Construction outlook 2014

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CDB loan SPECIAL REPORT: 2014 DEVELOPMENT OUTLOOK to fund Oversupply and uncertainty, but also optimism Palestina roadwork VI construction industry emerging from recession

By JASON SMITH jsmith@bvibeacon.com

Gov’t inks $819k contract with G-Unit

By NGOVOU GYANG ngyang@bvibeacon.com In 14 days, work is set to begin on the Pleasant Valley Bridge in Palestina, which was severely damaged during the passage of Tropical Storm Otto in 2010.

On Tuesday, government inked an $819,848.58 contract with G-Unit Construction for the bridge repairs and drainage rehabilitation in the area.

The work is the first major project funded by the Caribbean Development Bank loan of $15.6 million approved by the United Kingdom in 2012, said Dr. Drexel Glasgow, government’s chief of infrastructure planning, research and development.

CDB see page 18

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uilding activity tends to stall during a recession. Funding dries up, investors get nervous, and contractors idle their INSIDE: tools. Since BALLOONING COSTS 2008, that was Construction costs in the certainly the Virgin Islands are among case across the the highest in the region. C a r i b b e a n , See graphic on page including 24-25 to find out why. much of the Virgin Islands. But don’t tell that to James Hunt.

“I’ve been here four years and I’ve been incredibly busy,” said Mr. Hunt, who manages construction projects for the VI office of the firm BCQS. “All my work is over in the North Sound area.”

Some of the millions of dollars worth of construction that has

By CHRYSTALL KANYUCK ckanyuck@bvibeacon.com

Beacon Business..........................8 Vol. 29 No. 33 • 2 sections, 56 pages Road Town, Tortola, British Virgin Islands © 2014, The BVI BEACON

Construction continues on Mosquito Island earlier this month. taken place on the northern tip of Virgin Gorda recently can be attributed to one-off events, Mr. Hunt admits. For example, Sir

Gov’t’s HLSCC arrears growing College establishes endowment fund

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Photo: TODD VANSICKLE

Government’s debt to the H. Lavity Stoutt Community College for the tuition assistance programme has grown since last year, college President Dr. Karl Dawson said this week.

During last year’s Standing Finance Committee deliberations, then-bursar Ursula Moore told legislators that the college was

owed about $4.2 million for the BVI Student Tuition Assistance Programme for the period between 2009 and 2012.

Under the programme, Virgin Islands nationals — about 80 percent of the student body — receive free tuition at the college.

Asked this week about the current arrears for the programme, Dr. Dawson said he didn’t have the exact figure, but the amount has increased in the past year.

These arrears come on top of arrears from the college’s annual

Arrears see page 19

Richard Branson was forced to rebuild his “great house” on Necker Island after it was destroyed by a lightning strike in 2011.

“But it hasn’t just been that.

We’ve had Mosquito Island; we’ve

Construction see page 24

Ministry still waiting on greenhouse proposals But ‘one or two’ expected soon

By CHRYSTALL KANYUCK ckanyuck@bvibeacon.com Government had hoped to progress with the Paraquita Bay greenhouses with the help of qualified experts last year, but after the public tender notice was released in November no firms submitted any proposals to

operate the facilities, according to the Ministry of Natural Resources and Labour’s recent presentation to the Standing Finance Committee.

Speaking to the committee during its deliberations earlier this year, Permanent Secretary Ronald Smith-Berkeley said that three potential bidders had picked up the tender documents from the Ministry of Finance, according to

Greenhouses see page 19

Page 24 | Thursday, February 27, 2014 | The BVI Beacon

Special Report

The BVI Beacon | Thursday, February 27, 2014

Special Report

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Construction: VI developers, lenders optimistic that industry is emerging from recession Continued from page 1

had Oil Nut Bay,” Mr. Hunt said, referring to large villa developments in the area aimed at the super-wealthy. “And I really see that area for the next five, six, seven years as having the potential for construction to maintain at a healthy level.”

North Sound may be a rare bright spot, but generally it has been a rough few years for the VI construction industry. In its major subsectors — villa/resort, local residential, commercial and infrastructure — activity slowed and in some cases stalled completely during the recession. Major challenges remain, but most of the industry observers interviewed for this article said they are finally seeing hopeful signs that a recovery in construction activity may gather steam in 2014.

Real estate market

First, though, obstacles will have to be overcome. Due to previous expansion, the real estate market is now burdened with excess inventory that dampens enthusiasm for new builds.

Currently, there are about 200 villas priced above $500,000 for sale in the territory, and there’s a glut of more than 90,000 square feet of vacant commercial space available, much of it in Road Town, according to Edward Childs, a director at real estate broker Smiths Gore.

