Residential Report Puerto Rico – H1 2020

Puerto Rico Residential Report H1 2020

Puerto Rico Residential Report | H1 2020

Introduction After a fiscal crisis, an extended recession, hurricanes, earthquakes, and a global pandemic, Puerto Rico has weathered crisis after crisis over the past several years. The Island’s resilience during these challenging times has been supported by its people’s strength of character, a healthy business environment founded upon Puerto Rico’s status as a part of the United States, a highly competitive tax code, and its entrepreneurial spirit.

The Coronavirus pandemic, while devastating, is proving to be a transformative experience for Puerto Rican real estate in what were initially unexpected ways. The lockdown, as a result of the Pandemic, has accelerated the closing of retail locations that had already had a closing date or were expecting to close in the near term, and has narrowed the focus of consumers with regards to physical retail. This is also evident in the fast pace change of the future of work.

The new norm of social distancing may be a two-edged sword to the office occupancy rates. Companies unable or unwilling to have their employees work from home will need larger spaces to provide proper separation. Offices shifting the focus to remote work may reduce their footprints as fewer employees need access to a physical office. The speed of technology adoption has accelerated in some cases by years.

The reset created by the pandemic has also prompted residents of high cost and high tax domiciles to reconsider their current living situations. Places like Puerto Rico with natural beauty, tropical weather, familiar amenities, and strong tax incentives, should only become more attractive places to live and work as real estate in traditionally prime markets becomes less attractive or essential.

Another outcome of the global pandemic has been the promotion of reshoring pharmaceutical and other manufacturing to the United States. This as a means of strengthening US national security interests against a future medical crisis and continuing trade challenges. Puerto Rico is currently the world’s fifth largest pharmaceutical manufacturing hub by volume. The industry traces its roots to the late 1960s and early 1970s, when manufacturers were initially drawn to the island by the now-expired federal

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tax incentive Section 936, which expired at the end of 2005 and prompted manufacturing to move overseas. One positive outcome the island could see from this pandemic is the re-onshoring of US and international pharmaceutical manufacturing, as the island still has much of the necessary infrastructure, educated workforce, experience and tax incentives in place. The potential to reignite manufacturing in Puerto Rico is expected to also play a role in the stabilization and grow of the island’s office market.

We believe in Puerto Rico and its people and will continue our commitment to the island. JLL Puerto Rico has significantly stepped up its data collection and analysis over the past six months and has more than doubled the size of its research and advisory team on the island. This investment will become apparent over the coming months and years as we strive to be the premier source of expert real estate information and services in Puerto Rico, the Caribbean, and Greater Latin America. JLL’s vertical services integration, world class best practices, commitment to ethics, boots-onthe-ground expertise, and region-leading real estate dataaggregation are and will remain at the core of what enables us to achieve our client’s ambitions.

Andy Carlson Country Manager, Puerto Rico

Puerto Rico Residential Report | H1 2020

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Puerto Rico Residential Report | H1 2020

Summary As one of the most dynamic and competitive economies in Latin America and the Caribbean, Puerto Rico has a population of 3.1 million (as of 2019) people, with approximately 1.5 million housing units spread throughout the island. The average monthly rent for non-luxury housing in Puerto Rico was estimated at approximately $500 USD in 2018; however, the islands dynamic and multi-dimensional housing landscape is better aggregated by zip code.

With an overall favorable business environment for investors, Puerto Rico is home to some of the most attractive and noteworthy business incentives in the United States. In 2020, alongside efforts to expand the benefits of Puerto Rico’s economy, the government expanded the opportunities of several arenas within the corporate tax incentives code by consolidating laws 20 and 22, which established a 4 % corporate income tax rate, 0 % rate on dividends distribution, 75 % property tax exemption, 75 % construction tax exemption, and 50 % exemption on other municipal taxes, into a single broader more robust law now entitled Act 60.

Eligible activities include manufacturing, R&D, Finance, Advertising, Technology, Medical Tourism and general exports

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of goods and services, among others. To learn More on these and other current business incentives JLL has complied tax incentive information in our Puerto Rico Real Estate Investment Guide, 2020.

Puerto Rico has long been known to be a U.S territory that combines both lifestyle and economics, as it is both part of the United States while having autonomy of governance.

