Why did property prices rise during the pandemic?

More than a year ago, during the midst of a coronavirus lockdown, hardly anyone predicted that property prices in Cayman would continue to rise.

All advanced economies, shuttered by COVID restrictions, were expected to fall off a cliff. Mass unemployment seemed inevitable. Consumers, anticipating having to tap into their savings just to make ends meet, were putting off large purchases.

Cayman was no different. A report commissioned by the Chamber of Commerce concluded a two-month lockdown would lead to a 15% decline of GDP in 2020. Led by the halt to tourism, other sectors, including construction, financial services, real estate and other services, were all expected to take a significant hit.

Based on previous crises, it was also clear that thousands of foreign workers would leave the islands.

The construction and real estate industry was widely expected to resume post-lockdown but much more slowly at a lower level. The changing financial circumstances and priorities of investors were unlikely to allow for property purchases on an island with closed borders.

The reduced demand for rental properties from fewer residents and tourists, in turn, was going to considerably weaken the business case for certain developments.

However, 13 months later, the effects, although severe for many, were less extreme than anticipated.

For the construction and real estate industry, forecasts turned out to be entirely incorrect. In fact, construction has been the main driver of the economy in 2020. This year the sector is expected to grow by 10%.

New development projects are announced almost every week. The latest is Catalina Bay Seafront Residences, a three-storey condominium complex next to the George Town Yacht Club and Barcadere Marina, slated for construction in early 2022 and completion by late 2023.

The projections for the rental market were nonetheless accurate, after initially between 5,000 and 6,000 people left the islands.

Rents declined by approximately 10-15% last year, said Lou Dimitrov, real estate economist at Dart, at the 2021 RICS Cayman Real Estate Market Forum, last week.

Intuitively, the lower demand and reduced cashflow from property investments should have deflated asset prices. Yet property prices increased.

According to Dart’s investment analysis group, condominium prices island-wide, for example, rose by more than 10% last year.

So, what is going on?

Dimitrov explained that investment analysts separate the real estate market into the space market and the asset market.

While the space market deals with physical capital in the form of actual buildings, the asset market deals with financial capital. As such, real estate is part of a broader capital market where property assets compete with stocks, bonds and other financial assets.

Both markets are separate but connected. Rent levels, for instance, determine the demand in the asset market, because investors buy based on the income stream, in the form of rental payments, that the asset generates.

But the asset market is also affected by the cap rate – the current yield investors demand to hold real estate assets. This, in turn, is impacted by interest rates and the rates of return of other assets in the economy.

At the macroeconomic level, the most important measurable factor that led to higher property prices, Dimitrov said, was the expansionary monetary policy in the United States. Last year, the Federal Reserve increased the money stock by $4 trillion, an amount that was larger than all of the money that was in circulation in most of the 1990s.

This money, made available through credit, was largely used to buy assets and inflated prices everywhere, from stock markets to property markets.

The release of almost half a billion dollars in pension savings in Cayman had a similar effect, in practice, for local investors. Those who did not need the savings payout for consumption had to reinvest, with property being one available option.

Decreasing interest rates, in combination with more available money, have also changed the equation for property buyers who use debt financing.

Purchasers can buy more expensive properties and get more financing for the same regular debt repayments. And investors can buy pricier assets and still receive the required capital return.

Fleur Peck of Blue Point Consultants said that the “number one” factor for increased activity in the property market was lower interest rates. “Suddenly people have realised that they can afford a property, whereas two years ago they could not,” she noted at the RICS forum.

Other investors benefited from the strong performance of equity markets in recent years, which offered the opportunity to reinvest some of the gains in alternative assets like real estate.

International investors have also changed their priorities and lifestyle preferences because of the pandemic, said RE/MAX broker/owner James Bovell.

Some even decided to buy in Cayman without ever visiting the property.

Despite closed borders, being COVID-free with a stable economy has made Cayman an attractive proposition internationally. Because large multi-million-dollar property investments have the added residency incentives, luxury market sales have more than tripled in the past 12 months.

The same attributes appeal to Cayman residents. Some already had property on island, but decided, for instance, to invest in a holiday home locally rather than abroad, Bovell said.

Support local journalism. Subscribe to the all-access pass for the Cayman Compass.

Subscribe now