Government spending, traditionally a big driver of construction, has markedly slowed amid austerity policies. And while National Democratic Party leaders have long been touting the planned expansion of the Terrance B. Lettsome International Airport and the extension of Road Harbour’s cruise ship pier as having tremendous potential to stimulate growth, it remains uncertain when work on either project will start.

Nevertheless, optimism about the world economy’s prospects is increasing, and this confidence may eventually benefit VI builders, developers and others who depend on the sector to make a living, Mr. Childs said.

During recent winters, it seemed that recovery was imminent because central banks in Europe and the United States

way to build, especially in these modern times with modern materials.”

For example, using steel-frame premanufactured buildings could bring down the costs of homebuilding. Mr. Butler, the BCQS director, said that in other countries, governments operate “affordable housing” programmes to bring down costs for lowand middle-income buyers.

“I think the cost of labour and the costs of materials, that’s kind of a fixed cost,” he said. “To me, you can’t really subsidise that, but you certainly can with land costs. And also if you do these on a volume basis, use the same design and you just do a rollout. It has to be economies of scale.”

Steve Fox, an architect with the VI office of OBM International, has seen a similar trend as architecture firms across the region cut rates to win work.

“It’s hard to pull yourself out of that once you’re in it,” he said.

“People have been expecting fees to be reduced.”

Firms took hits and stayed in business, but the trend is not sustainable, said Mr. Stoutt, the Contractors Association president.

“When you start doing that, it can spell trouble for any industry,” he said. “You weren’t able to grow your business, and I don’t think anybody is in business just to stand put, barely pay your bills. You always want to make your business bigger and better.”

Affordable housing

Changing design

VIRGIN ISLANDS BUILDING COSTS AMONG REGION’S HIGHEST Some see need for affordable housing programmes

By JASON SMITH jsmith@bvibeacon.com

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hat the Virgin Islands is a particularly costly place to live won’t come as a surprise to anyone who has ever tried to build a house here.

Merciless topography, scarcity of available parcels, and demand from wealthy villa-building foreigners keep property costs perpetually high. And that’s just for the land.

With import duties, pricey shipping, a limited labour pool, and other logistical headaches inherent in building on a small island, it’s no wonder VI construction costs are among the highest in the region.

“For a three-bedroom home, you’re almost looking at a minimum outlay of at least $500,000 just for the construction,” said Sjoerd Koster, the head of banking services at VP Bank.

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he cost to build most types of structures in the Virgin Islands routinely tops costs across the Caribbean, according to the BCQS Market Trend Report 2012. VI construction industry observers attribute this to a small labour pool, a high cost of living, import duties, and shipping costs for building materials, among other factors.

Regional costs A comparison of regional building costs is striking. In 2012, for example, the cost to erect a warehouse in Trinidad and Tobago ranged from $50 to $80 per square foot on average, according to the project management firm BCQS. In the VI, the same structure costs an average of $80 to $130 per square foot.

On a per-square-foot basis, a more complicated building, such as a “medium quality” house or apartment complex, starts at $110 in Jamaica and $140 in St. Maarten. Prices start at $200 in the VI, according to the BCQS study.

Out of the 10 countries surveyed, the study found that the VI has the highest average building costs in most categories and the smallest population. Labour is the biggest cost driver, according to Ben Butler, director of BCQS’ VI office.

“It’s reflected across the board in the pumped money into their economies to get consumers spending again, he said. However, when the stimulus efforts stopped, so did buying and investment activity.

“I always said that the one year that I see good sentiments left over

Graphic: TODD VANSICKLE

cost of living in the BVI,” he said. “It’s not that construction workers are getting paid more than they should do; it’s basically the cost of living which sets it.”

Job estimating Dion Stoutt, the managing director of ADC Construction and president of the Contractors’ Association of the VI, agrees that labour is a big factor in driving up cost, but mainly because it is often used from the previous high season and not flattening out in the summer season, I’ll finally believe that we are getting through the worst. And that, I believe, has happened,” Mr. Childs said.

Dion Stoutt, the managing director of ADC Construction and

inefficiently, he said. That’s often a result of management not paying ample attention to how workers are used, according to Mr. Stoutt.

“In the States people can bid a house using man hours,” he said. “They know it takes a man two hours to do a task. You really can’t do the same calculation down here because the structure is not there in terms of the ability to

control the labour on site.”

He added that some contractors aren’t familiar with the details of what they should charge for materials or how to properly price a job estimate.

“They have nothing in place to go back and say: ‘Well, I charge $10 to lift a brick; it costs me $2, so I can reduce my margins to $5 and I’m still making money,’” he said.

