The Residential Market in the Post-Irma Era
Wednesday 6 September 2017 was not an ordinary day for the BVI.
The events, and their aftermath, will forever be etched in the memory of those who experienced Hurricane Irma first hand and those overseas who watched from a distance. In the months that have passed since “Irma” visited our shores, the islands and people of the British Virgin Islands have demonstrated a resilience that was, at first, hard to imagine. From the initial relief operation, to the clearing up of the debris that covered the islands, the British Virgin Islands have emerged once again as a strong tourist destination, offering land and water-based activities that onlya year ago were in the process of rebuilding. There remains much work to do, clearing up the last of the debris and fixing the damaged infrastructure, but for now residents of the territory can look forward to a brighter future.
This devastating Category 5 hurricane passed through the northern Caribbean from 5 to 8 September before hitting Florida as a Category 4 hurricane, although by this time the intensity had lessened, and the impacts were less severe. Hurricane Irma reached its peak intensity on 6 September, the day the eye sliced through the British Virgin Islands. Sustained wind speeds reached 185 mph with gusts up to 220 mph. Twisters within the hurricane caused additional damage, and the minimum pressure fell to 914 hPa (27.0 inHg). This somewhat analytical description of the hurricane belies its intensity, the likes of which few people in the world have experienced. We were fortunate that the storm passed over the BVI during the day and also that the hurricane force winds did not extend out by many miles. Still, the destruction wrought in the hour before and after the eye passed over the BVI, resulted in an estimated $3.2bn worth of damage, countless homes and businesses being damaged or destroyed and the displacement of much of the population.
Financial Services Recovery
he BVI’s twin pillars of the economy, tourism and international finance, were both impacted by Irma, albeit in markedly different ways. Many firms operating in the financial sector evacuated their employees from the BVI either just before Irma, or in the days and weeks after. With many offices in the BVI severely damaged or destroyed, satellite offices were quickly established in other jurisdictions such as Grand Cayman, Jersey and Aruba so that company incorporations, and financial sector business, could continue uninterrupted. Within the jurisdiction, companies quickly relocated to temporary locations with many firms sharing space, allowing a reduced operation in the BVI to continue. The office rental sector was very active throughout 2018 as companies sought temporary or alternative office locations, with the office rental market settling down at the start of 2019 to more normal levels of activity. While the financial sector in the BVI has shown itself to be resilient to the impacts of Hurricane Irma, a range of policy decisions from the UK, EU and the US affecting the operation of international finance jurisdictions remain a challenge for financial services in the BVI.
In contrast, the BVI’s tourism industry was devastated by Hurricane Irma with the sector still in recovery. Prior to Hurricane Irma, overnight visitors in the BVI reached a record high of 407,764 in 2016. In the immediate aftermath of the storm, airlift was restricted to emergency and evacuation services and, with much of the accommodation damaged or destroyed, very few tourists arrived in the BVI for several months. The annual average count of overnight visitors declined from 413,704 in August 2017 to 142,691 in August 2018, before increasing again, reaching 222,722 by February 2019 as shown on Chart 1.
The Government estimated that the number of available hotel rooms (including villas) fell from 2,700 prior to Irma to just 336 rooms as at 1 March 2018. While many villa properties are now available to rent for the 2018/19 high season, most of the major resorts in the BVI remain closed. These include Bitter End Yacht Club (86 rooms) which has now been demolished, Biras Creek Resort (33 rooms) which has been closed since 2015, Little Dix Bay (100 rooms) which is due to reopen at the end of 2019, Peter Island Resort (52 rooms) with no announced reopening date, and Long Bay Resort (56 rooms) which was destroyed but is now under new ownership with rebuilding plans in hand. With so many resorts requiring substantial investment, the long term recovery of the hotel sector remains a work in progress.
The BVI villa rental market, like the yachting industry, has been able to recover far more quickly than the resort sector, with individual home owners able to repair their properties once insurance claims have been resolved. While many owners undertook repairs through the first six to nine months of 2018, most villa owners were able to commence rental operations by the 2018/19 high season. The villa rental market has therefore been a vital component of the BVI’s tourism offering, particularly while the major resorts remain closed. Guests staying in rental property will typically rent cars, provision for a week, frequent local bars and restaurants and take day trips, ensuring that many of the service businesses which suffered significantly last year, are also able to be back up and running. The indications are positive for a strong 2019/20 high season.
