Tourism boom fuels Dominican Republic's property market
April 18, 2018
The Dominican Republic's residential property market is growing fast, thanks to robust tourism growth and the arrival of luxury international and boutique hotels. Non-resident stay-over tourists rose by 3.8% in 2017 to almost 6.2 million, despite hurricanes Irma and Maria, which caused cancelled flights from major tourist source countries, while cruise arrivals soared 36.9% y-o-y in 2017 to 1,107966 people. The Dominican Republic has a population of just 10.2 million people and a GDP per capita of US$7,360 in 2017, according to the IMF.
There are no restrictions on foreigners' buying property. "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.
Aside from its reputation as a tax haven and long stretches of sandy white beaches and a balmy temperature, foreign homebuyers are attracted because property is still a bargain, relative to the rest of the Caribbean. A newly-built one-bedroom apartment near a beach can be bought for just US$150,000 or less.
Foreign property investment is also encouraged by incentives, which according to the country's tourism office, include:
- Tax-free receipt of pension income from foreign sources, including moving belongings to the country, is guaranteed (Law 171-07 on Special Incentives for Pensioners and Persons of Independent Means).
- Foreign buyers receive a 50% exemption from property tax
- Exemption from taxes on dividends and interest income, generated within the country or overseas
- Foreign buyers receive a 50% exemption from taxes on mortgages, when the creditors are financial institutions regulated by Dominican financial monetary law
- Exemption from 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.
Foreigners are further encouraged by a strong economy, stable government, an improving infrastructure, and easy access via its three international airports.
However, the Dominican Republic is not your usual Caribbean fantasy 'unspoiled virgin island paradise'. It has about 10 million people spread over a mountainous 48,072 sq km, and the social problems include a vast gap between rich and poor, and the highest possibility in the world of death from handguns, though the situation has improved dramatically over the past decade.
There has been an amazing increase in wealth, with the country's average per capita GDP increasing by almost three times from just US$2,460 in 2003 to US$7,360 in 2017. Moreover, the national poverty rate dropped sharply from 41.2% to 30.5% in the past five years.
Also, it does have great attractions for the adventurous traveler. "There's the natural beauty of the landscape. The country is very green, different shades of green," says Monique Frings of Dominican-realty.com. "It has the highest mountain in the Caribbean and a small salt water lake. There are miles and miles of beaches and nobody comes. It is still very open."
Unlike elsewhere in the Caribbean, US travelers are outnumbered by other nationals more used to risk-taking and adventure: the Canadians, the Germans, and the North Europeans. They come to the Dominican Republic in the winters, for it has an agreeable climate, neither too hot nor too cool (28 degrees to 30 degrees), with a continuous gentle breeze. Only July and August are really hot.
The economy grew by a healthy 4.8% in 2017, amidst the disruptions caused by the hurricanes Irma and Maria, after real GDP growth rates of 6.6% in 2016, 7% in 2015, 7.6% in 2014, 4.7% in 2013, 2.8% in 2012, and 3.1% in 2011, according to the IMF. The economy is still expected to expand by a healthy 5.8% this year and by another 5% in 2019.
However the surge in foreign property investors has been pushing prices up by an average of 10% every year since the global crisis, according to local real estate experts. Currently, prices for residential properties with an ocean view typically start at about US$100,000 while beachfront properties start as low as US$150,000.
At the high-end market, prices of luxury homes, which typically have an asking price of at least US$5 million, are stable, but in some areas, these prices are also rising robustly.
"The bottom has been hit and now, up it goes," said Cesar Herrera Gutiérrez of Provaltur International, the exclusive affiliate for Christie's International in the Dominican Republic.
The volume of luxury property transactions increased by around 10% last year, according to Sandy Parekh of Re/Max Coral Bay Realty. Despite this, it is "certainly nowhere near 2008."
The Dominican Republic also offers good rental yields, with some areas registering net rental yields as high as 10% annually, according to some local real estate experts.
What is on offer
The Dominican Republic's property market is very diverse. Prices at the lower end of the luxury market range from around US$100 to US$420 per square foot (sq. ft) for a prime oceanfront home, according to Parekh. However high-end residential property prices can go as high as US$5 million in the north and US$9 million in the south. The highest-priced home in the Dominican Republic is listed for US$25 million, ReMax's Parekh added.
In Santo Domingo, the country's capital and largest city, the average price of a two- or three-bedroom house in the city center stands at around US$150,000. In recent years, luxury developments have been increasing along the coastal areas, making it the centre of high-end residential properties. Luxury beach villas in or near the capital city are priced as high as US$7 million.
In Puerto Plata, on the north coast, apartment prices have been rising by double-digit figures. Bigger apartments have showed the highest price appreciation. A 200 square metre (sq. m) apartment in upscale neighborhoods of Puerto Plata, like Sosua, costs around US$2,400 per sq. m.
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 Parekh.