“Or, ‘I charge $10 to lift a brick; it costs me

$15 and I’m losing money.’ But they keep using that same rate all the time and they’re either up or down.”

The Caribbean Development Bank sees that as a problem facing contractors across the region. That’s why last July the CDB partnered with H. Lavity Stoutt Community College to teach contractors and artisans in the use of a specialised spreadsheet the bank developed to simplify project bidding.

president of the Contractors Association of the VI, holds a similar view about the potential for the sector’s recovery in 2014.

“There are a lot of things that are on the table, around the corner, but we’re still not fully there,” he said.

Development applications received by the VI Planning Authority back up that view, according to VIPA Chairman Louis Potter. The authority usually receives about 300 applications annually, and actual construction occurs each year on about 200 of those projects, Mr. Pot-

ter said. Though home-building and commercial applications have been “relatively slow” in coming in, he added, his conversations with developers lead him to believe there may soon be a “surge” in activity, especially if government infrastructure projects get going.

“The course allows guys to become more efficient in job estimates and be less dependent on quantity surveying,” said Dr. Derry Hodge, HLSCC’s dean of workforce training, referring to cost estimation specialists.

The five-day workshop, he added, attracted more than 30 attendees and was so popular that HLSCC plans to offer it again this year. Better estimating should allow “At this stage there needs to be that second burst of energy,” he said.

Recession’s effects If the pace of activity picks up, it will be welcome news for contractors, many of whom have had to cut into their profits to keep

contractors to be more competitive and issue fewer change orders, Dr. Hodge said.

Technology The type of building technology employed also contributes to costs, according to Mr. Stoutt, of the Contractors’ Association.

“In many cases we’re still building like the ’60s: putting up plywood, pouring concrete,” he said. “It’s not the most efficient

In recent years, government has unveiled or pledged to develop three initiatives that aim to make home ownership more affordable. In September 2011 the VI Party-led government amended the Customs Management and Duties Act to exempt first-time homebuyers and certain types of investors from import duties on building materials.

More than $110,000 in exemptions was handed out under the programme during the first nine and a half months of 2013, Customs Commissioner Wade Smith told legislators during this year’s Standing Finance Committee deliberations.

The National Democratic Party-led government has made similar efforts towards improving housing affordability.

A “land bank” to offer buyers subsidised land costs is in the works but hasn’t yet been formed due to a lack of funds, Deputy Premier Dr. Kedrick Pickering said in an October interview. However, a Virgin Gorda Lands Committee to distribute Crown lands near North Sound recently has started meeting and should make initial distribution recommendations by March, Dr. Pickering said in December.

Additionally, Premier Dr. Orlando Smith said in January that the 2014 budget would include a $300,000 allocation to the Ministry of Health and Social Development to start an “embryonic” social housing programme.

their firms afloat.

“To me, ultimately what’s happened is you’ve got less work and the same number of contractors, so you’ve got more competition in the market now,” said Ben Butler, a director with BCQS. His colleague, Mr. Hunt, said that

the bids developers are receiving these days reflect that perspective.

“Historically, overhead was 13, 14, 15 percent. We’re now getting percentages a lot lower than that on some projects,” he said. “I think that’s a reflection that people want to win the work.”

In addition to lower bids, some clients have changed their building designs, eschewing solar panels and other environmentally sustainable features that carry a higher upfront cost, according to Mr. Fox. “People’s focus on those issues just went off the map altogether,” the architect said. “It wasn’t a consideration. It was just a survival situation where people just wanted to build whatever they could possibly manage to build.”

Those who could still afford to build also became more riskaverse, paying closer attention to reducing their liability and reviewing the risk that contractors would go bankrupt, according to Mr. Hunt.

“There’s lower margins, more pressure on the contractor. He’s got to watch his cash flow; he’s got to maintain his position all the way through. That puts the client in a certain amount of risk,” he said.

“How do you respond to that? You speak to your lawyer.”

Delayed effects The recession affected different parts of the sector at different times.

Erick Oeseburg, the owner of Poolworks BVI, said demand for the high-end “vanishing-edge” pools his company designs and installs didn’t wane until 2011 because the money to pay his company had previously been allocated.

“2009 was our best year ever: That’s because of the nature of projects here,” he said. “People have to plan years ahead. The

Construction see page 26

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Special Report

Construction from page 25 homeowners finally got done and said, ‘We bought a piece of land in the BVI, and finally after 11 years we have a complete functioning house.’”

Mr. Stoutt’s contracting firm, by contrast, felt the effects almost immediately after the 2008 collapse of the US investment bank Lehman Brothers, which, in turn, had a chilling effect on financing commercial buildings.