While the land-based tourism sector will take further months to fully recover, the yachting industry has demonstrated remarkable resilience and is primarily responsible for the significant increase in over-night visitors to the BVI post Irma. Many of the bareboat charter companies were operating close to full capacity by the end of 2018 and were expecting strong charter bookings in the 2018/19 high season. This trend should continue to improve into next season. The ability of the charter companies to quickly reorganise following a major hurricane, and the resulting positive impact in maintaining over-night tourist arrivals, must be recognised by the Government. A unique attribute of the yachting sector is its economic contribution to the sister islands of Anegada, Jost Van Dyke, Cooper Island, Norman Island and Virgin Gorda without which many of those islands would be struggling economically post the hurricanes. Fortunately, the converse is true and they are doing very well as the sector rebounds. This is clearly another benefit of a diversified overnight accommodation sector.
However, there are concerns that the private crewed charter sector of the yachting industry has seen a reduction in the number of crewed yachts based in the BVI. This is partly due to the impacts of Irma, where some owners have decided not to replace damaged vessels, but also the continued impacts from the relaxation of the “six pack” legislation in the USVI in 2015 which has made St Thomas a more competitive home base for crewed charter yachts. Crewed yachts can just as easily access the Spanish Virgins of Vieques and Culebra from their St Thomas base, rather than sail east to the BVI where cruising permit fees increased in August 2017. Crewed yachts based in the BVI contribute significantly to local businesses through provisioning, maintenance and fueling prior to charter and to local bars and restaurants during charter and their continued use of the BVI as a base should be encouraged. At a time when the Government is looking to increase hotel rooms in the BVI, supporting the crewed charter industry will do much to increase the supply of luxury accommodations in the Territory.
Chart 1 also shows the return of cruise ships to the BVI with cruise operators delaying their return until they were satisfied that the BVI had sufficiently recovered as a destination to again be attractive to their passengers. The first of the larger vessels returned in August 2018 and the 2018/19 high season has seen a number of cruise lines return to the BVI. The Cyril B. Romney, Tortola Pier Park suffered modest damage and was repaired following Irma with many of the retail outlets continuing to operate. Cruise ship passengers peaked at 700,000 arrivals in 2016, falling to 200,000 arrivals in 2018. However, there is a steep upwards trend in cruise ship arrivals and the cruise ship industry is projected to be back to pre-Irma arrivals next season.
Batu Villa, Virgin Gorda
Public Sector Recovery
To date, much of the recovery in the BVI has been led by the private sector, which was able to rebuild once insurance claims were settled. The Government has been slower to respond, because of the extent of the damage suffered by public institutions, particularly administrative buildings, schools and community centres, and to infrastructure including roads. A Disaster Recovery Coordinating Committee (DRCC) was established to co-ordinate recovery activities in the BVI and to prepare the way for the establishment of the BVI Recovery and Development Agency (“RDA”). On 23 April 2018, the Government passed the Virgin Islands Recovery and Development Agency Act, 2018 establishing the RDA to spearhead the recovery in the BVI. The mission statement of the RDA (https://bvirecovery.vg/) is:
Working with the Government of the Virgin Islands, the Recovery and Development Agency will raise investment to implement the recovery and development of the Virgin Islands, delivering value for money and developing national capacity, in order to realise the vision of the Recovery and Development Plan.This vision is for the BVI to become a model for building stronger, smarter, greener and better, fostering a vibrant and innovative economy, cohesive and empowered society, nurtured and sustainable environment, resilient infrastructure, good governance and a high quality of life for all.With a staff already in excess of thirty full and part time personnel, the RDA has a slate of projects in the planning, procurement and operations phase. These range from repairs to the Virgin Gorda police barracks (operational phase) to the removal of derelict boats (procurement phase). There are also plans for the West End Area Programme, which includes the rehabilitation of the West End ferry terminal, and the BVI Green Energy Plan which aims to transition the BVI to a lower cost, more resilient, green energy supply.
The Real Estate Market
In the aftermath of Irma, there were fears that the real estate market in the BVI would suffer as a result of damage to so many homes. In practice, Irma has been a catalyst for the real estate market, providing investors with opportunities to acquire hurricane damaged properties as many owners opted to divest of their investment rather than rebuild. More importantly, many BV Islanders decided to invest in the market taking advantage of the opportunity to acquire real estate they had previously not been able to afford.
With so much destruction, the insurance companies were overwhelmed by the number of claims they had to process while for many people claiming insurance, problems of under-insurance became apparent. While most claims were settled by mid to late 2018, the delay in securing settlements, or agreeing settlements that were less than the cost of the damage due to under-insurance, have impacted property owners’ choices in deciding whether or not to rebuild. For many owners, particularly those living overseas who were unable to secure a reliable contractor or those without the wherewithal financially to rebuild, the only choice has been to sell their property “as is”. Faced with continued deterioration of their properties, owners of damaged property, priced for a quick exit which created a competitive market mainly in the $200,000 – $700,000 price range.