However, as Puerto Rico is not a ratified state in the union, Puerto Ricans do not qualify to participate in federal elections and have a non-voting representative in the House, and therefore residents are not required to pay U.S. Federal taxes.

Unlike other Caribbean, Latin American and global markets, the most prevalent investment advantage in Puerto Rico is the islands currency is the U.S. Dollar, residents are U.S. citizens, assets and businesses are under U.S. legal jurisdiction, and practices GAAP procedures under the supervision of the Federal Bureau of Investigation. The attractiveness of the island both physically and economically has been drawing new residents for years; however, the COVID 19 global pandemic has increased demand for class A residential real estate substantially, as former city dwellers seek alternatives amidst unprecedented changes to how we work and live.

Puerto Rico Residential Report | H1 2020

Market

Insight

Fueled by a steady stream of corporate relocations and incentive-based immigration, Puerto Rico has solidified its position as a gateway to Latina America. Puerto Rico’s picturesque natural environment and favorable location continues to attract high profile public and private entities, and a large contingent of Latin American firms’ U.S. operations. Additionally, the presence of the busiest airport in the Caribbean underscores the growing international appeal and incomparable accessibility. Relative affordability, favorable costs of doing business, and the presence of prominent higher-education institutions are beginning to attract top-talent and companies alike.

-4.0% Population Growth

-8,000 Employment Growth

68.1% Home Ownership Rate

Top 5 Residential Municipalities

*Based on net square footage available on various listing sites.

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Puerto Rico Residential Report | H1 2020

JLL Pro Pricing JLL Pro is a data aggregation and automatic valuation model (AVM) that factors location, class, status, and size of properties to generate price estimates.

Municipality

Class A NPV PSF

Class A GAR PSF

San Juan

$416.80

$45.84

Guaynabo

$359.20

$39.52

Humacao

$215.10

$23.66

Dorado

$467.00

$51.38

RĂ­o Grande

$449.60

$49.46

*Pricing based on 5,000 square foot assumption

Global Residential Clock (Q4 2019)

San Francisco Tokyo Sydney Singapore, Boston Stockholm, Los Angeles London Brussels Berlin, Frankfurt, Toronto Madrid Amsterdam

Puerto Rico Delhi, Sao Paulo Moscow, Mumbai Mexico City

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Paris, Chicago, Washington DC New York Beijin Hong Kong

Value Growing Slowing

Values Falling

Value Growth Accelarating

Value Bottoming Out Shanghai Seoul Dubai

Puerto Rico Residential Report | H1 2020

Residential Drivers Tax incentives and industrial employment are driving the demand for housing in Puerto Rico, mainly law 60 and the new home buyer incentive (HBA). In Puerto Rico, the residential sector is largely concentrated in the San Juan Metro Area and its demand is subject to different macroeconomic trends and demographic factors. From an economic perspective, growth and employment rates affect the demand for private housing, and thus positive growth in these measures drives up the demand for the home market.

In addition, demographic factors such as population and education growth also drive residential demand. Since the expiration of code 936 at the end of 2005, the island has experienced population and economic contractions that have depressed the majority of residential prices. However; with the potential return of additional pharmaceutical manufacturing and increased demand for class A residential properties as more expats move to the island due to the COVID-19 pandemic, the residential sector is poised to perform well over the coming months and years.

government funds have been leveraged to develop 325 public housing communities spread across the island. These projects provide free housing for families where the average income is around 20,000 USD. In addition, the housing projects are designed to be in close proximity to public schools, recreational activities with sport compounds, and religious organizations; however, with varying degrees of effectiveness.

Single and Multi-family Housing Areas San Juan

Dorado

Apartments Multi-family

Single Family

Guaynabo

RĂ­o Grande Single and Multi-family

Single Family

Humacao Single and Multi-family

The government of Puerto Rico also continues to play a substantial role in the housing market, and acts as the main driver for the low-income residents. As of this year,

Private School Locations Baldwin School of PR TASIS Dorado Academy

Academia Perpetuo Socorro Robinson School Colegio Bautista Rosa de SarĂłn

The Palmas Academy Private Bilingual Schools 0

10

20 km

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Puerto Rico Residential Report | H1 2020

The Luxury Market Puerto Rico Sotheby’s International Realty Market Trends: San Juan The following are market data sets on Puerto Rico Sotheby’s International Realty current listing inventory in Puerto Rico. The data trends track key inventory metrics including list prices, home size/features, and days on market against our total active Puerto Rico inventory.

