Tourism boom fuels Dominican Republic's property market

Dominican Republic´s residential property market is growing considerably, thanks to the continued robust growth of the tourism sector and the rise of luxury international and boutique hotels across the country. In 2014, stay-over tourists rose by 9.6% to around 5.14 million from a year earlier.

The surge in the number of foreign property investors and tourists in the country has been pushing property prices up. In early-2015, the average price of residential properties in the country reached US$2,078 per square meter (sq. m.).

In Puerto Plata, located on the north coast, average apartment prices have increased by a whopping 23% in early 2014 from a year earlier, according to the latest Global Property Guide survey. Bigger apartments showed the highest price appreciation. A 200 square metre (sq. m) apartment in upscale neighborhoods of Puerto Plata, like Sosua, costs around US$2,426 per sq. m, up by 19% from a year earlier.

The same trend is evident for house prices in Puerto Plata, though the price appreciation is not that high. The average house price in Puerto Plata rose by 7% to US$1,689 per sq. m. in early-2014 from a year earlier.

Residential property prices in the country have been rising by an average of 10% every year after the global crisis, according to local real estate experts. In 2014, the total construction costs of houses rose by 3% from a year earlier, after an annual increase of 5%, based on figures from the Oficina National de Estadistica. However, in September 2015, housing construction costs fell by 2.3% from the same period last year, mainly due to a decline in the prices of construction materials.

In Santo Domingo, the country´s capital, luxury developments have been increasing, especially along the coastal areas, making it the center of high-end residential properties. Luxury beach villas in or near the capital city are priced as high as US$7 million.

Dominican Republic gdp inflation

In the Cabarete area, the price of an oceanfront condominium in a central location starts at about US$120,000, while a similar condo in a hotel-style development is priced from around US$250,000, according to Sandy Parekh of Remax Coral Bay Realty.

On the other hand, a 6,000-sq. ft. oceanfront residential property would be typically priced between US$1,700 and US$2,500 per square meter (sq. m.), according to William Holden of Holden Sotheby´s International Realty.

Despite the continued increase in demand, residential properties in the Dominican Republic have remained relatively affordable, and the country is still one of the least expensive housing markets in the Caribbean.

Though Dominican Republic has its own currency, the peso, most real estate listings and transactions are quoted in U.S. dollars.

The Caribbean’s top tourist draw

The Dominican Republic has been the top vacation destination in the Caribbean since 2005, by a considerable margin, according to the World Bank.

  • During the financial crisis of 2008-2009, the country’s tourism sector remained stable, with around 3.98 million and 3.99 million stay-over tourist arrivals, respectively, based on figures from the Caribbean Tourism Organization.
  • In 2011, the country managed to attract more than 4.3 million visitors, up by 4.4% from a year earlier, despite continued weakness in global economy.
  • In 2012, the tourism sector expanded strongly, with tourism arrivals rising by 6% y-o-y to 4.56 million tourists
  • In 2013 the country has enjoyed a modest 2.79% growth (y-o-y) to 4.7 million tourist arrivals by air.
  • In 2014, the country received around 5.14 million stay-over tourists, up by 9.6% from a year earlier while the number of cruise ship passengers also increased 2.7% to 435,494 people over the same period.

The tourism sector continues to grow strongly, amidst robust economic growth. From January to May 2015, the total number of tourist arrivals in the Dominican Republic rose by 6.8% to 2,378,348 persons from the same period last year, according to the Caribbean Tourism Organization. The majority of these tourists came from the United States, Canada, France and Germany.

Dominican Republic tourist arrivals

The government aims to attract about 10 million visitors every year by 2023.

Punta Cana is the most popular tourist destination in the Dominican Republic. Punta Cana’s international airport, situated in the country’s popular eastern region, received around 1.67 million or 66.8% of all tourists traveling to the country during H1 2015.

The Dominican Republic’s tourist developments are concentrated in the eastern and northern regions. Southern areas such as Barahona and Pedernales are less developed and less visited, but there have been efforts to promote them as eco-tourism destinations.

Foreign buyers rush to the coast

Dominican Republic gdp per capita

The Dominican Republic is the top Caribbean choice for foreign property buyers, especially to full-time expats, retirees, and second-home investors. The country has a total population of just 10 million people and a GDP per capita of US$6,481 in 2014, according to the International Monetary Fund (IMF).

Some of the most desirable residential areas are in tourist hot spots such as the capital, Santo Domingo, and the areas on the country’s beautiful Atlantic coast, such as the tourist towns of Sosua and Cabarete, the peninsula of Samaná, and Puerto Plata. Luxury beachfront apartments in places such as Punta Cana and Bavaro, Las Terrenas and Boca Chica have been built in recent years.