Chart 3 reviews the post Irma market for homes sales showing sales volume, number of sales per quarter and the median sale price. The data shows that while the number of sales increased in the months after Irma, the median sales price fell, reflecting the market focus on damaged property. The two sales that closed in Q4 2017, shortly after Irma, were already in contract before the storm where the purchasers still opted to close. One of those sales was a house priced at $1.6M which resulted in the high mean sales price for Q4 2017 of $890,000. By Q1 2019, the median sale price had dropped to $300,000.
Between Q4 2017 and Q1 2019, a total of 71 properties had been sold at a total sales volume of $43M, averaging $605,000 per sale. Of these sales, approximately 60 were below $500,000 in value.
Chart 2 shows that the property market has remained active post Irma, even in the last quarter of 2017 when much of the commercial activity in the BVI had ground to a halt. The table shows the total sales volume for all types of property (land, houses and other property) by quarter between September 2016 and the first quarter of 2019. Total $0.20sales volume (expressed in US Dollars) in 2018 and 2019 has been boosted by land and property sales at Oil Nut Bay (3 sales in 2018 & $0.00Q1 2019) and Moskito Island (2 sales in 2018). Both developments were pro-active with their respective post Irma clean up and repairs to ensure they were functional in the shortest time possible. As a result, Oil Nut Bay was open to home owners by Christmas 2017 and the general public by Easter 2018. At Mosquito Island, all home owners who had commenced construction prior to Irma confirmed they were proceeding with their respective projects.
The renewed vigour in the residential market for “as is” property as a result of Irma and continued sales at Oil Nut Bay and Mosquito Island, has resulted in total sales volumes in Q2-Q4 2018 and Q1 2019 exceeding three of the quarterly periods in 2016 and the first three quarters of 2017 (with the exception of Q4 2018 which was slightly lower than Q1 2017).
As shown in Chart 4, the post Irma market has been dominated by local purchasers keen to acquire property at discounted values due to hurricane damaged condition. While there have been fewer foreign investors in the market, delays in closing due to the land holding licence system could indicate increased foreign investment in the coming month.
The price distribution of home sales post Irma by price range is shown in Chart 5 where the dominance of sales under $500,000 is clearly reflected and represents 60 of the total number of sales. In contrast, there have only been ten sales over $1.0M representing 14 of the total number of sales. The first quarter of 2019 had four sales over $1.0M (with one of the sales in excess of $3.0M). Overall, this quarter indicated a total of 22 property sales closing, the strongest quarter for property sales post Irma.
Finally, Chart 6 breaks down the sales post Irma between the Virgin Gorda and Tortola markets. As can be expected, the sales are dominated by the Tortola market where there is a larger inventory of houses and pool of investors.
There are signs that the market for “as is” property is beginning to slow as the majority of owners looking to exit their investments have already made a move to do so. However, owners of damaged property in higher price ranges, especially over $1.5M have found it more difficult to exit, with many properties still available for sale. Even before Irma, there were far fewer purchasers for property in the higher price bands and vendors have continued to find it difficult to gain traction despite the substantial discounting on price as a result of hurricane damage.
Looking forward to the remainder of 2019, the signs remain positive for continued activity in the BVI property market. The next few months should signal whether or not the market has moved away from concentrating on the sale of damaged property to a more normal market, trading homes which were either not damaged or have been repaired. At the same time, the impacts of the wider global economy need to be watched as worldwide, economic growth is slowing, having peaked in 2017. The US economy, initially boosted by tax cuts from the Trump administration, is also facing a slow-down in growth as continued uncertainty from trade wars impacts the manufacturing sector. However, the US economy projections remain ahead of those in Europe with a slower growth rate forecast for the Euro sector.
As Irma’s arrival on 6 September 2017 turns from months to years, the lessons from this catastrophic hurricane need to be reflected in stronger building codes, improved planning and a better understanding of insurance. For those who could afford it, or who had adequate insurance coverage, the necessity of rebuilding stronger and more resilient homes was clear, but not all have had the means to do so. Government and insurance companies each need to take a lead, to ensure that, should the BVI be impacted again by another Category 5 hurricane, buildings will be better constructed to withstand the impacts of a major storm.
In time, people will look back at the lessons learned from Irma, whether in terms of its physical intensity, how the government responded and what help came from the international community or perhaps the psychological impacts on those who experienced Irma first hand. For sure, many will wonder how, with all that destruction, so few lives were lost on 6 September. For now, we continue to rebuild, determined to see the British Virgin Islands emerge from a significant natural catastrophe to become a country where resilience, vision and hope will shape the future.
Golden Pavilion Villa