The condo dilemma
Changes to Bermuda laws designed to stimulate economic investment have made it more difficult for international buyers to purchase condominiums, writes property lawyer Mathew Kelly in this opinion article.
The recent budget highlighted two major problems in Bermuda, namely an increasing debt burden and a decreasing population.
In the last few years, changes to real estate law have not helped these problems by making it harder for non Bermudians to buy condos so limiting the property market and deterring people from settling here.
Prior to 2015, international buyers could purchase a condo provided it was above the minimum annual rental value threshold of $32,400 (which equated to a property value of at least $400,000) and was located in a designated development only.
Two recent changes in the law have added further restrictions on the ability of international buyers to purchase condos. Conversely, these restrictions do not apply to purchasing houses.
In June 2015, a new law was introduced which provided that international buyers could only buy condos if they held a “residential certificate”.
To qualify for this certificate, buyers first had to show they had "substantial means". There was no actual definition but typically buyers with over $2 million in assets had been granted the certificate.
Secondly, and importantly, buyers needed a continuous source of income outside of Bermuda. This automatically prevented those on a work permit in Bermuda from being able to purchase a condo.
These qualifications restricted the market available for Bermudian sellers looking to sell their condos.
There were also positive developments in that the ARV threshold was reduced to $25,800 and the requirement for international buyers to purchase condos in designated developments only was eliminated.
A further restriction was introduced in March 2021 via the Economic Investment Certificate scheme. At first glance, this initiative was to be welcomed as it encouraged outside investment into Bermuda.
Provided a non-Bermudian invests at least $2.5 million into qualifying funds in Bermuda (such as Bermudian businesses, government bonds and/or real estate) they would be granted the EIC giving them the right to reside and work in Bermuda for a five-year period.
Provided they had retained their investment, then after five years the EIC holder could apply for the residential certificate.
This is the key issue.
Effectively, this currently restricts the condominium market to Bermudian buyers only, since international buyers must not only be wealthy, but they now have to wait over five years before they can apply for the residential certificate to purchase a condo.
Prior to the introduction of the EIC, government conducted a brief consultation exercise with stakeholders in the real estate industry, namely attorneys and realtors.
The stakeholders lodged their concerns about the new policy and highlighted that this would greatly restrict the market for Bermudian sellers of condos.
Notwithstanding the red flags raised, the law came to pass. Many people at the time, and I suspect still now, don’t realise the consequences of the above changes to the condo market.
Given the need to increase money coming into Bermuda and to encourage people to move here, it is worth reconsidering the unnecessary restrictions.
Rather than requiring a residential certificate, the international buyer should be able to purchase any condo provided it meets the minimum ARV threshold, as is the case when purchasing a house.
The need to provide protection to Bermudians can be met by simply increasing the ARV threshold rather than having these extra requirements which complicate matters unnecessarily.
Removing these obstacles would encourage people to move to Bermuda, bringing more money into the economy and helping ease the debt burden.
If an international buyer purchases a condo for a million dollars, for example, this alone would generate a fee of $114,000 to government (stamp duty of $34,000 and an alien licence fee of $80,000).
Not only would this benefit the government's coffers, but the Bermudian seller would also benefit by having access to the international real estate market.
In terms of protections provided to Bermudians, it is worth noting that a Bermudian buyer always has priority over an international buyer. But if no Bermudian buyer is available, then the Bermudian seller cannot sell their condo.
From my own experience in representing sellers and speaking with leading realtors, the market for houses is buoyant whereas the market for condos is subdued. A change in these laws could help stimulate the condo market and benefit the economy.
The concepts of the EIC and residential certificates are a step in the right direction and encourage investment into Bermuda. However, the grant of a residential certificate should only relate to the grant of residency and should not be a precondition of purchasing a condo.
I highlighted various suggestions to reform and improve the property market to bring in investment to these shores in an article in The Royal Gazette (20 May 2020).
These new measures affecting the condo market are a step backwards. The reversal of these laws would bring about positive changes in terms of population and investment, both of which are needed in Bermuda right now. (See page 9)
Mathew Kelly is head of real estate at Hamilton Legal Ltd.