Rollover doesn’t stop investment

As a lawyer dealing extensively with immigration issues I have concluded that contrary to recent widespread reports the rollover policy is not the cause of any over supply of property but rather generally encourages investment in property.

I appreciate that many may find this conclusion to be counter-intuitive but consider the following:

Three short years ago Hurricane Ivan damaged or destroyed the majority of housing in Grand Cayman. Many thousands of construction and relief workers flooded in. Hundreds of millions of dollars in insurance payments and fresh capital flooded the economy to re-build and in many instances to re-build better. Those fortunate that could exchange Formica for granite, added spare rooms and generally used their predicament as an opportunity to upgrade.

Thousands of vehicles and everything from televisions and sofas to dining room tables and refrigerators needed to be replaced and tens of thousands of trees and plants imported and planted. An enormous number of temporary workers were brought in to accomplish this. As these efforts were continuing many more long-term workers were added to the economy with (for example) hundreds of new expatriate workers arriving just for the opening of the Ritz-Carlton and still more for the growing financial industry.

This sudden increase in population and economic activity with a corresponding shortage of housing drove up rents at a time when interest rates were at historic lows. With commerce booming landlords could (and in many cases did) charge rents that gave returns of 12-15 per cent or even more. The high rental return in part contributed to a rapid increase in property prices and allowed some workers to charge more for their labour and some developers to charge more for building. Many saw what was going on and jumped on the bandwagon and started building at once and so still more and more construction workers and sales people were brought in to meet the self-perpetuating demand. And then the obvious happened. Interest rates have gone up. Strata and insurance rates have gone up. Demand for housing (primarily because supply has caught up with needs – and not due to rollover) decreased – resulting in a sometimes marked decrease in rental prices.

With most reconstruction completed and lost items replaced demand for related workers is decreasing and they are starting to leave, reducing demands on aspects of the housing supply still further. Owning rental units in certain sectors has become less attractive.

On top of this, the value of the US$ (and correspondingly the CI$) has fallen significantly against most major foreign currencies relatively decreasing the spending potential of many foreign nationals working in Cayman but supporting families overseas, and at the same time the USA has suffered a tempering of its real-estate market, undoubtedly influencing local sentiment.

This is not a bubble about to burst. The relative price of Cayman real-estate compared to the high prices in the rest of the developed world (half the price of Bermuda and less even than Florida) and the special attributes and blessings of our community, will moderate against that. As far as I can tell, not all types of property are affected by the perceived oversupply issues. Inland and uninspiring one and two bedroom condos – particularly those more than a few minutes from town (and older homes) appear to be those in greatest oversupply. Ultimately there may well be a moderate reduction in sale prices in certain sectors and investors and young people and others (including importantly Caymanians) who are unable to afford starter homes at recent prices will seize the opportunity to buy and the economy will become used to a reasonable and rational return on property rentals. The population will grow steadily at a more manageable pace and in a few years (absent another disaster) we will likely have an undersupply of housing spurring another flurry of construction activity. Construction in the Cayman Islands has in any event always been cyclical. For the time being, with less immediate demand, some added reality may be entering the local property market. The high cost of living, largely influenced by the price of housing, may even enjoy some welcomed moderation as a result.

Welcome competition is now here. It is now no longer a case of you take what you can get, but rather, you take what you can get in the best location at the best price with the highest quality and amenities. It is interesting to note how limited the exclusion of children and pets has become in rental agreements.

Rollover is actually a false distraction to all of these issues, save possibly in respect of a limited amount of fear mongering from persons who either do not understand or choose to pretend not to understand the actual implementation of the law. If a business is employing someone to do a job then if that person leaves, the business will still needs someone to do that job – and if there is no-one available locally – the business will in almost all cases get another permit holder. The net result is that the total number of workers remains the same and increases or decreases only based on the needs of the economy – not because of rollover. Contrary to popular mythology the term limits policy does not in require every expatriate worker to leave. More accurately it prevents the renewal of work-permits in respect of expatriate workers in the private sector who have been here for seven years and who have not obtained Key Employee Status, or who, having applied for Permanent Residency, have not been successful and having exhausted any appeals, have worked out a final one year work permit.

If you can afford a down-payment, it might be viewed as economic madness to pay rent for seven, eight or nine years if you know you are likely to be here at least that long. Even if you want to stay in Cayman and are nevertheless rolled over – you can come back in a year if you have kept your nose clean and someone will employ you – and in the interim, if you have bought property and particularly if you have built some equity over the previous years, given natural moderate inflation in rents, have a tenant pay your mortgage for a year with money left over.

Whilst there are exceptions, I suggest that most people who are ultimately rolled over have not invested (and never would have invested) in property here. They are quite naturally driven to live as frugally as possible and send as much money home by way of remittances. They often share sadly substandard accommodations in their efforts to save as much as possible to send home. Those with particular skills or working in exceptional circumstances stand a reasonable chance of not being rolled over at seven years, provided of course that their employers have made ultimately successful applications for key employee status before they have been here for seven years. However, if a worker wants to remain past nine years then unlike before, he or she will pretty much have to invest in local real-estate as a result of the rollover policy. They can receive up to 20 points towards the 100 needed to qualify for Permanent Residence if they own their own home and/or have otherwise committed to the country by investing in land or even a rental property and contrary to popular belief that provision does not favour the wealthy. Points are awarded by reference to an applicant’s investment in property relative to their means.

Rollover and its related provisions therefore arguably encourages investment in property and is certainly no real basis for any albeit temporary challenges faced in aspects of the local real-estate sector, whose future in the longer term is as bright as ever. I will leave any continuing debate to others. I must now go and congratulate a colleague on the news received today of the grant of her Permanent Residence. She is a fine individual but was no doubt in part successful in her application due to her recent purchase of property in the Cayman Islands in direct recognition of the points it would gain for her.

Nicolas Joseph

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