“A lot of things were on the table,” he said. “You were bidding a lot of projects, but when they got the prices it disappeared.”

Mr. Fox said OBMI didn’t begin to seriously feel the effects of the recession until 2010. The firm saw a “mini-rebound” in 2011 driven mainly by clients who were wealthy enough to withstand the recession’s effects, but the amount of work later dipped, only to rebound again in 2013.

“At the moment, and it’s been like this for years now, it’s been hard to predict into the future for more than four months,” Mr. Fox said.

North Sound The future of development in North Sound is a lot easier to predict. This year the pace continues to be frenzied, with work continuing at Oil Nut Bay and Mosquito Island.

At ONB, eight of the planned 88 villas have been completed, and construction on seven others will progress this year, according to Emily Oakes, the development’s director of marketing. About half of the development’s total lots have been marketed for sale, she added: Of those, 23 have been sold.

Other main components of ONB’s infrastructure — including a nature centre, children’s club, two tennis courts and two cisterns designed to hold 360,000 gallons of water — will be complete by March 15, Ms. Oakes said. Work on ONB’s “marina village” and marina is scheduled follow.

At Mosquito Island, which Sir Richard purchased in 2007 for $20 million with plans to build a $75 million “eco-resort,” work on the project’s core infrastructure is progressing. This year, the island’s first villa, which will be owned by Sir Richard, will be completed, according to Charlotte Tidball, a spokeswoman for the development. It will be followed by ten other privately

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imely and relevant statistics about the state of the Virgin Islands’ construction industry are hard to come by. Despite a National Democratic Party campaign pledge to provide better data about the number of new housing starts in the territory, statistics available from the Town and Country Planning Department are vague and current only to 2012. Totals of planning applications — there were 511 filed in 2009 and only 434 in 2012— are broken down into subcategories, such as residential, resort, commercial or government. However, some statistics gathered from a variety of sources paint a picture of a construction industry that has stagnated up to 2012 and is yet to return to rapid growth.

$3m (2)

2007

26

homes sold

$2-3m

$1m

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(15)

$3m (3)

2008

29

homes sold

$2-3m

$1m

(11)

(15)

2009 $2-3m (4)

15

homes sold

$1m (11)

2010

$2-3m (4)

20

homes sold

$1m (16)

2011

$2-3m (4)

15

homes sold

$1m (11)

$3m

2012

(2)

9

$2-3m (2)

homes sold

$1m (5)

Construction see page 27 Graphic: TODD VANSICKLE

Special Report Construction from page 26

will have made people nervous,” he said, referring to Scrub Island Resort’s recent bankruptcy filing. “I think a lot depends on the airport.”

Foreign vacationers aside, fulltime residents’ demand for houses and affordable apartments remains strong even though supply is limited.

“On the existing available home, I don’t think there has either been a tremendous price drop or an increase in offer,” said Mr. Koster, the banker.

Mr. Butler, the BCQS director, added that he believes a combination of two factors — banks being more “bullish” on lending and government initiatives to improve affordability (See sidebar on page 24) — will also help to spur homebuilding.

owned villas, to be finished by 2020, Ms. Tidball added.

Additionally, roads are being cut and infrastructure prepared at nearby Blunder Bay, a 10-villa community that will be accessible only by boat. The project is “fully funded” and is receiving a lot of interest in part because of its location on scarce waterfront land in the area, according to Ashburn Harrigan, one of the property’s developers. He added that he expects the area’s popularity to grow.

“I know what the North Sound is, what it is capable of, and what it can become,” Mr. Harrigan said.

All of the activity in the area and the lack of work elsewhere has led Tortola-based contractors to become willing to make the commute to North Sound, according to Mr. Hunt, the BCQS project manager.

“We’ve now got Tortola contractors bidding on the majority of the projects we do on Virgin Gorda,” he said. “That’s just a sign of the times. People are willing to follow the work.”

Commercial space

‘Exclusive’ neighbourhood Property values on villa plots in the “exclusive” North Sound neighbourhood have held up in part because most of the other good land has been taken, according to Chris Smith, a broker with Coldwell Banker.

“If you look at Virgin Gorda, for example, the prime stuff is Oil Nut Bay and now Blunder Bay, where you’re talking about a couple of million bucks an acre minimum,” he said. “After that you have Nail Bay on Virgin Gorda, and that’s about it. You have nothing else for an expat buyer: very, very little.”

Mr. Childs, of Smiths Gore, said that he expects the unsold villa inventory to hamper demand for new builds across the VI for some time, even when taking into account that 50 to 100 owners of the 200 listed properties aren’t in a particular rush to sell. He added that in 2008 — a year that reflected contracts signed at the height of the market in 2007 — 29 villas were sold for more than $500,000. By 2012 that number had fallen to nine villas sold.

