Weak regulation threatens to burst real estate bubble
Local lawyers are calling on the Government to strengthen legislation and regulation around the real estate industry in Jamaica.
Head of litigation at Myers, Fletcher & Gordon Gavin Goffe said, “as lawyers who have a practice which touches and concerns real estate, we’re concerned about regulation. Not the fiscal regulation but in terms of the construction business and how that particular business is regulated or is not regulated.”
Goffe pointed out that Jamaica has a long history of poor regulation in the construction industry which only changed in 2019 with the promulgation of building codes.
“We didn’t have a building code in Jamaica for many years, what we had were standards which were published by the Bureau of Standards Jamaica. Even the building codes that were published since 2019, my understanding is that many of them expired and have not actually been replaced with enforceable legislation or regulation as we speak,” Goffe disclosed.
The Real Estate Board (REB) is a statutory body which regulates the real estate industry in Jamaica.
But Goffe contends that more needs to be done in terms of tightening regulation of the industry.
“We have a construction boom and we don’t have a booming regulator who is at the wheel making sure that we don’t end up with what we’re all afraid of, which is a burst bubble. The likelihood of this construction bubble bursting is made greater by the fact that we don’t really have the kind of laws, regulations and enforcement of those laws and regulations as we ought to have.”
He said the high interest rate environment has further emphasised the need for stronger regulations in the real estate industry.
“In the same way that BOJ speaks about low, stable and predictable inflation rates, the construction industry has a real issue when it comes to the predictability of it. It’s a real issue because there really hasn’t been the kind of regulatory oversight in that area that is required for a time such as this,” said Goffe.
He continued, “When we have these high interest rates, it also affects the developers, the cost to borrow to fund that development goes up. There’s only a limited extent to which they [developers] can pass on this increased cost to the consumers. The fact is that these apartment buildings which are where the market is right now are already so expensive there’s only so much more that they can go.”
“So where do they go to find/make the super profits that they have been making for the last five years?” the lawyer asked.
“They’re gonna cut corners to try and make sure that they finish the buildings quicker so that they can start servicing their debts quicker. They’re going to use the Chinese because we all know that the Chinese have a reputation of doing things much quicker than Jamaican construction labourers. That has its own ripple effect in terms of employment,” he pointed out.
He also disclosed that inflation pressures are also causing developers to be dishonest.
“They’re also going to lie. Have you ever seen an advertisement for an apartment and it says they are selling one bedroom, two and a half bathroom and you wonder how that make sense?”
“It’s because they intend to convert it into a two or three bedroom unit but if they were to tell that to the regulator they wouldn’t get approval because it would breach density requirements. If you have a three-bedroom unit then you have to have more parking, more amenity space, things like sewage all of those things are affected by the number of rooms that you might have, so they lie,” Goffe explained.
While real estate in Jamaica is still seen as a safe investment option, the lawyer cautioned that we should not take it for granted, pointing that if weak regulations continue, the real estate bubble will eventually burst.
“If we want to ensure that this bubble doesn’t burstâ€¦we need to do two things. One, we need to understand what’s happening out there and as investors we need to make sure that we are doing proper due diligence and making sure that we are only doing business with reputable developers who are being guided by the rules and laws and not trying to cut corners as a response to rising costs. Two, we need to consistently apply pressure to our political representatives, parish councils from the bottom up that this industry is far too precious and important to the development and the growth of our economy to not have it be tightly regulated and for us to allow the developers, scrupulous and unscrupulous ones to get away with what they have been getting away with so far,” Goffe stated.
At the same time, he warned that signs of the industry being strained have already started to surface.
“Right now, some pension funds are under pressure and some real estate funds as well. They have stock which essentially isn’t making a return. There are empty apartments all over Kingston and St Andrew, so there is a high demand in middle and lower income housing solutions but when it comes to the higher end, the high-rise apartments Kingston 5,6,7,8 there is actually a surplus as far as from where I sit,” he said.
Last month, former Prime Minister Bruce Golding wrote a column in the Jamaica Observer with the headline (Building construction lawlessness). Golding tackled issues of inefficiency, incompetence and corruption. He highlighted that the under the 2018 Building Act, which took effect on January 15, 2019, there are still “archaic arrangements” which must be revisited.