Since time immemorial real estate has proven a solid long-term investment and well-located, prime real estate even more so, but in short to medium term, most real estate markets, even prime ones like central London and New York, can see large swings in value that can be very damaging to investors who entered at the wrong point in the cycle.
The Pressure of Leverage on Real Estate Markets
This is mainly due to the pressure that leverage puts on the markets, meaning that most people use some form of borrowing, generally in the form of a mortgage, when they purchase property, and when rates go up, the cost to ‘carry’ the property increases putting more strain on the cash flow of the owners. It often becomes too much for the owners seeking to sell their properties. Still, in a rising rate environment, purchases tend to slow down as the increased carrying cost will lower the perceived value of the property, so the more owners forced to sell into a slowing purchaser market means prices end up getting reduced to attract buyers based on the revised valuation, taking into account increased borrowing costs.
In short, low-cost leverage will drive markets up, and higher-cost leverage will drive markets down…. Except in Cayman Real Estate.
This is due to some unique factors driving value in Cayman Real Estate, which have proven to be true cycle after cycle over the decades.
Unique Factors Driving Value in Cayman Real Estate
These are a combination of limited supply, low leverage, lower carrying costs resulting from no direct taxation, and a growing local population. Cayman Real Estate purchasers generally have low or no leverage on their properties when compared to other prime markets; there is no direct taxation in Cayman Real Estate, so owning land and property doesn’t have the additional cost of land taxes, nor do rental properties suffer from paying tax on the revenue derived and with a growing population of high net worth individuals based in Cayman Real Estate who can work in the many professional fields that drive the local economy, the demand for prime property remains strong throughout all phases of the cycle.
Real Estate Downturn in Cayman Real Estate
So what happens in Cayman Real Estate when a real estate downturn is caused by increased rates, inflation, war, or other macro factors that impact all other markets? Transaction levels slow, but prices maintain, meaning that whatever price level was reached as the markets rose tends to stay in place. In contrast, absorption slows and then begins to increase again as absorption levels pick up again. Within that paradigm, the super prime properties in Cayman Real Estate continue to move, driven by scarcity.
Overall, it is another example of the unique confluence of circumstances that makes Cayman Real Estate one of the premier investment and residential markets worldwide. Taken in turn, Cayman Real Estate has a limited supply of land and an even more limited supply of prime land, so, unlike other jurisdictions, as demand increases, there is no ready supply of new land to develop.