“Even if 20 get sold each year, that’s still 10 years’ inventory,” he said, adding, “It’s still

The BVI Beacon | Thursday, February 27, 2014

Photo: TODD VANSICKLE A worker makes repairs to The BVI Beacon’s office in Road Town.

way more supply than demand, and that’s the situation. But I think what we’ll see is the welllocated, good house that is correctly priced will sell.”

Villas on the lower end of the price spectrum are now seeing inquiries, he said, and buyers seeking villas that cost $3 million or more are usually wealthy enough to have comfortably weathered the recession. But it’s the middle market that “virtually disappeared” during the recession, he explained.

As Americans see the values of their primary homes increase and feel better about their economic prospects, interest in buying second homes in the VI could increase, according to Sjoerd Koster, head of banking for the VI branch of VP Bank. Given the long lead time to select a property and obtain an alien landholder’s licence, however, im-

proved consumer sentiment today could take two or three years to be reflected in improved building statistics, he added.

“It doesn’t immediately mean you’ll have people building or buying here,” Mr. Koster said.

But Mr. Smith added that the size of the villa inventory isn’t the only consideration. Successful foreign couples in their 40s or 50s, he explained, have been the VI’s typical villa-buying clientele: They often bought land to buy their dream villa, which they kept for several decades.

“Meanwhile, the house is 30 years old; it needs renovating completely. That’s our inventory,” he said.

Apart from villas, he added, the outlook for developing largescale hotels and resorts is unclear.

“I haven’t particularly seen it.

The experience of Scrub, I think,

Mr. Butler said the demand for new office and commercial space is much more limited.

Banks are now asking developers to have at least 70 percent of their buildings leased before granting financing to build, he said. With 90,000 square feet of vacant space available, that’s a hard sell.

“As a tenant, I’m not going to sign up to a developer based on a plan,” he said. “You’re going to look at what’s already constructed.

So to me the commercial real estate market is — well, look around: There isn’t really anything going on.”

Complicating matters is the uncertain outlook for the financial services industry, he added.

“If you’re sat there now as a law firm, a trust company, you’re probably going to sit there in your existing premises and make do until you have a better idea of what’s going to happen,” he said.

Mr. Childs said that he’s seen two trends among companies seeking office space. First, they’re looking for smaller space, he said, adding that a company that previously sought 5,000 square feet may now be happy to make do with as little as 1,500 square feet.

Additionally, companies that previously preferred to lease “shell finish” spaces and finish the interiors of the offices themselves are now asking developers to provide completed spaces.

Mr. Koster added that unless there’s a wave of new companies seeking to relocate to the VI, he expects that few new office buildings will be constructed any time soon. Bankers are willing to fund projects, he said, but only if they

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make financial sense.

“There are of course reasons, but it has to be a good reason,” he said.

Government projects Many construction industry stakeholders say the biggest level of uncertainty involves governmentfunded infrastructure projects. Since the 2011 election, Virgin Islands Party legislators have openly criticised Premier Dr. Orlando Smith’s handling of the economy, particularly his insistence that government should reduce its spending on petty contracts now in order to finance major works in the medium and long term.

In his recent budget address, Dr. Smith pledged that government would make substantial progress on its project list this year.

The list — 15 projects, including the airport expansion, sewerage modernisation, and dock improvements — is an ambitious one, calling for more than $63.75 million to be spent in 2014.

But nearly two months into the new year, the bulk of those funds has yet to mobilise. However, the list doesn’t include two long-awaited infrastructure initiatives: road repairs funded by the $15.67 million 2012 loan from the Caribbean Development Bank and more than $19 million in works to finish preparations on the Biwater project, which is designed to improve the territory’s water production and wastewater treatment systems.

Both of those initiatives are slated to advance this year as well, officials have said.

For Mr. Stoutt, of the Contractors Association, getting infrastructure projects moving is a must if officials want to grow the economy.

“It’s similar to what the US did when they were in their recession: They went out and built roads and bridges and all that kind of stuff,” he said.

He added that decades of rapid development have left the VI government with a considerable to-do list of expensive projects.

“They’ll be over $10, $15, probably over $50 million — all of them,” he said. “And the reason for that is basically we have to rebuild our whole infrastructure as a country.”

Mr. Childs said that such improvements serve as a signal to both foreign and domestic investors that the VI is good place to put their money.

“It’s important,” he said. “If you don’t get the infrastructure right, a lot of the growth from the private sector can’t happen.”