property investment, development and price increases, a self-fulfilling prophecy that encouraged more foreign buyers. The residential population and expatriate worker also dove into real estate investment with a passion. Most local wealth in Cayman is now buried in real estate.
This once powerful investment message is worn out, the bubble has burst and we don’t have a sales pitch to fit the new reality. If you remove speculation from the equation, the only justification for purchasing real estate is income producing, lifestyle improvement and basic housing needs. Hence the hope expressed above that the new economic development projects will soak up the inventory currently on the market. Besides residential real estate, what are we going to do with the huge glut of empty commercial property in Cayman? When government moves into its new building we will have nearly half a million square feet of vacant office space in Cayman. Think about that for a moment.
Unfortunately inventory and market activity are interlinked: if the market expands our inventory will also expand, especially in Cayman where we have so many big investors, experienced developers and freelance contractors sitting on all those land banks, investment funds and planned projects.
As more land banks are liquidated at distressed prices the cost of new development is reduced, which makes it more competitive to develop. This just-in-time, price sensitive, manufacturing capacity will anticipate any market growth and our inventory will expand before demand does. When you consider that there is also an overhang of property waiting for the market to improve, it is unlikely that we will return to the exciting appreciation led market growth of the past.
Our only solution is real economic diversity and expansion. Cayman is no longer unique in this new global marketplace. If we want to move forward we need new industries, new active business investors and more people living and working here. While we attempt to work those socially sensitive issues out, our competitors are aggressively inventing new opportunities.
The best bet for our real estate industry is to switch from selling market appreciation and focus on selling value within the current marketplace. The sooner that happens the quicker the industry can reboot.
Category: Viewpoint
It is time that we revisit who can rent apartments in Cayman.
Since we emulate Bermuda in most respects, a modification to their rules should be considered.
Not sure what you mean. As I understand it, there are no restrictions on the rental of property in Bermuda, apart from a very small proportion of “affordable housing” available to Bermudians only. Because of the shortage of suitable property, rent in Bermuda is shockingly expensive and the rental housing stock is old and generally poor quality. If you think the cost of living here is high, in Bermuda is it eyewatering.
Bermuda has very stringent rules concerning the purchase of property, but Cayman is well beyond being able to implement that sort of restrictive anti-competitive nonsense. Anything more certain to nail down the coffin of the Cayman real estate industry is difficult to imagine. Plus, whilst it is getting worse here, I don’t believe that Cayman even comes close to the level of xenophobia and race hate which prevails in Bermuda, which their property laws are designed to promulgate, and which will, eventually, be Bermuda’s downfall.
Not sure which comment to refer this to, but I’d like to make clarify the comments about the ‘garages’ turning into rental facilities. To call them ‘rental units’ is the biggest joke of the day. These places are health hazards with the gas hooked up illegally and don’t have hot water. If there is a/c (window unit), more of the cool air escapes than stays inside.
It’s a disgrace and shameful that we allow anyone to live in those conditions!
You know who you are!!! SLUMLORDS!!
Anonymous9
Yes the conditions are bad. However it is many times all that the workers can afford on their poverty wages.
The rental situation remains artificial. If the law of ‘supply and demand’ was really working, rents would have fallen dramatically. As it is, the asking price for a typical one or two bedroom unit has hardly changed over the past 2 – 3 years. The conclusion must be that the owners/landlords can afford to leave the properties empty because they are fully paid for and there are no loan payments to cover.
This contributes to the stagnation of the local economy. People paying less rent have more money to spend on other things; those paying higher rent, don’t.
