Inflation & Belize Real Estate
A recession and inflation are not new things, they are part of any economy. The US just came off a long bullish market. Just because inflation and recessions happen, doesn’t mean investment stops, strategic investors look to new avenues and leverage cost-effective ways to place capital.
When economies turn, people no longer look for Return on Investment, they look for Return of Investment. They start looking for investments and strategies around;
- Wealth Preservation
- Asset Protection
- Tax Optimization
When looking at a real estate investment, there are generally 2 elements cash flow and appreciation. Savvy real estate investors and people investing in offshore markets like Belize tend to dive a little deeper and there are essentially 4 pillars strategic real estate investors look for;
- Capital Protection,
- Capital Growth,
- Yield (Cash Flow),
- Favorable Taxation.
Luckily, when you invest in Belize Real Estate, you are in a position to check all 4 boxes. You also have the added benefit of limited supply and scarcity, in a market with growing demand.
When looking at a strategic investment strategy, it is important to remember that money doesn’t just “go away” it moves. A recession, by definition, is;
“a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP.”
In times of globalization, markets are more dependent on each other but are also still independent. What happens in one country, does not mean the same will happen in another. Just because one region is experiencing economic decline does not mean that another region will see the same effects.
In 2021, the US economy is seeing the highest inflation rates in over 40 years. This is largely fueling a lot of what is happening in the global economy. Real estate, however, is one of the only assets and investments that is pegged against inflation. When looking at an investment that is more resilient to inflation, you want something that has price adjustments that meet or are pegged to the rate of inflation. If you have an investment asset that adjusts with inflation, while still producing cash flow, you are well-positioned and diversified.
Typically, the more inflation-resistant investments are able to pass price increases along to their customers. This remains true in Belize. I am not by any means saying we are recession-proof, but Belize (especially real estate) is well situated, all things considered.
One important thing to note is that property values and rental income both tend to keep up with inflation over time, and the investors that invest in real estate tend to outperform the market during inflationary periods. For example, in 2021, inflation reached its highest level in 40 years, and real estate (both rental income and asset appreciation) outperformed the S&P.
Generally, real estate assets and investments perform their best when inflation rates exceed 7% (which they do now). The inflation-hedging capability of real estate stems from the relationship between GDP growth and the demand for real estate. As economies expand, and people relocate or reallocate, the demand for real estate drives rents higher. When you have a combination of residents looking for rentals combined with the vacation rental market, you are able to adjust. Higher rents with better occupancy, in turn, translate into higher capital values. Therefore, real estate tends to maintain the buying power of capital by passing some of the inflationary pressure on to tenants and by incorporating some of the inflationary pressure in the form of capital appreciation.
Real Estate Investment & Inflation
When compared to other investments, real estate tends to hold up well against inflation. But it’s important to realize that there are many different types of real estate investments, and not all have the same inflation resistance. When looking for more inflation-resistant real estate assets it is important to look for;
- Short-term lease durations: This allows you as an investor to quickly adjust rents (market rent and net rent) to meet the demand and inflation. A vacation rental market is perfect for this. Typically, the average rental on Ambergris Caye is 6 days, and prices can very quickly be adjusted. You can also offer monthly rental rates, which avoid locking in at below-market rent for a year.
- Price powering: Can you control and quickly adjust the price when needed to match inflation? Vacation rentals give you high control as you can continuously adjust rates to meet inflation and/or demand. A lot of other rental markets have vacation rental restrictions (controls), or rent controls in place. Belize does not, which makes it a great investment when it comes to ownership control.
- Resilient or increasing demand: Belize has seen double-digit tourism growth every year except in 2020 (COVID restrictions). The country has just entered the world’s radar and has frequently been at the top of the list when it comes to emerging vacation destinations.
- Fewer Regulations: Belize does not have rent controls. This allows you to manage your rentals as needed. We are also one of the very few “pro-landlord” countries in the region. We do not recognize squatters, and as the owner of the property, you can dictate who stays there and for how long.
