Why developers prefer building high-end housing

More demand doesn’t always mean more profit, they say

BY JANICE BUDD Associate editor Sunday buddj@jamaicaobserver.com

Sunday, February 03, 2013

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HOUSING developers in Jamaica are often beset with the complaint that they don't build enough houses for lower to middle class Jamaicans, although this is obviously the area of higest demand.

But the developers say despite the high demand, too often, there just isn't enough profit and there are far too many bureaucratic inefficiencies involved to make such ventures worthwhile.

Chairman of the Jamaica Developers Association Michael Lake says this is simply the case even these days with the trending down of interest rates on borrowing.

"We are in a period of low interest rates, which, at times, really generally fosters more activity, more (housing) developments. But then what you find is that developers are only going for a certain type of development because of challenges that exist in the market," Lake said at a Jamaica Observer panel discussion with sector players last Wednesday.

"A developer who is an entrepreneur is going towards what can provide a reasonable return on his investment. We already know that interest rates have fallen, so therefore people such as a developer, or institutions that fall under the umbrella of developers like insurance companies... They weren't developing for a number of years, but now they have become active because they need to find a better return than putting their money on fixed deposit," he noted.

Deanall Barnes, vice president of local manufacturing and distribution company ARC Systems, agreed with Lake's assessment and said this problem isn't being properly addressed from a national perspective.

"Most of the demand falls within the middle-income bands, and if we are to follow his argument, then most of the homes would be in upper-middle income and above. The problem that exists, as a country is not being addressed any at all. Because where the demand is, it doesn't work out economically for the developer," said Barnes.

Lake said the limitations in the amount of money available to persons within the middle-lower income bracket often make it easier for developers to focus on projects where they know that the ability to purchase does exist.

"You don't find a lot of developers going that way with lower/middle income homes because they don't see a way out, as opposed to the higher-end developments where buyers come with 50 per cent of the funding. And when that happens the developer can see light at the end of the day. Because you have to understand, the investors/financiers, they go and borrow the money on the market and when the financier realises that you are not meeting the expectations, they move to sell the project on the market or take it away from you," Lake explained.

"That will sort of give you an indication of where these housing projects are likely to go," he noted. "The margin on a $3-million home is $I0,000, a lot less than the margin on a $30-million home."

He explained that it also takes more out of developers to efficiently complete that lower-middle income housing project.

"Achieving that sort of product requires flat land, which is not readily available. It requires that you build 400 homes, in other words, economies of scale. You require larger tracts of land. It requires you have your infrastructure already in place. The government is not yet there, meaning, I don't have a sewage system that I can tap into. It means that I now have to put in the sewage [system]. It means that [sometimes] there is no water... you have to dig your own well. Infrastructure costs become expensive."

He says the burden of all this capital investment is carried by the developer for the life of the construction project.

"Even if you could actually do a lower-middle income housing development project, the reality is that that customer doesn't even have the deposit. You then have to rely on his funding to come through from the National Housing Trust," he said, while urging people to go through the Government's mortgage lenders.

"But the National Housing Trust doesn't pay you until you actually complete the house and it's signed over and the ownership is registered, that's when you actually might get paid."

The developer also pointed to fickle local government policies which can change overnight and cause housing investors sudden financial loss and hardship.

"Parish councils now coming up with all kind of variables, like saying, 'Okay, you need to manage the property for a certain period of time', and I'm like, 'What?'" Lake exclaimed.




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