I haven’t looked at 1-2 bedroom units, but larger places have certainly had a pretty decent drop in rent the last few years. Could be that supply and demand is still working, but people who were living in larger places have had to down-size and are now living in the smaller places keeping demand up in that area 🙂
The rent of my 2 bed has dropped from $3000 to $2100 in 18 months, that’s almost drop of a third
A comment on the tax-free status of real estate in Cayman. If you are a US citizen, and this includes all Caymanians with US passports, and you sell a property in the Cayman Islands for more than you paid for it, you are required to pay capital gains tax to the IRS unless it was your primary residence for two of the last five years. Failure to do so is tax fraud. Any US citizen who owns rental property in the Cayman Islands,and this includes all Caymanians with US passports, is required to pay income tax to the IRS for all rent received.Failure to do so is tax fraud. US citizens, and this includes all Caymanians with US passports, are taxed on their worldwide income. Salary froma job overseas is only tax free for the first US$86,000. Anything you earn from your job above this amount is taxed by the IRS and failure to pay it is fraud. If you are a US citizen, and this includes all Caymanians with US passports, you must submit IRS tax forms yearly, even if your total income is less than US$86,000 and you have no other source of funds – you will pay no income tax on this but you must still submit the forms and explain why you do not owe. Failure to do so could result in an unpleasant conversation with the IRS if you move back to the States, and you will have to explain why you have not submitted tax forms for the years in the Cayman Islands and try to prove that you did not owe because you earned less than US$86,000. If you are audited by the IRS (and you live overseas), and you have submitted your tax forms yearly, then the IRS can only audit you for the past three years (unless they have resason to believe there is fraud). If you are audited by the IRS and you have not submitted your tax forms yearly, then you can be audited for every year that you did not submit a form.
A well written article by Dennis Smith.
The future lies in economic diversification and not necessarily development for developments sake.
We need a coherent and well thought out and structured plan. Where is our multi-faceted plan that addresses all the various forms of economic activity?
Well said Dennis and 15:32. Real estate development is not the answer to all of Cayman’s economic issues. The industries business model needs change. Along with that we need renewed Cabinet interest in Stay Over Tourism and the Professional Services Industry.
The article by Dennis Smith on real estate was intelligently written, outlining what he thought was the main reason for the slump in property values-a decline in tax haven investment in property and reduced local investment.
I wonder if he would allow me, as an outsider, to add my comments. The decline in property values is a world wide phenomenon. In the UK it’s approaching 20 per cent and in holiday destinations such as Spain even more. This decline is linked of course to fall in incomes associated with recession and reduced economic activity. Cayman, joined at the hip as it is with the USA has suffered in a similar way. I doubt if it is possible to factor out from that that part of the decline which is due to the decrease in speculative tax free wealth preservation and the local investment demand which is hit every time an expatriate worker leaves and takes his rent with him.
But this western world recession is not here to stay. The ebb and flow of economic activity is a well recognized event. Economies will recover. Money will start inevitably flowing back to Cayman.
Don’t panic.
Those with Cayman Property should sit tight unless they desperately need the funds. They will not starve and in spite of the implications of the article they’re not numerous in the cosmic scheme of things. The golden goose is just egg bound for the moment. Selling will only exacerbate the problem.
What really is the problem is not this short term pause but the longer term treadmill of unrestricted development with no plan for the environment. A well respected local expert recently said that it is mad to try to bring back the past. But is it not even more mad not to try to get off this treadmill. ?
There is another problem with our real estate market, lack of effective regulation. Developments, for example the former Treasure Island that government allowed to be converted into apartments created a glut of rentals, the family that built a small apartment complex is forced to compete with the developer with deep pockets, it does not take a genius to understand who loses in this scenario. Large Scale developers should have no involvement in the middle to low income family rental market.
Sorry but is this poster real? "Large Scale developers should have no involvement in the middle to low income family rental market." Well as someone who rents in the middle to low income family rental market I am glad you don’t have your way. What you are saying is that these "evil" developers have made living costs cheaper for the poorer families in Cayman. Well I suppose we think that is a bad thing do we? Why is it a bad thing? Because property owner wealthier middle class members are making less money extorting high rents from the poor than they did before because of previous supply side restrictions. Mmmm. Is this 19th century rural Ireland we are talking about here?
Actually there is a lot of truth in what Reality Check is saying. Due to economies of scale, a large developer should be able to build projects cheaper that the Caymanian mom-and-pop operations. Without doubt the big developer should be able to provide a more affordable product and manage the projects more efficiently. The end result: lower rent.
