Article: Priced-Out Buyers in the VI

December 31, 2006
National Perspectives
Priced-Out Buyers in the Virgin Islands
By JENNIE GREEN

CHARLOTTE AMALIE, V.I.

COLLEEN WILSON, a lawyer who relocated her family to St. Thomas for a job at a multinational insurance company this spring, has not rented a home since she was 21. Not in Britain, nor in Jamaica, nor in Florida. Here in the Virgin Islands, however, she has been renting a three-bedroom house for more than eight months. And she doesn't like it.

"Renting seems like such a waste," she said, of the modest house on a small lot in the eastern Red Hook section of the island that could be hers to own for slightly more than $1 million.

"But I'm just not comfortable with the range of prices here," she said. "Based on the property values in Miami, where we lived before, I expected to purchase something nice for $500,000 or under within six to eight months of exploring the island. Everything I'm interested in is $1.2 million, and I can't see myself mortgaging my entire lifestyle to incur that kind of debt."

The high prices would not have been an issue had Ms. Wilson and her husband, Ludlow Bailey, moved here five years ago, before a new government program to attract investment and businesses to the Virgin Islands drove up prices.

Until recently, homes on the United States Virgin Islands - made up of St. Thomas, St. John and St. Croix - were widely considered undervalued. The traditional housing market was dominated by a small group of retired or semiretired second-home buyers from the mainland who were undaunted by the prospect of growing old in an outpost environment that was not home to an abundance of medical specialists, state-of-the-art hospitals, department stores or even paved roads.

In 1989, all three islands were ravaged by Hurricane Hugo, and in 1995, Hurricane Marilyn destroyed nearly 80 percent of the homes on St. Thomas. The economy sagged and the housing market softened further.

Afterward, initiatives were undertaken to strengthen and diversify the economy, and in 2001 the Economic Development Commission was created.

The commission offers companies a number of inducements, including a 90 percent exemption on local income taxes; a 90 percent exemption on dividends; a 100 percent exemption on gross receipts taxes; a 100 percent exemption on property taxes; a 100 percent exemption on excise taxes; and 1 percent customs duties. The creation of the commission was accompanied by an aggressive marketing campaign, which resulted in about 100 companies' moving to or expanding on the islands between 2002 and 2004, employing nearly 3,100 people.

"Of course there's a trade-off," said Nadine Marchena, the commission's assistant chief executive. "In exchange for the benefits, we expect our companies to invest in the community. We ask them to buy locally, support regional charities and establish residency - anything that demonstrates an intention to stay."

The commission does not require the companies or their employees to buy real estate. But it did not take long for most of the newly imported chief executives to realize the tax benefits of buying.

"They made it their business to know everything there was to know about the agency and its benefits," Ms. Marchena said, "to the point where they were functioning as ambassadors for the E.D.C., telling their clients why it would be beneficial for them to buy this or that property."

The Virgin Islands housing market has changed dramatically since 2002. On St. Thomas, there are now 110 homes for sale, 44 of them listed for more than a $1 million. In 2006, 17 homes have sold for over $1 million, compared with one home that sold for $1.01 million in 2002.

The St. John market has risen, too, because of a severely limited supply of housing: two-thirds of the island is a national park. And in St. Croix property values have also increased, though much less dramatically, because of its distance from the economic and tourism hub of St. Thomas and its less densely populated area.

While the commission's efforts attracted wealthy professionals, they also gained the attention of federal officials. In 2004, the United States Treasury Department concluded that the commission's efforts were costing the federal government more than $1 billion a year in lost tax revenue. An investigation revealed a smattering of financial abuses coupled with lax residency requirements. The findings resulted in new residency rules, requiring all employees to be physically on the island for 183 days a year.

"Enrollment in the E.D.C. program has been adversely affected," said Nick Bailey, co-owner of John Foster Real Estate. "Several of the E.D.C. companies were audited or couldn't meet the residency requirements, so they left. That put the brakes on the rapid, artificial inflation of the real estate market."

Those people who bought or built expensive luxury homes were not in a hurry to sell for less than what they considered these homes to be worth, which resulted in a glut of high-end properties.

"The market has leveled off, but it isn't going down," said Dawn Wheatley, a broker with John Foster Real Estate, "and the reason is a limited supply of inventory. Almost no new housing has been built in more than 20 years, and we're back to our original client base of second-home buyers from the U.S. The downside is that there are very few homes available in the under-$300,000 range."

"Even the average two-bedroom, two-bath condominium is going for between $400,000 and $700,000 now," she added.

Prospective home buyers with limited resources might hope for some break in the market. For now, though, the market is strong, and residents breathed a sigh of relief this year when a gentle hurricane season left all three islands intact.

More than eight months after her relocation, Colleen Wilson has put house-hunting on the back burner. "We're still ready to buy the right property for the right price," she said. "But I don't want a damaged place. Neither of us are particularly hands-on people."

Yet not everyone is complaining about the market here. Aaron Black, a developer with a company called Labal, says he is not concerned about the flat property values. Labal was founded by Mr. Black's father, Gordon, who fashioned a viable business from a hobby of transforming hurricane-damaged properties into luxury homes and villas, then flipping them for a handsome profit.

"Fortunately for us," the younger Mr. Black said, "a key factor beyond the E.D.C. that sustained real estate values here was and continues to be an abundance of baby boomer wealth. Don't forget, this is a generation that has been driven by their dreams and desires, and the kinds of properties we've been developing are compatible with that common fantasy of escaping to a tropical paradise."

Neither of the men expressed concern about finding buyers for their two luxury properties on Frenchman's Bay and Magens Bay, listed at $4.2 million and $2.5 million, respectively.

"It'll probably sell to someone from the States," said Gordon Black, standing beside a new infinity pool on the deck of his recently finished 4,250-square-foot property, Villa Cote Sud, on Frenchman's Bay. From there, a long staircase pauses at an outdoor shower before leading directly into some of the finest snorkeling grounds on the island. "It might not go as quickly as it would have a couple of years ago," he said, "but we can always rent it out in the meantime."