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A developer who spent over $100 million on townhouses and apartments in the Golden Triangle Area was last week ordered by the Supreme Court to demolish them. It’s critical for buyers, bankers, and the regulators to understand whether this will lead to the burst of the housing bubble.

The case of Sarah Hsia et al v Martin Lyn et al handed down on January 21, 2020 involved an application by residents on Upper Montrose Road for an injunction to demolish townhouses and apartments that were completed prior to the developer’s application to modify the covenant that restricted the land to single-family residences.

It was heard at the same time as the developer’s application to modify those restrictive covenants.

According to the judgement, Justice Judith Pusey found that the character of the neighbourhood in Upper Montrose Road was still predominantly single-family homes and that it should remain that way.

Justice Pusey also found that the developer had little regard for the Kingston and St Andrew Municipal Corporation (KSAMC) as they completed construction without discharging or modifying the restrictive covenants and changed the layout to accommodate a third bedroom when approval had only been obtained for one- and two-bedroom units.

Who could have foreseen such a thing?  Delroy Chuck, Minister of Justice and Member of Parliament for North East St Andrew.

There is a letter from the minister of justice, which was copied to the prime minister and the town clerk, in relation to an unrelated case concerning a development within his constituency, in which he said: “Sadly, in Kingston 6 and Kingston 8 of my constituency, multistorey buildings have been allowed to be constructed contiguous to single storey residential units.

It is unfair to these long-standing residents, and out of character with the area.

Many of these residents have complained that the authorities have allowed their privacy to be invaded as occupants of these multi-storey developments can see everything in their bedrooms, front and backyards.

They feel their privacy and security have been compromised.

Whilst I support developments in the area, where single storey developments exist – approval should not be granted for any multi-storey development which allow (sic) for the invasion of adjoining residents’ privacy.

So unless the area is appropriate for a multi-storey development, I strongly urge that only townhouse development should be allowed in North East St Andrew.”

Unfortunately for these residents, the authorities don’t appear to share the Member of Parliament’s concern about privacy.

The residents of Upper Montrose Road brought their concerns to the attention of the town clerk, but no assistance was forthcoming from Church Street.

In another case in which the writer is involved that is currently before the court awaiting judgement, the KSAMC approved a multi-storey apartment building on Birdsucker Drive that was in breach of the regulations as it was too close to the neighbouring single-family properties.

Initially, the KSAMC said there was no breach.  After NEPA showed that the apartment building was, in fact, too close, the KSAMC responded that it’s not that the entire building was too close – just the balconies (that overlooked the bedrooms and backyards of the neighbours).

What measures have bankers put in place to secure their investment in the event an approved development is demolished?

Typically, a bank will not disburse until the development has been approved by the KSAMC, but if the KSAMC’s approval is rendered null and void by the developer’s breach of the conditions, then how secure is the loan? Equally important is the issue of the steps, if any, that the KSAMC takes to ensure compliance with the conditions of their permit.

Several months ago, it was reported in the news that the Supreme Court had granted a stay of the KSAMC’s building permit for a development on Dillsbury Avenue.  To date, construction continues and the authorities have done nothing to halt it, leaving the residents to fight for themselves and potential buyers and investors unaware that their money is at risk.

Bearing in mind that it’s largely pension funds and retirement schemes that are buying up these high-rise apartments before ground is broken, the foundation has been laid for a crisis of epic proportions. To whom will retirees look when their pension funds suffer?

With the judgement of Justice Pusey lenders now need to carefully reassess their exposure.  In addition to requiring copies of the permits, they should demand to see the objections that neighbours may have filed and all court documents related to the development.  They might wish to obtain an independent legal opinion on the matter or send an attorney to watch proceedings in court.

Because sometimes what goes up, will come down.

Even as debate rages over the impact of the influx of multi-storey residences and the attendant population increase on social services, the National Water Commission (NWC), which activated a water restriction regime in sections of the Corporate Area last Thursday, says it produces enough water to supply the city.

“Yes, we do produce adequate amounts of water,” NWC President Mark Barnett reiterated via phone yesterday.

It was a point he made at the Radio Jamaica community meeting in Half-Way-Tree last Thursday night.

