Real estate at a crossroads
Mathew Kelly, May 20 2020
Since the arrival of Covid-19, I have read various sobering articles about the effects on the real estate market from leading realtors and valuers. As a real estate attorney, I share these concerns.
However, instead of being consumed by all the negativity, I also see this as the perfect opportunity to bring about fundamental change to kick-start the market.
The real estate market is a key indicator of the health of an economy. This is particularly so in Bermuda, where this market makes up approximately 15 per cent of Bermuda’s gross domestic product. Unlike other sectors of the economy, real estate affects everyone, whether you rent or own. For many it represents their most valuable asset and, importantly, provides the security of having a roof over their heads.
Bermuda’s market has struggled since the 2008-09 recession. Conversely, competitors such as the Cayman Islands saw increased market activity in both commercial and residential sectors. To counteract the effects of the recession, Cayman lifted restrictions on ownership and boosted its economy as a result. Bermuda, on the other hand, set up committees to discuss strategies, but little ever changed. Since Covid-19, the market is likely to worsen and now is the time to act.
The key areas we need to address are as follows:
1, Non-Bermudian buyers
Such buyers must apply for an alien licence to purchase property. There is an application form together with a fee of 8 per cent of the purchase price on houses and 6 per cent on condominiums. This should take weeks to process, but in practice it can take more than six months.
My experience has been that several buyers have recently pulled out of purchases because of delays. To put this in an economic perspective, the Government loses out considerably on tax revenue.
For example, a house worth $3 million would attract a licence fee of $240,000 plus stamp duty of $169,000. That is a loss of $409,000 on one sale alone. Cayman, however, does not impose a licence requirement so buyers avoid the delays and costly fees. We should follow suit and abolish this requirement.
2, Stamp duty
Property sales attract stamp duty based on a sliding scale. For example, a sale price of $1 million and $2 million attracts stamp duty of $34,000 and $99,000 respectively. To boost the struggling lower-end market, the duty up to the first $750,000 should be zero-rated for all Bermudians — not just first-time buyers — as a stimulus. 3, First-time buyers
Bermudians buying their first home up to $750,000 are exempt from stamp duty. However, buyers must live in the property for at least three years to qualify. Usually the stamp duty is collected from the buyer and held for three years pending approval of the exemption. Unless the buyer can raise the stamp duty, the purchase falls through. This defeats the purpose of assisting first-time buyers. We need to remove this requirement. At the same time, perhaps, the exemption should be increased to, say, $1 million.
4, After Repair Value levels
A non-Bermudian can purchase only certain properties. The ARV level for houses is a minimum of $126,000 (worth about $2.5 million) and for condos it is $25,800 (worth about $400,000). There are no such restrictions in Cayman.
However, with the differences in sizes of the local populations, it is sensible to protect the lower-end properties for Bermudians. That said, the ARV threshold for houses should be reduced to open the market. This would benefit Bermudian sellers who are struggling to sell.
5, Condo restriction
Non-Bermudians on work permits cannot purchase condos, although they can purchase houses. There is no logic to this distinction. The removal of this barrier would give a much needed boost for Bermudian sellers, as the condo market has suffered in recent years.
The banks holding mortgages play an important role during this crisis. Many homeowners may be struggling to make repayments while being laid off. Banks are helping borrowers by offering mortgage repayment holidays or interest-only repayments for three months. This is helpful, but only in the short term.
While banks are reluctant to foreclose, they have to answer to their shareholders. A key change to stimulate the market would be the reduction of interest rates for borrowers. Bank rates in Bermuda can be about 5 per cent to 6 per cent. In other jurisdictions, rates can be as low as 1 per cent.
A leading bank recently announced it had considerably reduced its lending rates in Cayman, but not to the same extent in Bermuda. However, banks deal in risk exposure. The real estate market in Cayman is booming, while in Bermuda it is stagnating. It seems the banks would be willing to reduce rates if there was greater confidence in the market.
If people are not buying, then there are no licence fees or stamp duty. With greater market activity, government coffers would dramatically increase. The proposals made here would increase market activity and confidence, which in turn is a win-win for the Government.
In a world after Covid-19, robust action is needed. In no uncertain terms, the real game-changer is immigration reform. Politically, the Bermudian public have very different views on immigration reform. However, with greater numbers of residents, the demand to rent or buy properties increases and the flow of money from outside sources begins.
For years the population of Bermuda has been shrinking and, in turn, so has the economy. In the new reality, the conversation of protectionism needs to change to tackle this real crisis. The conversation should focus on what vision do people have of Bermuda in five years’ time.
Everyone should be united in wanting a successful economy in Bermuda with homes and jobs. It is not a case of opening the immigration floodgates; rather, it is by reducing restrictions for the right immigration model that you encourage job makers and investors to return to our shores.
The immigration changes are not irreversible. The case could be made for a three to five-year trial in an effort to get Bermuda’s real estate and general economy moving again, so we can compete with our rivals on a level playing field.
Bermuda is in a precarious situation. With a relatively small population, the effects of a predicted long recession would hit people hard. There is not the same safety net of welfare benefits here as in other places. Where people have lost jobs, and possibly their home, the social housing is not available.
However, being small is also an advantage. It means we are flexible and can implement market changes quickly. Our small size will help us to beat the virus and, like New Zealand, we can be open for business again. We could position ourselves as a safe haven in case of future lockdowns and attract overseas professionals and investors.
Over the years, I have acted for many clients — from purchasing their first home to their dream home. I hope this continues into the future, rather than seeing foreclosure cases mounting.
Bermuda’s real estate market is at a crossroads. We can choose to continue along the road of inaction or we can tear up the rulebook and take the road to recovery.
• Mathew Kelly is a director at Chancery Legal