Bahamas Gov’t’s proposed $1M residency bar likely to spook foreign buyers
April 08, 2017
Half a decade later, challenges remain – uncertainty over the Trump presidency, and property oversupply in some regions. In 2016, inward property investment flows fell to $163.2 million, with net purchases amounting to -$49.9 million due partly to the exit of foreign buyers. Foreign investment inflows fell from $1.20 billion in 2014, the year of peak Baha Mar construction (more on this later), to $250.3 million in 2015, with net purchases of -$42.2 million. But Bahamian Central Bank Governor John Rolle downplays the significance of the outflows, suggesting that the Central Bank’s data was “still plagued by incomplete coverage of foreign residential construction”.
The net outflows, nonetheless, are a source of concern given that overall foreign direct investment (FDI) in the Bahamas has been relatively depressed for the past two years.
This is especially worrying given the government’s decision, in the Homeowners Protection Bill, to try to attract “cream of the crop” ultra-high net worth individuals by raising to $1 million the permanent residency threshold.
Foreign Affairs Minister Fred Mitchell describes the current $500,000 investment threshold for permanent residency consideration as “absolutely too low”. “The cost of a work permit is $12,500 for someone who is a managing director of a bank for one year, and then you’re giving permanent residency to someone because he could pay $500,000 for a house. Something is wrong with that.”
However, the consensus among real estate brokers is that eliminating buyers purchasing between the $500,000 and $1 million price points, and disregarding developers who have invested in developing properties targeting clients in the $500,000 to $1 million price range, could produce wider ripple effects in the economy.
George Damianos, Sotheby International Realty’s president has warned that Bahamas must compete against Caribbean rivals offering products the Bahamas does not, such as economic citizenships, implying that the proposed “doubling” of the permanent residency threshold would reduce the nation’s competitiveness.
Some developers do not dismiss the plan altogether but suggest that the government provide a lead time before implementing the change. Jason Kinsale, the developer behind ONE Cable Beach and the Balmoral, emphasizes that it is vital for the Government to introduce the plan in gradual steps, maybe prompting a one-time property-buying surge.
On the plus side, the Bahamas’ pristine beaches and private islands continue to attract the world's elite. In 2016, travel and tourism contributed 44.8% or $4.017 billion to the Bahamian economy, according to the World Travel and Tourism Council (WTTC). So tourism is, by far, the Bahamas' largest industry, and it continues to grow.
Prices firm in the Bahamas, yields good in Nassau
The Bahamas has traditionally had quite high yields. But as such a high proportion property rentals is seasonal, it is hard to get good figures.
Among the different types of properties that we survey, inland condominiums on Nassau have the highest average yields at around 8%, with yields of around 7% for Nassau condominiums along the water. Yields in Abaco and Grand Bahama waterfront are moderate, ranging from 3.57% to 4.45%. Last year we found a similar yield gap for Nassau houses, so it seems that this real factor, not a statistical blip.
Bahamas impose little tax
Rental Income: There are no income taxes but stamp duties are imposed when leasing Bahamian real property.
Capital Gains: There are no taxes on capital gains in the Bahamas.
Real Property: Property taxes should not be a major concern. The maximum tax rate is 1% for properties worth more than US$100,000.
Inheritance: Inheritance is not taxed in the islands.
Residents: Income of residents is not subject to tax.
Buying costs can be very high in Bahamas
Round-trip transaction costs, i.e., the cost of buying and selling property, range from 9.10% to 25.50%. The huge range is partly due to the progressive nature of Stamp Duty, which ranges from to 2% to 10%.
The high transaction costs are also due to the (very high) agent's commission, usually paid by the seller.
Commission for real estate agents in the Bahamas are set by The Bahamas Real Estate Association. The real estate agent’s fee is 6% for developed properties and 10% for undeveloped properties or vacant land.
Bahamas' law is pro-landlord
Rent: Rents can be freely agreed both for long-term fixed term tenancies, and for holiday lets.
In theory some property falls under the Rent Control Act, but it only applies to buildings with a total value of less than B$25,000, so in practice it is inoperative.
Tenant Eviction: The landlord must give the tenant proper notice of rent due and possible eviction for defaulting on rent. If the tenant fails to pay the rent on time, the landlord can summon the local police and repossess the property.
Even though a court order is not necessary for tenant eviction, most landlords bring defaulting tenants to court and sue for uncollected rent.
National Debt could soar to 70% of GDP by end of fiscal year 2017Economic growth remains sluggish in Bahamas, with national revenue just matching national debt. According to the Central Bank, national debt increased by $373.1 million during 2016 to break the $7 billion mark at year-end, closing at $7.042 billion.
Many point to the recent Hurricane Matthew as a major contributor. Matthew’s Category Three-Four storm surge and winds forced the Government into unanticipated borrowing amounting to $130 million from a syndicate of commercial banks.
International credit rating agency Moody’s, in its latest quarterly assessment of the Bahamas’ sovereign creditworthiness, gave an insight into the extent of Matthew’s impact on the Government’s finances by projecting a deficit equivalent to 3.6% of GDP for 2016-2017, from 2.8% the previous year. The rating agency forecasts another $300 million-plus fiscal deficit this year.
“As the Government will incur additional borrowing to cover reconstruction spending for public infrastructure, we now expect the central government debt-to-GDP ratio to reach 70% by end of fiscal year 2017,” Moody’s said.
Economic growth went into negative territory in 2015 at -1.6%, after -0.5% in 2014. The economy is believed to have grown by 0.26% in 2016. The IMF's forecast is for 0.99% growth in 2017.