- Favorable Taxation: Belize is a tax haven. Belize has very low property taxes. Low corporate tax. No capital gains tax. And no estate tax.
Recessions and inflation are not permanent. Real estate investors make money through rental income and appreciation. Good real estate investments offer passive income, stable cash flow, tax advantages, diversification, and leverage. It is important to invest not only for the short term but for the long term as well. Even though Belize real estate is counter-cyclical when compared to other real estate investments, we still see the boom in bullish markets when people have more accessible capital. After a Bear market comes a Bull market which will see all real estate (especially vacation markets) have a more substantial appreciation.
In regards to investment, Belize is unique as it is both Central America & the Caribbean, the mainland has more similarities to the Yucatan Peninsula (Cancun, Playa Del Carmen, Tulum, etc), while Ambergris Caye is more comparable to the Cayman Islands, The Bahamas, British Virgin Islands, Etc. The fact Ambergris Caye is an island, there is far more scarcity of property than being on the mainland. As a real estate investor, scarcity works to your advantage for both rental income and property appreciation. The fact that Ambergris Caye is one of the few opportunities with high tourism growth and land available, makes it a unique opportunity in today’s market.
Ambergris Caye (being the largest island in Belize and #1 destination), luckily has island economics. Island economics means that you see greater property appreciation on an island due to scarcity of property and limitations on how much can be built. The island economics of Ambergris Caye creates scarcity, not only scarcity of property and rental accommodations but also in completed resale homes.
Belize also has growing tourism with unprecedented COVID tourism recovery. Ambergris Caye (the #1 destination in Belize) and the island where the popular San Pedro Town is located see over half of all tourists coming to Belize. Even though Ambergris Caye is experiencing tourism growth, the destination has not seen rental accommodations meet the demand.
Even though tourism is growing and we have seen Belize tourism rebound in 2022 to pre-COVID numbers, the total rooms for rentals have stayed stagnant with almost no new inventory and often even a decline in inventory. Tourism pre-COVID grew by over 60% in 5 years (over double-digit annual growth of 14.6%) but lodging and inventory stayed the same. Even now, rental inventory saw a -5% decrease from Q4 of 2022 to Q1 of 2023. Below you can see the lodging and rental inventory on Ambergris Caye over the last 3 years;
Rental Inventory: From Q4 2022 to Q1 2023 lodging
Ambergris Caye Lodging Inventory
For lodging, as a point of reference, Ambergris Caye saw -2% in Q3 2022, -1% in Q4 2022, and -5% in Q1 2023. Over the last 3-years, Ambergris Caye lodging saw a decrease of 20% in inventory though tourism has increased by 14.6% annually. So compounded tourism growth over 13 years at an average of 14.6%.
As you can see, the 3-year trend has been consistent with many quarters seeing a dip in rental inventory (even with an increase in demand). This creates a unique opportunity for investors. With the shortage in supply and increase in demand, there is a need for more lodging and rentals.
Belize has a unique offering when it comes to real estate investment. We have a market that is not overly leveraged (due to a lack of traditional bank financing), and we are a growing destination that produces cash flow and can quickly adjust. The lack of inventory of rentals and resale properties creates a unique opportunity. If you combine that with the fact we are not as susceptible to real estate bubbles (due to most real estate being owned outright with cash) we are one of the most well-positioned markets.
- Low Carrying & Holding Cost.
- With Fee-Simple Title You Own the Property Outright as a Tangible Asset.
- Belize is a Tax Haven.
- An Appreciating Asset in a Desirable Destination.
- Primarily Cash Market Making Les Susceptible to Real Estate Bubbles.
- Growing Demand with Limited Supply
It is also important to note that you own a tangible asset when you buy a property in Belize. Belize has full foreign ownership with the ability to own a property with a fee-simple land title (outright ownership). Unlike stocks, bonds, or cryptocurrency; if the value goes down (or even has no value/defaults), you still own a tangible asset in Belize that you are in control of and can use. Belize is also a tax haven, and property taxes are very low, which means the cost of ownership is next to nothing.