“On an average, we produce just about 48 million gallons of water to the Corporate Area. If you look at the number of persons in the Corporate Area, to the supply, that water, it is adequate. It is very adequate,” Barnett stressed.

As of Monday, February 3, Hermitage Dam recorded a level of 87.2 per cent of its 343.2-million gallon capacity. The Mona Reservoir, meanwhile, had 79.6 per cent of its 643.5-million gallon capacity.

“There may be planned developments that I’m not aware of… What I can speak to is what is in front of us and, based on what is in front of us, our approval process is guaranteeing that those developments will have water,” the NWC boss added.

The issue, he argued, is that the state of the supply network gives rise to heavy leakage.

“We all know the infrastructure in the Corporate Area is older than most of us. I know for sure it’s older than me. And, therefore, when you have such a system that you have under-investment, you’re bound to have a situation where you’re going to be leaking out most of what you produce,” Barnett explained.

While it’s not a new argument for the NWC to bemoan the condition of its decades-old water supply and sewerage system, on Thursday Barnett laid much of the blame on what he and other players in the construction development arena have described as a history of disorderly urban planning across the capital.

“It wasn’t orderly planned in a way that you put out your water supply system, sewerage as well, and then other developments take place. It doesn’t happen like that. So, we have always argued: We need the orderly planning arrangement that tells me where people are going to live; that tells me where the businesses are going to operate; that tells me where factories are going to be located. That helps you to determine the type of water infrastructure that you need to put in place,” the NWC head charged.

The town planning authority, Kingston and St Andrew Municipal Corporation, maintained that it oversees “a robust approval process” currently guided by the Provisional Development Order, 2017. That order, among other things, allows for higher population densities across the Corporate Area and the construction of multi-storey, multi-family units. Players in the industry, including some architects, engineers, and developers themselves, have raised concerns about the impact of the development on privacy, access to water, air flow, shading, solid waste management, among others.

The NWC has publicly advised developers that it is not responsible for supplying water to high-rise buildings above the second floor; it is the purview of the respective developer.

On Thursday, Barnett welcomed the increase in mid- and high-rise buildings, arguing that it provides a means of rehabilitating the NWC’s network.

“On the matter of high-rise, this may come as an objection to the audience, but the fact is, what we have seen now, we have been able to utilise what has been happening to renew a lot of our infrastructure… For those engineers who are here in the audience, they know in a water utility it is a continuous investment that you have to make up to 10 per cent per annum. The NWC is not able to do that on an annual basis because of other reasons. So, number one, we are renewing the infrastructure in the Corporate Area,” Barnett disclosed.

“And just recently, we spent upwards of $6 billion to improve our transmission means. That is investment that we should have done many years ago.”

Meanwhile, the NWC said the current water restrictions, which take effect from 9:30 pm to 4:59 am each day, affect areas served by the Mona Treatment Plant — Mona Heights, Old Hope Road, Hope Road, Hope Flats, Lady Musgrave Road, sections of New Kingston, sections of Half-Way-Tree, Hagley Park Road, Maxfield Avenue, Molynes Road, sections of Harbour View, Mountain View Avenue, Cross Roads, South Camp Road, downtown Kingston, Beverly Hills, Ravinia, Mona Road, Devon Square, Waterloo Road, Cassia Park, Eastwood Park, and Upper Maxfield Avenue. The restrictions are in an effort to hedge against the dry season when the inflows into the two main storage facilities in the Corporate Area are expected to fall off.

With a network of more than 150 underground wells, and about 250 river and spring sources, the NWC produces more than 90 per cent of the country’s total potable water supply. It provides more than 70 per cent of the population with direct water services, and only 15 per cent with wastewater services.

STETTIN, Trelawny —Minister of Local Government and Community Service Desmond McKenzie has charged municipal corporations to become more forceful in clamping down on unapproved housing developments in light of the dangers they pose in the event of an earthquake.

He was speaking against the background of a magnitude 7.7 earthquake which struck Tuesday about 80 miles from Jamaica, shaking people in the Caribbean and as far away as Miami, USA.

“The municipal corporations will have to become more aggressive in shutting down developments, whether big or small, that don’t have the requisite approvals from the local authorities.