Funny how we now get our knickers in a knot and boo-hoo about the wealthy big developer competing with the poor old locals, but it is Caymanians who set the stage for this to occur. Caymanians invited the big developers’ dollars with open arms. (Open pockets?) Now thatthe genie is loosed, the reality that most Caymanians cannot compete with very wealthy foreign investors is a hard pill to swallow. Too damn bad. That is the way the market works. Too late now to whine. One day we all be wukkin’ fi de Mahn. Seems like Big Mac already does and he is a big important Caymanian. So man up and follow suit behind your leader, OK?.
Why should we bestow special attention on the small scale Caymanian landlords anyway? What makes them warrant special favour? Think about Steve Thomlinson who built a hospital with his own blood, sweat and tears – with no concessions from government. Think how he must feel about the red carpet rolled out for, and all the giveaway concessions bestowed upon, the Shetty hospital project? The competitive disparity and inequity in this scenario eclipses anything seen in the rental housing market.
For a lesson from God about all this, look to the seas which "He hath founded it upon…", the big fish eat the small fish. No so good for the small fish. But that’s life.
A bigger problem of course is those who bypass planning regulations and continually add on "extensions" and "garages" to their properties, which three months later miraculously turn in to another vehicle parked along the roadside and another low income family having moved in to the neighborhood. What do you think that does to the surrounding property values?
Your attitude seems a bit pro elitist. The poor have to live somewhere. You are happy just as long as they do not have to live in your neighbourhood. A slum out of your sight is fine, just not next door to you, right? Damn those poor people, why don’t they just disappear, huh?
While such development to which your referred may have a negative effect on surrounding property values due to the impression of values formed in the mind of the more hardened bourgeoisie, to the owner of the particular property in question, the value of his property has increased. What was once a property that produced no income now brings in regular monthly revenue. The people who do such additions do so for economic reasons. While I do not condone violating regulations, economic realities are difficult to overcome.
Why does no one decry the effect that high end development has on the affordability of housing for the less advantaged? (Well actually many poor people have done so, but their voice does not count in this country.) At one time, nearly every Caymanian either had "family land" or could afford to acquire property and build a home, even if it were a very modest one. Development drove property prices beyond the reach of many. Now many Caymanians can barely afford rent.
Every coin has two sides.
"At one time, nearly every Caymanian either had "family land" or could afford to acquire property and build a home, even if it were a very modest one."
And they sold it all off for the almighty dollar. That is neither my fault nor yours probably but yet still a reality. You reap what you sow I suppose.
My point was in reference to those deliberately and blatantly ignoring the law, and those who are are charged with upholding it deliberately and blatantly turning their back, something which seems all too prevalent around here.
Every anus has two sides as well.
We substantially agree on one point: blatant abrogation of the law is way too prevalent in this country. My point was that your point pointedly pointed to the negative impact on values resulting from poor people moving into a neighbourhood.
Since the context of the comments here are focused on the diminution of land values, it is not taking license to assume that your comment was what it seems: focused on property values and not .
The issue of marginalising the poorer class is an ongoing problem in this country. If we are not part of the solution we are part of the problem. It is partly my fault if I do nothing about it. The same can be said of you. We do reap what we sow. That is how life works.
You could have made your point about lawlessness without any reference to the negative impact on values resulting from poor people moving into a neighbourhood. No?
I fully agree that every anus has two sides – an input end and an output end. But in the end, what goes in and what comes out is still sh… well, anyway…
(So, what was your point again?)
There’s another problem with offshore real estate that surfaced about three years and maybe someone could offercomment on the way that has influenced the property market.
Many people in the UK were encouraged to invest things like ‘golden handshakes’ and bonuses in offshore property but the tax implications were not properly explained.
Under the EU Savings Tax Directive HMRC (the UK’s IRS) obtained details of all these investors and hit them with tax demands on what they thought was tax-free income.
Anyone know how they reacted?