Economy

Investors Scour for Deals in Hurricane-Battered Caribbean Islands

Investors benefit from the misfortune of others
Investors Scour for Deals in Hurricane-Battered Caribbean Islands

Within 48 hours of Hurricane Maria blowing out to sea, leaving a ransacked Caribbean region in its wake, Andrew Dickey got a phone call from an investor looking to buy a hotel in the region.

“That was a shock,” said Mr. Dickey, a senior broker with real estate services firm JLL. “It was pretty quick: You get the call that says: ‘I hope I’m not insensitive, but…”

It takes more than a Category 5 hurricane to completely shut down the Caribbean real-estate market.

Deals, of course, have been delayed in the hardest-hit areas, where power still hasn’t been completely restored and many buyers and sellers have moved to the sidelines during the initial recovery effort. But the markets for both commercial and residential property have begun stirring to life sooner than many would have thought after 2017’s harrowing hurricane season.

Investors are being lured back by the short-term prospect of low prices and the long-term possibility that disaster aid could spark an economic boom in the region.

“Hopefully they’ll use this as an opportunity to rebuild a lot of the infrastructure and make some pro-business changes, so the island will emerge stronger than it was before,” said hedge-fund manager John Paulson, who has purchased such trophy properties in Puerto Rico as the Condado Vanderbilt Hotel in San Juan and the St. Regis Bahia Beach Resort over the past five years.

For now, interest is particularly keen among sellers cutting prices and buyers looking for discounts. For example, a five-bedroom house with a panoramic sea view in Dutch St. Maarten, which was on the market for $3.5 million in the summer, is now for sale in damaged condition for about $1.9 million, according to Walter Kassel, managing director of local brokerage Tendal Real Estate.

The owner of a seven-bedroom house on Tortola, the largest of the British Virgin Islands, had been asking $3.25 million. Now the owner is open to any offer, according to Robert Cooper, director at 7th Heaven Properties Ltd., a U.K.-based brokerage.

On Puerto Rico, brokerage firm Douglas Elliman is getting ready to start marketing two, side-by-side 413-acre waterfront parcels that recently had been appraised for $90 million each, according to Jessica Robertson, a realtor with the firm. That is about half their original appraised values and “starting points for us especially given where we stand at the moment with the recovery efforts,” she said.

The search for buried treasure in the Caribbean is nothing new. It has been going on years particularly after values sank to distressed levels during the 2008 global financial crisis.

Investors such as Mr. Paulson, Nicholas Prouty, Blackstone Group LP and Goldman Sachs Group Inc. have purchased billions of dollars worth of hotels, office buildings, distressed debt and other assets in the region.

But some deals have turned out to be fool’s gold, especially for investors who thought they would be able to flip properties for a quick profit. While real estate in most of the U.S. has recovered, Puerto Rican property has remained low as the island has lurched from the Zika-virus scare to the government’s default on billions of dollars of debt.

Mr. Paulson, who bet against residential housing before the 2008 crash, said in an interview last week that he is ahead on his investments in Puerto Rico, although he doesn’t expect them to be “home runs” without a healthy economy. He agreed that one of the problems is that other big institutions didn’t follow him and a few other investors to the island “at a level that’s as strong as I’d like to see,” creating a healthy market.

The big hurricanes of 2017, particularly Maria and Irma, have added a new pile of problems in the region. Some islands, like Barbuda, suffered so much damage they remain virtually uninhabitable.

In Puerto Rico, the recovery has been slow, particularly in terms of restoring power. More than 100,000 residents are estimated to have left the islands, raising the specter of a long-term decline in the country’s economy if they don’t return.

The retail sector, in particular, is a mess. One sign of this is the lawsuit that luxury-mall landlord
Taubman Centers Inc. filed against luxury retailer Saks Fifth Avenue about a month ago alleging the retailer has dragged its feet in the rebuilding of its store in the Mall of San Juan. Hudson Bay Co., the owner of Saks, said it is in the process of repairing the store and is focused on its staff’s well-being.

But some landlords have benefited. Because dozens of hotels and office buildings have shut down, those that have remained open are doing strong businesses with recovery workers and others.

Optimists hope Puerto Rico’s economy will benefit from what they describe as a “mini-Marshall Plan,” the tens of billions of dollars in hoped-for U.S. recovery aid similar to support offered to Europe at the end of World War II. Many investors also believe the hurricanes will help spark a favorable resolution of the bankruptcy negotiations under way among creditors, Puerto Rico’s government and the public power utility.

“Maria was the best thing to happen to Puerto Rico vis-à-vis its debt,” said Kenneth Blatt, chief operating officer of the hospitality division of Caribbean Property Group LLC, an investor in the region.

Thanks to the hurricanes, Puerto Rico also might have missed the bullet in the tax overhaul effort under way in Congress.

House Speaker Paul Ryan and Jenniffer González-Colón, Puerto Rico’s delegate in Congress, released a statement last month indicating the territory might get more benign treatment. “It is our intention to make improvements to our tax-reform legislation as it relates to Puerto Rico when we go to conference,” the statement said.

Investors already in the region said they would be making new investments once the economy recovers. For example, Mr. Paulson said he would probably go ahead with an expansion he is planning for the St. Regis.

Mr. Prouty, who has invested $350 million in equity in housing, retail and a marina in Puerto Rico, said he, too, is looking for other deals. He added that investing is Puerto Rico was only for those committed for the long haul.

“There are no flips here,” he said. “It’s a question of plodding along and doing the right thing.”

Source/The Wall Street Journal

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