This column provides informative commentary on financial matters and is written by Patrick van Beek, managing Proprietor of Caribbean Actuarial & Financial Services.
Having spotlighted many of the major asset classes since this column began being published I will now look at the asset class which after cash, is almost certainly held by more Guyanese than any other - real estate. I have heard it said more than once that every Guyanese dreams of owing a home. One resource which Guyana has plenty of is land and with vast amounts of land available the government has gone someway to fulfilling that dream through the distribution of lots in housing schemes at concessionary rates . The aim is simple - encourage development by providing the land which the owner then builds real estate on.
Perhaps one day the dream will become a reality, though it seems that certain schemes have proved more popular than others. With improved infrastructure like the construction of a four-lane highway on the East Bank, schemes which are further out of town will become more accessible and hence provide a greater incentive for building there. Most people would probably consider their real estate as their home and a place to eat, sleep and relax. However, what may not be apparent is that a home is also an investment. Since it is a tangible asset, generally it can be considered to provide real returns ie house prices should grow in times of inflation. This is best seen when there is a devaluation of the currency. A property which once sold for tens of thousands of dollars now sells for tens of millions.
Real estate is by far and away the most expensive asset class in terms of unit size -locally some commercial properties may run into hundreds of millions of dollars. Even at the retail end of the market the cost is such that few people can afford to save enough money to buy or build a home outright. Fortunately, there are many institutions locally which will assist by lending the funds required.
Because a mortgage can be secured on the property itself and a home is immovable it provides the type of security which is attractive to a bank. This means interest rates can be lower than when loans are secured on assets which may not be realised in the event of foreclosure. Thanks to concessionary rates of tax on smaller loans and in no doubt in part due to competition from the New Building Society, loans are now available from commercial banks at several percentage points less than prime rates. In fact a recent GBTI advertisement offered a home loan for low-income families at a rate of just 8%. With inflation running at around 5.5% this means that the real cost of borrowing at this rate is only 2.5%. In developed markets throughout the world in the majority of 10-year periods, real estate has consistently provided an average real return well in excess of 2.5%, though this includes commercial real estate which is arguably a higher risk and so would be expected to provide greater rewards. Even so, even after subtracting the cost of financing at current rates it is quite possible that a home could be sold at some point in the future at a tidy profit. Couple this with all the rent that would be saved from owning rather than occupying there seems to be a lot sense in owning a real estate, even if a loan needs to be taken out to finance it
What remains to be seen is if a vibrant secondary market for real estate develops in Guyana. The fact that real estate should provide a real return is a moot point once there is no one to buy it when it comes onto the market. Most real estate agents in the directory seem to be advertising themselves as developers rather than selling existing properties. This seems to fit in with the situation of there being so much new land available for development that it makes sense to build exactly the house you want rather than buy someone else's.
However, if there is sustained economic growth the situation will arise where families' incomes will increase and they may be on the lookout for a larger property or one in a more attractive location. This process is called moving up the property ladder, but unless there is someone to buy the house you currently own it is unlikely you can afford to go up the next step. For a move up to be successful there must be properties which are attractive to first time buyers who in turn must be able to find them. In order for this to happen real-estate agents must offer a service where sellers can advertise their houses and let potential buyers know what is out there and for what price. In many countries estate agents advertise properties for sale in the local press with a picture description and price. If a market is to develop then we need to see the same thing here.
There may also be knock-on benefits to the economy - if someone knows a similar house to their own is going for a certain price it gives them a fair idea what their own house is worth. There is a feel good factor in knowing that you have built up net worth of so much - perhaps if more people were confident of their net worth then, rather than leaving their hard-earned cash in the bank, they would be more willing to invest in riskier investments, thereby fuelling development and growth in the economy.