Jamaica
News - Real Estate - Sales (May 30, 2004)
Investing in
real estate - Assessing the pros and cons
If you are a returning resident,
welcome home. Real estate seems to be emerging again as a serious investment. In
the early 1990s there was a real estate boom with several financial institutions
investing in major new office structures, hotels, factories and homes. At that
time, LOJ's Folio 4 life insurance investment plan did very well for those who
invested in that real estate-linked equity insurance plan. Today, the closest
investment that we have to that is Sigma Unit Trust's Real Estate Fund (which
also balances some fixed income securities in the mix also). Of all the funds on
the local market, including the other two funds that make up the Sigma family,
this is the worst performing and actually shows a negative 12-month growth rate
of -5.13 per cent.
IN DEMAND
At the same time however, industry players in the real estate market remind us
that residential properties, especially townhouses in the $12 million - $18
million range, are gobbled up in some cases even before ground has been broken.
Which, on the flip side, suggests significant rental opportunities there if you
choose to buy and rent.
All of this however, does not mitigate some of
the major disadvantages of real estate in general and the specific situation
here in Jamaica. Yes we are partial to the market because of several reasons. In
the first place, Government policies have not been particularly favourable to
real estate as an investment. There are major taxes and charges involved in
purchasing and selling real estate in Jamaica.
TAXES AND CHARGESWhat are these taxes and
charges? There is a transfer tax of 7.5 per cent of the agreed sale price paid
by the vendor. Then there is stamp duty of approximately 5.5 per cent of the
sale price shared equally by vendor and purchaser. There are attorney's fees of
three to five per cent (negotiable) and you get a break there only if both
parties share the same attorney, which at the best of times is ill-advised.
There is a registration fee at the Titles Office of a half of one per cent of
the sale price, again shared by purchaser and vendor. On top of all of this, you
need to put away funds separately for the sale agreement, letters to utility
companies, and so on. And finally, if the property is being sold by a realtor
you will generally have to fork out another five per cent for the realtor's
commission. You can decide but I am seeing a figure of more than 15 per cent of
the asset there and a top end of well over 20 per cent out of the vendor's
principal.
If then, you are buying to resell, you should
think long and hard about it. If you are buying to hold and rent, then enquire
further of the real estate specialists in the local market.
Matched against this, fixed income securities
and equities offer major tax breaks. It becomes then, a straight exchange
between value added for fixed income and equities as against a significant fall
away in value on your real estate investment.
Bear in mind that each year you are also required
to pay property taxes on all real estate that you own, including your primary
residence. By no means least in the mix is the illiquidity of real estate. On
top of all of the charges and taxed outlined above, real estate is an illiquid
investment and can take anywhere from three to six years and sometimes longer to
offload.
There is still yet another danger in real
estate investing, especially if you chose to buy a significant quantity of land
for that purpose.
There is a large group of Jamaicans who take the
view that any piece of unused land means open season for capture and squatting.
While many understand the need for every Jamaican to own a piece of the rock, it
gives absolutely no one the right to capture anyone's property for their own
purposes. Until our legislators move firmly and unequivocally against squatting,
you could be setting yourself up to risk of verbal and physical abuse or far
worse. Now there are many Jamaicans, especially those from a generation ahead of
the current 35 - 55 age group (which Americans refer to as the 'Baby Boomer
Generation') who swear by real estate as a sound and secure investment in
Jamaica. I know of a very wealthy Jamaican entrepreneur from a humble background
in St. Elizabeth who built himself from the ground up and who not only anchored
his vast wealth on real estate, but accompanies this with his own personal
mantra stated here in his own words: "Land caan rotten".
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