The destination of choice for wealthy holidaymakers, Caribbean islands such as Barbados and the Bahamas are famed for their idyllic beaches, white sands and palm trees. Of course, you don’t have to be a millionaire to buy a holiday property on one of the region’s less developed islands. But just how idyllic are the investment prospects in such places?
Properties in the Caribbean offer relatively high rental returns thanks to the climate. That's because the season is pretty much all-year-round. With more than 100 islands to choose from, property developers have been busy constructing everything from apartments and individual villas to resort investments and even retirement properties.
Mortgages of up to 70 per cent of a property's value are commonly available to UK investors through local banks. And according to Caribbean investment specialist Property Frontiers, residential real-estate prices are rising at up to 10 per cent a year.
"Across the Caribbean as a whole, prices vary immensely," says founding director David Cox, admitting that property on St Lucia, St Kitts or Antigua would be beyond the budget of all but the most wealthy.
"Grenada, for instance, offers entry to the market at costs that echo those experienced by Barbados and St Lucia in their infancy. As such, they offer great investment potential," he says. "The island already has better infrastructure and accessibility than many other islands, which is why prices are expected to rise 10 per cent a year over the medium term."
Hotel opportunities
Property Frontiers believes that, because the Caribbean is already such a thriving tourist destination, high-quality villa and hotel accommodation is most likely to offer the best returns in coming years. That's because there is a shortage of these properties in the less developed islands.
Hotels and resort investments have the potential to produce a much higher income stream than traditional holiday lets, because they are leased on a nightly basis, and offer all the facilities and services that travellers need. However, like any investment, the risks need to be carefully weighed up against the potential rewards.
Bacolet Bay is one of just six developments being constructed on Grenada. Once these are completed, the government has pledged to restrict further development to ensure a balance between supply and demand.
Near the island's capital, St Georges, the planned five-star resort will be set in 41 acres of tropical gardens with its own 200m-long beach. A variety of apartments, villas and hotel cottages will benefit from facilities including a spa and fitness centre, beachfront bars and restaurants.
Scheduled to complete in mid-2009, the construction manager behind the project is Bovis LendLease. Financing comes from Cameron & Cameron Asset Management, having invested into the development company specifically set up to develop the resort.
Buyers are required to sign a long-term lease of 20 years with the resort operator, who will then manage the property as hotel accommodation.
Under a lease-back agreement, individual units will be placed in a rental pool and managed by a major US hotel operator (which is in the process of being appointed). For many investors, this will represent the single biggest risk. The operator is responsible for everything from cleaning and maintenance to financial management and promotion of the resort.
Prices start from $430,000 (£231,000) for a 'hotel cottage', meaning that investors will need deposits of about £65,000 in order to obtain a mortgage through a Caribbean bank.
Average room rates per night are estimated at $500, of which the hotel operator takes half. After property taxes, the estimated net income is $36,000 – equivalent to a hefty rental yield of 14.3 per cent. And that's before projected capital growth of 10 per cent a year is factored in.
The figures certainly look good on paper, but with rival hotel developments coming up at the Mount Cinnamon and Port Louis resorts, there is every chance that competition could put downward pressure on the fat room rates upon which both the rental yields and capital growth rely. Occupancy levels as well as rates could suffer in the event of a protracted economic downturn in key wealthy markets such as the UK and US.
There are also other upfront costs for investors that need to be taken into account. Fitting out the rooms to the standards expected of an international luxury hotelier requires a separate outlay of $40,000 for a two-bedroom villa.
To enable the purchase of property in the Caribbean, potential buyers will need to apply for the amusingly-titled Alien Land Holding Licence. Once obtained, alien land holding tax is payable at 2.5 per cent of the purchase price, and a further 2.5 per cent of the sale price when the property is sold. Stamp duty is a further 1 per cent of the purchase price, and legal fees are likely to run to $4,000.
There are annual property taxes equivalent to 0.1 per cent of the assessed market value of the land, and 0.02 per cent of the value of the building.
There are also the financing costs. Property Frontiers states that the level of mortgage interest rates is currently US Libor +3 per cent for the first five years, or a hefty 9.75 per cent at the time of writing.
The popularity of purchasing hotel rooms as an investment took off in the UK with the launch of Guest Invest. But, due to the relative immaturity of this form of property investment, the re-sale market for such products is relatively untested.
Given the exit risks, buyers need to be comfortable with the commitment they are taking on, and research the potential for their investments very carefully.
Grenada can accurately be described as an emerging holiday destination, and has a shortage of five-star resorts.
The number of visitors to the island reached an all-time high in 2007 and the World Travel & Tourism Council predicts that international visitor arrivals will reach 600,000 by 2016, with travel and tourism forecast to grow at the rate of 2.8 per cent per year between 2008 and 2017.
A 'hotel cottage' in Bacolet Bay, Grenada
Grenadian tourist board figures show that stop-over arrivals (as opposed to day-trippers from other islands) grew by 24 per cent between 2005 and 2006, despite a drop in overall visitor numbers of 11 per cent. Mr Cox puts this down to a drop in cruise liner visits, as tourists increasingly consider Grenada as a holiday destination in its own right.
In the same period, European tourists increased by 49 per cent, and one-fifth of all tourists visiting the island are from the UK, staying for an average of 10 nights. Direct fights are readily available from the UK, but steps are being taken to increase availability from the US, which could trigger a dramatic rise in tourist numbers.
Despite government targets to offer 2,700 hotel rooms on the island, there are currently 1,700. Less than half than these are of a three-star standard or higher. There are less than 20 hotels of a good four-star quality, and the few five-star resorts are on the south-west coast of the island.
Average temperatures are 24-30 degrees all year round. As well as sun worshipping, diving and sailing, golf is another attraction – a Four Seasons resort and championship standard golf course is proposed on the southern coast.
However, potential investors should not be fooled into believing that investing in Caribbean resorts is as easy as booking a luxury holiday – like any form of property investment, the risks need to be carefully weighed up against the potential returns.