Tourism-related developments include Amber Cove, the luxurious new Carnival Cruise Lines port-and-tourist village at Maimon, located just west of Puerto Plata, which finally opened in October 2015. Royal Caribbean is also planning to open a new port near Playa Dorada, between Puerto Plata and Sosua. Airlines have also started to increase their services into Puerto Plata International Airport as well as nearby Santiago International Airport.
The construction of major hospitality projects like Cap Cana, the Moon Palace Resort in Punta Cana, and San Souci Port in Santo Domingo are also expected to boost tourism.
Though the Dominican Republic has its own currency, the peso, most real estate listings and transactions, especially of high-end properties, 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. By 2016, non-resident stay-over tourists had increased to almost 6 million, while cruise arrivals surged to 809,286 people.
- In 2017, tourism continued to grow, despite hurricanes Irma and Maria. Non-resident stay-over tourists rose by 3.8% y-o-y to almost 6.2 million in 2017, while cruise arrivals soared 36.9% to 1,107966 people.
"During the year 5,500 new hotel rooms became available in the market. This is a record in the Dominican Republic's history," said Radhames Martinez Aponte, the country's vice minister of tourism.
"Yet even with that increase we were able to have an increase in the hotel occupancy rate [from] 75% in 2015 to 78% in 2016," Aponte added.
The government aims to attract about 10 million visitors a year by 2023.
Foreign buyers rush to the coast
Tourist developments are concentrated in the east and north. 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.
Punta Cana is the most popular tourist destination. Punta Cana's international airport, situated in the country's popular eastern region, receives around 65% of all tourists traveling to the country every year.
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.
Residential construction costs surging
In February 2018, the total construction costs for houses rose by 6.8% from a year earlier, after an annual rise of 5.1% in 2017, 3.4% in 2016, and a decline of 0.9% in 2015, based on figures from the Oficina National de Estadistica.
By property type:
- Detached house (one level): construction costs rose by 6.8% y-o-y in February 2018
- Single-family house (two levels): construction costs rose by 6.3% y-o-y in February 2018
- Multifamily house (four levels): construction costs rose by 6.4% over the same period
- Multifamily house (eight levels or more): costs increased 7.6% y-o-y in February 2018
Shortage of affordable housing
The construction sector has accounted for more than 7% of the country's GDP in recent years. During the first two months of 2018, the number of permits granted for the construction of apartments soared 29.2% compared to two years ago (2017 figures are not available), according to the Oficina National de Estadistica. Over the same period, permits granted for housing construction also rose by 11.5%.
However, most residential construction is aimed at the high-end market.
The low-end market has an acute shortage of accommodation, and the country has a housing deficiency of around 600,000 units.
Frequent hurricanes and flooding have exacerbated the shortage. Economic damage from natural disasters in the Dominican Republic costs around US$420 million a year, according to a recent study conducted by World Bank and the Ministry of Economy, Planning and Development. In September alone, two strong hurricanes, Hurricane Irma and Hurricane Maria, devastated a large number of houses, particularly those built of low-quality materials near the sea.
By end-September 2017, Dominican Republic received a US$150 million catastrophe contingent credit from the World Bank under the Catastrophe Deferred Drawdown Option.
The government recently pledged to expand social housing and build up to 40,000 new houses every year until 2023, with the help of the private sector.
Around 80% of all homes in the Dominican Republic are detached houses.
The 2008 crash
Crash-induced foreclosures did not significantly impact the Dominican Republic's market, because most foreigners pay in cash.
Even so the global crisis pushed prices down by about 20-25%, according to Alexandre Houisse of Coldwell Banker Coast to Coast Real Estate. New development projects fell by 70-80%, as a result of confidence crisis in the wake of global financial troubles, according to Parekh. "A lot of people that were going to develop projects put them on hold," he said.
Economic growth slowed sharply to 3.1% in 2008 and 0.9% in 2009. But the property market is now growing strongly again, growing by a healthy 4.8% in 2017, after real GDP growth rates of 6.6% in 2016, 7% in 2015, and 7.6% in 2014, according to the IMF.
In 2017, nationwide unemployment rate was 5.5%, at par with the previous year, according to the IMF.
Developing the mortgage market
Most property transactions in the Dominican Republic are done in cash, because the country has a very small mortgage market. To help it, in 2012 the government enacted Law No. 189-11, the Law on Mortgage Market Development and Trusts, providing tax incentives and establishing the Trust as a legal instrument.
As a result, more mortgages have been offered by local banks in the past five years, typically, with a loan-to-value ratio of 70% of the appraised value of the property. Interest rates start at 8%.
In 2017, the total value of loans for house purchases was DOP171.4 billion (US$3.47 billion), up by 11.7% from a year earlier and about 15.5 times the amount in 2000, according to the Oficina National de Estadistica. Housing loans grew by more than 18% per year from 2000 to 2017.
Yet when compared to the size of the economy, the country's mortgage market remains very small, equivalent to just 4.8% of GDP in 2017 - only a slight expansion from 2.8% of GDP in 2000.
- Tourism boom fuels Dominican Republic's property market - October 18, 2016
- Tourism boom fuels Dominican Republic's property market - November 29, 2015