“I want to say to the public, the Bible tells you that when the wise man and the foolish man were building the house, the foolish man wanted the easy way out so him build in the sand and the man who want to endure and to live good, did what was necessary, built on solid ground and we know what happened when the rains came,” the local government minister pointed out.

“I am urging all Jamaicans to stop ignoring the building regulation. You have many people who continue to build on the banks of gullies and you kotch up you house on the hillside and when the local authorities come you say is because you poor why dem fighting against you. You might be poor but they fighting against what you doing to protect you and your family and we are going to be doing lot of public education.”

McKenzie announced that Tuesday’s experience has prompted the Ministry of Local Government to engage in a massive earthquake education drive across the island to educate citizens on the dangers associated when the natural disaster strikes.

“We have taken a decision that the time has come, it should have happened before, but we now have to take the message about the dangers of earthquake right across the country. We are going into the parish of St Elizabeth on the 13th (February) in Black River for another such town hall meeting and then we are going to Lucea in Hanover the following week, the 19th. We are going to be going across the entire length and breadth of Jamaica, into the town centres, into communities such as this (Stettin), into the schools, to talk to Jamaicans,” McKenzie noted.

“This Government decided that earthquake is not just in the month of January we talk about it. We started weeks ago, we had a town hall meeting in Trelawny where we spoke about disaster, we spoke about earthquake, we had one in Portland.”

Noting that it is not something to gloat about, the local government minister expressed satisfaction that the Jamaican buildings stood up to a 7.7 earthquake earlier this week.

“Despite the challenges we have as a country, our buildings stood up and resisted a 7.7 — that is nothing to gloat about but it is important. And so we must continue to be vigilant, we must continue to do what is necessary,” McKenzie said.

He was speaking at the handing over of an indigent house in Stettin in the southern part of Trelawny before heading to Martha Brae, in the northern side of the parish to engage in a similar exercise.

There is a possibility that real estate ventures may see more funding from the $600 billion pension fund industry flowing their way.

Recently passed pension amendments have tweaked restrictions on investment options related to the segment, allowing the funds to own shares in or provide debt financing to companies which build, own, and manage property but which are not their own subsidiaries.

Under the amendments, pension funds are now permitted to fund real estate companies in the form of debt or equity. For private companies in general, the limit of investments in this form is five per cent, but for real estate concerns, this limit does not apply.

In relation to investments in real property, the intent of which is to generate income, pension funds can take more than 30 per cent stake without prior approval of the Financial Services Commission (FSC), the new regulations say. However, they may not invest in mortgages for property outside of Jamaica.

An industry insider connected to one of the largest local pension funds said that the new regulation allowing funds to own shares in real estate companies in which they do not have a controlling interest will also improve market liquidity as shares are easier to dispose of than actual real estate. She said the costs associated with selling shares are also much less than offloading property.

Before this, the law restricted pension funds from taking a stake in private companies beyond certain limits without the FSC’s approval.

Now, equity and debt financing for real estate companies have been added as investment categories to which a limit does not apply.

The pension fund insider said the effect of the new amendments is to allow unlimited investment in real estate companies, but it should be noted, she said, that “real estate is not as easily converted to cash as, say, equities and bonds, so fund managers will have to be mindful of that. There is also the cost of transferring the shares versus that of real estate”.

As at March 31, 2019, the Jamaican private pension industry was valued at $607.2 billion. Total investments in real estate in all forms was $23.52 billion, or 3.86 per cent of total assets.

There was little year over year change. As at March 2018, pension funds held $21.37 billion, or 3.99 per cent of total assets.

Regulatory amendments were approved in July to broaden the range of permissible assets in which pension plans can invest and strengthen the legislative framework with respect to safeguarding the assets of pension plans.

Amendments to the Pensions (Superannuation Funds and Retirement Schemes) (Investment) (Amendment) Regulations, 2019, were moved by Finance and the Public Service Minister Dr Nigel Clarke.

On Wednesday, the FSC, which provides oversight of private pension funds, said that prior to the recent amendments, Regulation 29 of the Pensions Investment Regulations allowed for unrestricted investments in real estate except where real property is non-income generating, in which case it has a limit of five per cent of the fair value of the pension plan.

The FSC explained that the recent amendments to the investment regulations did not amend the limits associated with real estate investment.

