There has been significant coverage in regional media in recent months on the subject of Citizenship By Investment (CBI) programmes, which are now operating in five Eastern Caribbean countries. Some of the commentary underestimates the crucial potential value of these programmes for the development of new hotels, as well as for the redevelopment and modernization of existing resorts.
David Jessop of the Caribbean Council wrote in a recent article, that “at a purely economic level, it is hard to understand why such schemes are not designed to be sustainable in ways that bring continuing income to the country concerned. Without any residency requirement there is no long term gain in the form of other taxes or fees.”
In an earlier report, the Migration Policy Institute (MPI) stated, “The economic benefits of the property model are unclear. Significant property purchase may raise housing values and help stabilize declining prices — albeit only at the high end of the market, as programs impose minimum property values,”
Both of these observations miss the point – and the potential – inherent in the CBI resort investment model. The fact that the Caribbean Citizenship By Investment programmes do not require residency make them ideal for financing new tourism accommodation. New build apartments and cottages, with resort facilities, can be developed and sold as real estate to CBI purchasers, who hardly ever stay in their properties, but then make them available to the resort operator as hotel accommodation and share in the rental income. Some existing older hotels, which are struggling financially and in desperate need of updating, can also be converted to CBI resort product.
The similar US federal EB-5 programme does actually require investors to take up residency in the States, which does not suit all investors. Nevertheless, the EB-5 programme has been used to fund a large volume of resort development in the Orlando area and one of our clients is utilizing that programme for the medium term funding of a US branded resort in the US Virgin Islands.
Our consultancy has worked with governments and developers across the Eastern Caribbean in recent years, resulting in one large scale luxury resort which opened last year in St Kitts and a US branded mid-market resort scheduled to open in November this year, also in St Kitts. Several other client projects have already achieved planning permission or are at various stages of development in Antigua, Dominica and Grenada, including a US branded conversion of an existing older hotel and several new boutique resorts.
Why is the CBI resort investment model so vital for tourism development in the Caribbean? Dr Anthony, Prime Minister of St Lucia, recently cited “the persistent decline in foreign direct investment caused by the world financial crisis” as the grounds for his government deciding to initiate a CBI programme. The specific critical problem for resort development in the region is the lack of debt finance.
Interest in the Caribbean from resort investors has increased in the last two years but debt finance from banks and other financial institutions in the region, particularly for new build projects, is virtually nonexistent. The banks in the region suffered a significant level of loan defaults on resort projects which were badly impacted by the 2008 financial crash. US and European banks, which often lacked previous experience in the region and in the resort sector, suffered even more severely for funding poorly evaluated resort projects in the boom period, prior to 2008. It will be some considerable time before these banks contemplate a return to the Caribbean resort finance market.
I have moderated the last two panel sessions on CBI programmes at both annual Caribbean hotel investment conferences – CHRIS in Miami and CHICOS in Puerto Rico. Likely sources of debt finance for Caribbean resort projects today are more likely to be US based hedge funds, trusts and pension funds rather than regional banks. Those institutions – and hotel branded operators – now understand that the CBI resort investment model is a relatively robust basis for hotel development, when structured carefully. While the 2008 crash saw the conventional vacation home buyer market collapse, with buyers abandoning 25% paid deposits, the buyer drop-out rate is negligible once a CBI client commences the process.
The two key factors for the sustainability of the CBI resort investment model are the thoroughness with which government agencies vet the CBI applicants and the quality of the investment inherent in the new-build resort or redevelopment of the existing hotel. I believe that the best option for the CBI investor is, firstly, to purchase “genuine” real estate – a condominium, freehold property or a fractional interest in a freehold property – far better security than shares in a hotel owning company. Secondly, I believe that the CBI purchase should be made within a formal resort environment – not a single stand-alone villa.
Implemented correctly, the CBI resort investment model can create a successful ongoing hotel operation of quality, which provides direct employment and boosts overall tourism revenue for the island. Nearly all CBI clients are cash buyers and, therefore, the CBI funded resort can operate as a debt free business going forward. This is a major economic sustainability factor. Resorts fail – not when they can’t make payroll – but, rather, when they can’t pay the bank.