Benefits of Off-Shore Investing in Belize
- Diversification: It is always important to diversify investment, but that is even more true during economically challenging times. Diversifying across asset types, markets, and even currencies is essential for wealth preservation and hedging your investment. Diversification into a hard asset like real estate protects your investment and hedges against the stock market’s volatility.
- Find Deals in an Unsaturated Market: Belize does not have a formal MLS. Though this makes the property search process more difficult (and a realtor almost essential) it also creates opportunities. As a reactive market, you can find great deals that fly below the radar. By expanding your reach and your investment in an emerging market (like Belize), investors can broaden their opportunities and find diamonds in the rough, and undervalued assets.
- Less Saturation & Competition: A relatively new market, like Belize, has less competition. One reason I love Belize is the fact you don’t have to be a genius to be successful. There is a very low level of competition (in almost all industries in Belize) which allows an investor to take success from more competitive markets. Real estate in Belize is a tangible offshore asset that can help shield an investor from the volatility of market swings.
- Bigger Upside: Growth in offshore emerging markets has the potential to outpace growth in developed economies like the US, where populations are getting older and growing slowly.
- Taxation: Property taxes are low (almost nothing). For property around Secret Beach, for example, the property taxes are $75 to $90 per year. Canal-front homes in Mahogany Bay have property taxes of roughly $108 per year. Belize has a corporate tax rate of 1.75% (offshore) to 3% (domestic). With no capital gains tax and no estate tax.
- Residency: Property ownership can grant residency. In Belize, you can qualify for an “Investment Residency” through real estate investment. With the state of the current market, Belize can provide a safe haven for those hoping to escape the current state of uncertainty. Through the residency, you can protect your current assets and help secure your future.
People assume that real estate values in the US reflect the global market; when in reality, there are many markets that thrive during inflation and a recession. Generally, when people lose in the domestic markets, they look to alternative investments (like Belize). When money leaves one country for another, it is an “Exodus of Capital”. When investors lose trust in domestic systems and institutions they often look for tangible assets offshore. It is also important to note that Belize is also predominantly a cash market, because of this, we don’t have overlending and real estate bubbles. Right now, Belize is not only seeing tourism growth but also experiencing an influx of expats looking to relocate, this is an “Exodus of People”. When a population is experiencing a growth of high net-worth individuals, you see even higher property appreciation. As economies expand, and people relocate or reallocate, the demand for real estate drives rents higher. When you have a combination of residents looking for rentals combined with the vacation rental market, you have a favorable real estate investment.
The global inflation rate is why so many people are investing even more in Belize real estate. The reason they are doubling down on Belize real estate when inflation is on the rise is that you have an asset hedged against inflation, in a market that is not as susceptible to bubbles (due to lack of over-leveraged real estate), with a low-cost of ownership.
In 2009 RE/MAX in Belize had more transactions than any year prior. At this time, the US had the subprime mortgage crisis and global economies saw a downturn. When inflation comes, there is more money in circulation, the money does not “go away” it is often just reallocated. Diversifying your portfolio is always recommended, and there are a lot of opportunities off-shore in markets like Belize. History has a tendency to repeat itself, and if history is any indication of what will happen, Belize is sure to see more real estate transactions and be a great investment vehicle for years to come.
During economically slow times, many investors look at tangible assets like real estate and gold. During periods of uncertainty and economic stress, it is important to look at getting not only a Return on Investment but also a Return of investment.
Property in Belize is a cost-effective way to get both. Ambergris Caye Real Estate provides investors a means to own a finite commodity that is a tangible real asset with future demand. We often like to view Belize real estate as counter-cyclical, when other markets go down, Belize generally stays stagnant or increases.
If you are looking to learn more about the Belize market and investment opportunities in Belize let us know! Our team and RE/MAX Belize look forward to chatting with you.