However, amendments to Regulation 24A (3) now make allowance for a pension fund to invest in any equity and debt securities of a private company that is established for the sole purpose of holding the real estate assets of funds or schemes. This change essentially applies to the method by which real estate can be acquired and managed.

“This gives stakeholders in the pensions industry increased flexibility while keeping risk at an acceptable level,” the FSC said.

As at March 2019, real estate assets represented 13 per cent of total pooled asset investments of pension funds, increasing year over year by five per cent.

Comparatively, stocks and shares (40 per cent) and government securities (31 per cent) were the largest asset classes within these pooled investment arrangements.

Realtors say they expect an increase in demand for first-time homebuyers in 2019 even as they indicate that those who rent homes are experiencing harder times as property owners list with Airbnb, the online community marketplace that connects people looking to rent their homes with those who are looking for accommodation.

Immediate past president of the Realtors Association of Jamaica Howard Johnson Jnr says that whereas he endorses short-term rentals and not just Airbnb, it has a negative impact on the local market.

“The gains from short-term rentals are much more attractive than that of a local rental,” he said, adding that “earnings can be generated by a much more stable currency such as the US dollar.”

Broker at Coldwell Banker Jamaica Realty Andrew Issa says that he is expecting more Jamaicans to express interest in buying a house during this year.

“I predicted 2019 will be a very strong year for real estate as demand continues to be driven by a stable, strengthening economy with low mortgage rates,” he said. “Jamaica has been back on the international list (as a country in which) to invest from early 2018. While crime did slow the momentum, it appears that Jamaica’s economic indicators are within the parameters for foreign investors,” Issa added.

Sellers’ Market

He said that the sellers’ market continues to strengthen across the board in both residential and commercial markets but noted that prospects are challenging for first-time homebuyers.

“In the residential market, you have first-time homebuyers who now qualify to buy based on their NHT (National Housing Trust) mortgage points and low-interest rate mortgage instruments being offered. Unfortunately, demand is still outpacing supply. As the economy continues to grow more and more, young professionals are placing their priority on buying their first property,” said the real estate broker.

Johnson said that he is anticipating more persons looking for investment properties for short-term rentals as well as the demand by first-time homebuyers to increase. “I’m suspecting that the new home starts promised by the Government, through the NHT, will also resolve many of the housing dilemmas now being experienced,” he said.

He noted that while the cost of houses seems to be trending up, “the higher price … is very subjective as sales are being generated despite what is being perceived. In many cases, persons are still financing their homes due to competition on interest rates in the marketplace. I have not observed any disruption in the mortgage market, but rather, more aggressive marketing for your business by financiers”.

Issa said “Investors are liking the returns being gained from the rental market and also seeing a 10 per cent annual increase in prices bring a very attractive mix to their investment portfolio. These investors continue to buy (at) locations that will attract expatriate clients and bring returns in US dollars.”

DOWNSIZING

He also observed that “downsizing is a segment of the market that is growing. The ageing population is beginning to make the choice that downsizing is a practical and sound economic decision.

According to the broker, commercial demand is also growing. “The daily request is, ‘Find me a commercial building with an ROI (return on investment) of seven to nine per cent, and I will buy it’,” said Issa, referring to potential investors. “So with all these small financial institutions being launched, I expect to see much more activity in developments of this nature. These new, young managers are aware of the built-up demand by young entrepreneurs searching for locations,” he added.

Issa also said that demand continues to grow for business process outsourcing space and that it will drive additional commercial build-out.

Despite the higher costs for houses, he does not expect that to inhibit sales. Issa said that “all mortgage companies have a similar formula for approvals, and with more institutions pushing for a larger share of the real estate market, I expect that these homes will be financed with buyers having two to three options to choose from”.

Airbnb investors, he noted continued to be a factor. The realtor said that the market for Airbnb is definitely a factor in the increase in apartment purchases.

However, he noted that “it is not for the faint of heart investors” considering the time and detail involved in managing the units.

Issa believes that overall, the real estate market in 2019 will bring attractive results for both private investors and financial institutions.

“Don’t be surprised to see very large properties change ownership this year as owners use the cash (from their sale) to expand their businesses while remaining tenants” by renting the same properties, he said