Category: Insights

Many people are asking if this is a good time to invest in Real Estate seeing that Trinidad & Tobago are in a recession.  Before answering that question, it would be wise to look at some of the advantages of investing in Real Estate while bearing in mind that investments in Real Estate are generally regarded as long-term.

As pointed out in the Association of Real Estate Agents (AREA) Principles of Real Estate classes held each year at Roytec, there are several advantages in such an investment.  Amongst them are:

• There is relatively a fixed supply of land available and in addition, with a growing population, demand is likely to increase over time.
• Real Estate is varied and therefore an investor has many choices, e.g. Land, Residence, Apartment Building, Offices, etc.
• Over the years, Real Estate investments have provided a hedge against inflation
• Assuming a mortgage is obtained, there is a “forced” savings in the mortgage payment and therefore a build-up in equity (i.e. the difference between the value of the property and the mortgage) all other things being equal.
• Many people have become very rich by using leverage to enhance the return on their real estate investments although it can be dangerous at times.

With this in mind, the present situation locally could present some opportunities to make such an investment.  Some of these are:

• Due to the slow-down in the economy, it might be possible to negotiate with developers and contractors. You can ask for extras and upgrades or request a reduction in price
• Even if you are not buying a new home, you can still negotiate. If a home has been on the market for quite some time the seller may now be willing to accept a much lower price due to the current recession.  Take your time in selecting the property you like best and then be prepared to negotiate.  It is also a good idea to get a professional valuation before signing an agreement to purchase as you may be paying too much!
• Even banks may be willing to negotiate slightly with their terms. Call different banks and get their terms before selecting one.  Negotiate for

1. Interest rates, (the higher the rate, the higher the instalment you pay).
2. Term (length) of loan, (the shorter the term, the higher the instalment although you will pay less over the life of the loan).
3. Loan-to-value ratio (the higher the ratio, the more you can borrow – all other things being equal).
4. Management fees (sometimes called negotiation fees).  See if any of the banks will offer you any concessions and under what conditions.

As in all investments, caution is strongly recommended.  Real Estate investing requires a relatively large sum and one has to remember the closing costs.  In addition, economists are forecasting that there may be job cuts throughout Trinidad & Tobago. If you think there is any chance that your job might be in danger, it would be unwise to now go into a long-term debt like a mortgage loan.

It is also important for everyone, especially in today’s fragile economy, to have a nest egg to fall back on.  Experts recommend that you have 3-6 months of expenses put aside for emergencies.  If the cost of investing in real estate will wipe out all your rainy-day funds, you may want to save more before investing.

As you can see from above, while there are many reasons not to buy now, there are also several advantages why buying now might make sense.  Although historical data does not predict what will happen in the future, it may assist in making a decision.  Over the last 20 years, the yield on residential real estate has been in excess of 10% p.a. – despite the downturn in 2008.  In other words, a property purchased in 1996 for $200,000 would now sell for more than $1,300,000.

Finally, when purchasing a home, it is important to remember that while it can be a very good investment, there are other factors involved such as quality of life, pride of ownership, etc.  In the final analysis, the decision is yours and you have to carefully consider your personal circumstances before making a decision.

The MMRR has featured prominently in the news recently.  Many people however are not familiar with the term and the purpose of this article is to try and demystify some of the mystery surrounding it.  First, a few questions for those of you who have a mortgage.

1. Do you know what type of mortgage you have – fixed, variable or adjustable?
2. Is there a penalty for early repayment?
3. What is the split in your monthly payment between principal and interest?

If you could not answer one or more of these questions, apparently you are not alone.  A few years ago, the Central Bank of Trinidad and Tobago carried out a survey and discovered that many borrowers were unaware of key aspects of the mortgage loans.  As a result, in September 2011, it introduced the Residential Real Estate Mortgage Market Guidelines.  The two important features of the guidelines were (a) the requirement of a Disclosure Statement and (b) the introduction of a Mortgage Market Reference Rate (MMRR). In the case of the former, it was specified that lenders must supply to borrowers a minimum set of information regarding their mortgage loans.

This information includes:

1. The amount borrowed and the term (Number of years)
2. The type of mortgage (Fixed, Variable or adjustable)
3. The MMRR and the margin (explained later)
4. When your rate is expected to be reviewed
5. The various charges and fees
6. An amortization schedule showing the split in payments between interest and principal.

As regards to the MMRR, it is a reference rate which, when added to a “margin” (determined by the lender), will equal the interest rate of the mortgage.  The margin is based on the credit history of the borrower, the Loan-To-Value ratio (the percentage of the value of the property that is borrowed) and the location of the property.  The MMRR on the other hand is calculated on a quarterly basis by the Central Bank and is a weighted average of yields of applicable Treasury Bonds and the Cost of Funds in the banking system.

The good news (from a borrower’s standpoint), is that if you have an adjustable or variable mortgage that is due to be reviewed and the MMRR has declined since the last date on which your interest rate was fixed, then the lender MUST lower the interest rate on your mortgage.  On the other hand, if instead the MMRR has increased, the lender does NOT have to increase the interest rate on your mortgage.

In addition, your mortgage rate can NOT be changed more than once every twelve months on your review date and there is also a ceiling of how much the interest rate on your mortgage can be increased by over any three year period (350 basis points or, the increase in the Repo’ rate – whichever is the larger).

