The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Successive governments have “buried their head in the sand” and are “guilty of this fallacy” that simply building more homes will solve The Bahamas’ housing crisis, a senior banker has warned.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business that instead of focusing on constructing more affordable housing the Government should work with the commercial banking industry and other lenders to cure the “overhang” of distressed properties that has persisted since the 2008-2009 recession.

Disclosing that his own BISX-listed institution alone has “a distressed property portfolio worth $20m that’s not doing anything”, he renewed a call - made now to three different prime ministers - for the Government and private sector to collaborate in creating a real estate investment trust (REIT) or similar corporate vehicle.

Mr Bowe, telling this newspaper that he and Fidelity were prepared to back the REIT with their own money, said that once appropriately financed it would buy distressed properties from Bahamas-based commercial banks at a fraction (cents on the dollar) of what they are valued at on industry balance sheets.

Once acquired, these properties would then be refitted to provide a ready-made affordable, low cost housing solution for hundreds of Bahamian families. Besides selling them at a knock-down price, which would be feasible given the lower purchase price paid by the REIT, the Fidelity Bank (Bahamas) chief said it would also have the freedom to enter more creative housing arrangements such as lease-to-own deals.

Besides easing an ‘affordable’ housing shortage, which Keith Bell, minister of housing and urban renewal, recently estimated at around 12,000 units, Mr Bowe said his proposal would further boost the Bahamian economy by finally removing distressed assets that have clogged bank balance sheets for up to 15 years.

In so doing, he explained that funds previously tied-up in non-performing loans would now be freed for lending to productive sectors of the Bahamian economy such as business/commercial ventures as well as qualified borrowers in the housing market.

This would drive both economic growth and job creation, and Mr Bowe suggested his proposal would get more Bahamian families into their homes faster since the properties are already built rather than having to wait for construction to be completed. It would also likely be less costly for the Government, and potentially reduce its risk exposure, while making greater inroads into the ‘affordable’ housing shortage.

“The Government sees the building of homes, and multiple administrations are guilty of this fallacy, as they view the construction of new homes on Crown Land as being cheaper and a more productive use of property,” Mr Bowe told Tribune Business.

“When you use Crown Land to create excess inventory, you crowd our commercial opportunities that Crown Land can be used for. You crowd out opportunities to use that property for industrial purposes; farming, development opportunities that may involve light manufacturing, and you are not addressing the overhang from the 2007-2008 financial crisis.

“Governments largely bury their head in the sand and view the distressed properties as a banking problem as opposed to seeing it as a national problem.” Bahamian commercial banks have still not completely cleared the backlog of distressed credit that resulted from the recession of 15-16 years ago, with total industry loan arrears - across all categories including mortgages - peaking at $1.2bn.

That has since been considerably reduced, but the challenges with finding qualified buyers able to obtain mortgage financing and lack of confidence mean many distressed properties from that era still remain on the banking industry’s books.

Mr Bowe, acknowledging that the Government has to manage social risk in contrast to the banking industry’s financial risk, told this newspaper that “this is the time for these two train tracks to cross over” and resolve both the distressed properties problem and housing shortage. 

Noting that there were several options available, he added: “If they develop and establish a REIT, for all intents and purposes, that purchases distressed properties for a fraction of the carrying value banks are holding them for, and turns around and use a portion of its funds to refit those properties, it has the ability to sell them on for certainly less than what they were on the books of the banks for.

“The REIT is an equity-based vehicle looking for investors looking for higher returns and taking on higher risk....... It’s not a new idea. It’s not revolutionary. It’s something that exists in all major countries. The private sector leads the REIT, but there’s nothing prohibitive for the Government - to create housing opportunities - to be the sponsor investor of this REIT and hire appropriate property managers and administrators.”

Using such a vehicle to acquire distressed properties from Bahamian commercial banks would free the industry up from having to act as a real estate manager, and instead enable it to refocus on its core business of seeking returns from viable lending opportunities through loan repayments. And it would allow more Bahamians to acquire or lease homes at rates they can afford due to the REIT’s lower acquisition costs.

“This is one where where too often the Government is doing the same thing as it’s done in the past and is expecting a different result,” Mr Bowe told Tribune Business. “If they’re building new low-cost housing, which turns out not to be low-cost when all costs are added in, you’re not addressing side real estate issues.

“You’re not addressing the overhang, you’re not addressing the shortage because you’re only doing about 30 homes in each development. If you’re saying hundreds of families are in need you’re not addressing the actual shortage by doing housing developments.

“You’re not addressing the overhang of distressed property investments, and you’re not strengthening the banking sector by taking unproductive assets off the banks’ balance sheets and allowing them to redeploy funds into productive assets which is better for economic productivity and growth.”

Asserting that the Government will never catch up with housing demand through new construction, Mr Bowe said he and Fidelity Bank (Bahamas) were prepared to back the talk with their own funds. “I’m not putting forward what I’m not prepared to stand by,” he added. “I’ve spoken to three prime ministers and said Fidelity Bank (Bahamas) would be prepared to buy bonds from a vehicle that turns around and buys distressed properties.” 

Mr Bowe said this would simply shift the bank’s risk from ownership of distressed properties to an investment in a REIT that is “backed by the same” real estate now being converted to productive use and assets again.  “This not a novel idea put forth where we’re not putting the bank’s resources behind it,” he reiterated.

“I’ve discussed it with my Board of Directors and management. We have a distressed property portfolio of $20m. That’s $20m not doing anything. If we convert that to bonds, and get them into the lease-to-own market or sale, we’d certainly take advantage of the opportunity.”