One of the most high-profile developments has been the Cap Cana project on the east coast, a high-end residential and tourist mixed development of hotels, oceanfront homes, golf courses and commercial establishments.

There are no restrictions on foreigners’ buying property in the Dominican Republic. “Tourists come for the surfing and the windsurfing, and many of them end up buying homes here too,” says Josefina Covents of the Cabarete-based agency Josefina Covents y Asoc.

Foreign property investments are greatly encouraged by the Dominican Republic government. Incentives, according to the country’s tourism office, include:

  • Tax-free receipt of pension income from foreign sources, including the possibility of moving belongings to the country, is guaranteed by Law 171-07 on Special Incentives for Pensioners and Persons of Independent Means.
  • Foreign buyers receive a 50% exemption from property tax
  • Exemption of taxes on the payment of dividends and interest, generated within the country or overseas
  • Foreign buyers receive a 50% exemption on taxes on mortgages, when the creditors are financial institutions that are regulated by Dominican financial monetary law
  • Exemption on payment of taxes for household and personal items
  • Exemption from taxes on property transfers
  • Partial exemption on vehicle taxes
  • Developers are relieved of all national and municipal taxes for ten years, including the tax on the transfer of ownership to the first purchaser of a property, by Law 158-01 on Tourism Incentive.

Aside from its reputation as a tax haven and long stretches of sandy white beaches and balmy temperature, foreign homebuyers are attracted to the Dominican Republic because property prices remain a bargain relative to the rest of the Caribbean. A newly-built one-bedroom apartment near a beach can be bought for just US$100,000 or less.

A stable government, an improving infrastructure, and easy access via its three international airports are further encouraging foreigners to purchase residential properties in the Dominican Republic.

Housing market cycle

Dominican Republic construction cost houses

Over the past decade the country has had a building boom, much of it was fuelled by foreign homebuyers. Crash-induced foreclosures did not generate a significant drain on the Dominican market because most foreigners pay in cash. Even so, according to Alexandre Houisse of Coldwell Banker Coast to Coast Real Estate, the global crisis did push prices down by about 20-25%.

New development projects fell by 70-80%, as a result of confidence crisis in the wake of global financial troubles, according to Sandy Parekh, broker-owner of Remax Coral Bay Realty. “A lot of people that were going to develop projects have all put them on hold,” he said.

Economic growth slowed sharply to 3.1% in 2008 and 0.9% in 2009, in sharp contrast with real GDP growth rates of 8.5% in 2007, 10.7% in 2006, and 9.2% in 2005.

As the global economy improves, especially that of the United States, the Dominican Republic´s tourism sector and property market started to recover. The foreign market for second homes has been reborn, especially during the last three years, said Realtor Association (AEI) president Emil Montas.   And foreigners with high buying power have in increasingly come to live in the capital after having made large investments in the past two years, according to a report by Dominican Today.

The property market is now growing strongly again, thanks to the boom in tourism and robust economic growth. In 2014, the economy grew by a spectacular 7.3%, from real GDP growth rates of 4.8% in 2013, 2.6% in 2012, and 2.8% in 2011, according to the IMF. The economy is expected expand by a healthy 5.5% this year and by another 4.5% in 2016.

Shortage of affordable housing

Construction activity in the Dominican Republic has been rising in recent years, particularly in coastal areas. In 2014, the construction sector accounted for around 7.3% of the country´s GDP, mainly fuelled by the growth in the new homes market.

However, most of the residential construction projects in the country are aimed at the high-end market. Because of this, the low-end market has been left behind with an acute shortage of low- to middle-income accommodations. It was estimated that the country has a housing deficiency of around 600,000 units. Frequent hurricanes and flooding have exacerbated the shortage. The government has recently pledged to expand its social housing programs and construct up to 40,000 new houses every year until 2023, with the help of the private sector.

Developing the mortgage market

Dominican Republic real lending rates

Dominican Republic has currently a very small mortgage market. In an effort to buoy the real estate market, the government enacted Law No. 189-11, the Law on Mortgage Market Development and Trusts, in 2012. The said law provides several tax incentives and exemptions. Moreover, it also established the Trust as a legal instrument in the country´s legal framework.

The new law is expected to promote the participation of the private sector in providing low-cost housing projects in the coming years, in an effort to meet the increasing demand.

"The implementation of the Law for Development of the Mortgage Market and Trust is expected to help boost the sector in the medium- and long-term, and to mitigate the increased housing deficit in the country," said Jorge Yanes of Fitch´s Latin America Group.

Most property transactions in the Dominican Republic are done in cash. However in the last two years, mortgages offered by local banks have been increasing. Typically, the loan-to-value ratio is 70% of the appraised value of the property and the interest rates start at 8%.