As you can see from the above, the MMRR has a direct effect on your monthly mortgage payments.  You should therefore keep a check on it and ensure that you are being charged at the correct rate.  To do this, look at the disclosure statement from the lender or if you cannot find it, call them and find out what is your margin, the current interest rate on your mortgage and when is your review date.  On the review date, check the MMRR in the newspapers (or online at http://www.central-bank.org.tt/content/mortgage-market-reference-rate-mmrr) and add it to your margin.  If the answer is less than the interest rate on your mortgage, call your lender immediately to get it reduced! You can also check our loan calculator online at https://www.gafarrell.com/useful-information/ to ensure that the monthly payment is correct.  Should you need any assistance, please contact us (https://www.gafarrell.com/contact-us/) at any of our four convenient locations.

For a recent history of MMRR rates, you can go to http://www.centralbank.org.tt/sites/default/files/MMR%20Announcement%20March%201%202016.pdf

A copy of the history is also shown below.

At the beginning of 2014, market conditions appeared favourable. Since that time however, there have been significant developments that have changed the once bright outlook.

– While the global economy appeared to be coming out from under the dark cloud that had been hanging over it for some time, this is now threatened by the economic stagnation in the Eurozone and Japan, as well as the economic slowdown in China, not to mention the economic effects of the Ebola virus.

– Oil prices which have a significant effect on the local economy have plummeted from around $90-95 a barrel (at the beginning of 2014) to under $60 per barrel.

– After experiencing a growth of 2.1% in 2013, the Central Bank reported that economic growth locally was unexpectedly flat in the first quarter of 2014.

– Headline inflation in Trinidad & Tobago, after remaining relatively flat for the first half of 2014, rose to 9% in October 2014.

– Partly because of the increase in headline inflation mentioned above, the Central Bank relaxed its accommodative monetary policy stance it had adopted for the last four years and has now raised its repo’ rate twice within the last 3 months, from 2.75% to 3% initially and then subsequently to 3.25%. This has resulted in one commercial bank (so far) raising its prime lending rate to 8% which would seem to signal that the days of record-low, mortgage interest rates are now over.

As a result of these developments, the government has already started cutting back on expenses and reducing budgets, and private investors now appear to be in a “hold” mode due in part also to the upcoming elections in 2015. Nevertheless, there are still many projects well underway throughout the country which may help cushion the economic impact of all of the above.

In the north, there are:

• A 5-storey, 40,000 sq. ft. office building at Queens Park West (Cost $50M).
• A 6-storey 68,000 sq. ft. office building at Queens Park East (Cost $100M).
• Three, 6-storey office buildings in St. Clair (Costs unknown).

In the south, construction has started on two mega malls:

• C3 Centre with 6 levels and comprising 600,000 sq. ft. (Cost $450-500M)
• South Park Mall with 200,000 sq. ft. of leasable area (Cost $300M)

In Tobago, there is the $400M Milsherv office accommodation project while in the central region, there is the proposed $900M upgrade to the Centre City Mall.

In addition, the Central Bank of Trinidad and Tobago’s September 2014 Business Confidence Survey (BCS) reported that the corporate sector is cautiously optimistic about the near-to- medium term prospects.

Consequently, the short term outlook for the local economy and the real estate market is cloudy and filled with uncertainty. It now remains to be seen to what extent the local economy will be affected by all of these events.

The dark cloud that has been hanging over the world markets for the last few years eventually seems to be lifting. Evidence of this can be seen in the fact that the IMF has forecasted that the global economy will show growth by 2.9% in 2013 and 3.6% in 2014.

Not to be outdone, the local economy, after declining over the period 2009 to 2011 at an average of 2.3%, now appears to be turning around. Based on preliminary data, the Central Bank of Trinidad & Tobago has estimated that the economy grew, albeit slowly, in 2012 (1.2%) and 2013 (1.5%). Consequently, bearing in mind the somewhat mild recovery and with inflation seemingly under control, the Central Bank maintained its accommodative policy stance and left the repo rate unchanged at 2.75% where it has remained since September 2012. This has led to record-low mortgage interest rates that resulted in a double digit growth in demand for real estate mortgage loans.

All of this was not lost on private investors. After a self-imposed moratorium on the construction of commercial real estate for 4-5 years, there are now several signs that commercial development has picked up throughout Trinidad and Tobago.

In the north, construction is underway on:

• A 5-storey, 40,000 sq. ft. office building at Queens Park West (Cost $50M).
• A 6-storey 68,000 sq. ft. office building at Queens Park East (Cost $100M).
• Three, 6-storey office buildings in St. Clair (Costs unknown).

In the south, construction has started on two mega malls:

• C3 Centre with 6 levels and comprising 600,000 sq. ft. (Cost $450-500M).
• South Park Mall with 200,000 sq. ft. of leasable area (Cost $300M).

In Tobago, there is the $400M Milsherv office accommodation project while in the central region, there is the proposed $900M upgrade to the Centre City Mall.

Furthermore, the government announced that it is working on a strategic plan for the development of the 4C’s (Couva, Chaguanas, Carapichaima & Charlieville) and UDECOTT has stated that it has a mandate to construct 74 projects at a total cost of $19B.

Bearing in mind all of the above, the future of the local economy and the commercial real estate market appears bright for the first time in about five years. The major risks would seem to be the fall in international energy prices and the spiralling murder rate. Investors however seem to be hopeful, at least for now, that the government will take the necessary steps to mitigate these risks and ensure that growth continues in these two spheres.