Puerto Rico Sotheby’s International Realty Advanced Search Tools enable luxury home buyers to compare an array of home metrics including, but not limited to new exclusive listings, price reductions/increases, property Locations/Communities, lifestyle/type and pending inventory sales.

Average Price of Homes for Sale

2

Bedrooms

3

4

All 0

2M Average Price

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4M

Puerto Rico Residential Report | H1 2020

16 Homes for Sale

3

4

9

2

3

4

Bedrooms

Time on Market

0 1

Bedrooms

2 3 4 5 All 0

200

400

Days

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Puerto Rico Residential Report | H1 2020

Featured Luxury

Properties

Dorado Beach Ritz Carlton, Dorado The Dorado Beach Ritz Carlton is one the top residential resorts in the Caribbean. Its residential offerings include a range of price points from $1.5 M- $30M, with a robust range of options with condominiums, single family homes and beachfront properties. Dorado Beach is island’s premier locale for luxury resort living, with both extraordinary beachfront homes and expansive golf view homes offer the coveted country suburban living, within a gated resort living, unmatched in the Caribbean.

Residences center around country club living, feature open floor plans, and premium finishes. Dorado Beach’s latest developments, the Isles, go from the lush landscapes and waterfront views to open spaces and contemporary architecture.

Condado, San Juan PR Condado is an oceanfront, tree-lined, pedestrian-oriented community in Santurce, San Juan. Condado Beach is a very popular beach among tourists in San Juan craving for a Caribbean beach resort experience with all the vibrant life of a city just steps away. Condado is often compared to the vibe of Miami Beach as the cultural experiences, nearby

beaches, and world class attractions make Condado an attractive destination. Condado attracts a diverse crowd, from families to famous celebrities. Beachfront resorts such as La Concha Resort and Condado Vanderbilt are loved by Puerto Rican celebrities, and they are a primary driver of the action and allure in Condado. There are a variety of water sports offered, and for visitors not staying at one of the beach resorts, beach loungers and umbrellas are available for rent.

Ponce Paradise, Ponce While San Juan has remained as Puerto Rico’s main tourist attraction, the Island’s efforts to ramp up tourism activities have meant a look at new destinations. This shift has brought developers’ attention to Ponce and a new “megaproject” called Ponce Paradise. According to AG&T, the development aims to create a world-class tourism destination, which will lead the advisory effort alongside Oceanfront International Group. The concept, designed by Michael Winstanely Architects and Land Design, includes a “town center”, a marina, a university medical center, a wellness community, and a large hotel, among other features. The project will be located close to Ponce’s airport on a 900-acre parcel and is estimated to cost around USD 1 billion.

Bahía Beach St. Regis, Río Grande Located on a former coconut plantation and situated between the El Yunque National Forest and the Espíritu Santo River State Preserve, the St. Regis Bahia Beach Resort is set adjacent to 2 miles of secluded beach with stunning views of the Atlantic Ocean. Situated on 483 gated acres of lush maritime forest on Puerto Rico’s idyllic Northeast coast, the Bahia Beach Resort offers an unparalleled tropical experience with multiple restaurants, pools, and athletic amenities. A destination unlike any other, where elegance and unspoiled natural beauty provide bliss and adventure in equal measure. Bahia Beach also designates over 65% of its property as green areas, including wildlife sanctuaries and nature trails.

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Puerto Rico Residential Report | H1 2020

Condado in one of the main tourist destinations in Puerto Rico, for its location near the historic Old San Juan, beaches, hotels and other places of interest such as nightclubs, casinos, shops and restaurants.

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Puerto Rico Residential Report | H1 2020

Palmas del Mar, Humacao Ranked as one of the top Airbnb locations in the Caribbean with a large full-time population, Palmas del Mar is one of the largest master-planned, resort-oriented residential developments in the Caribbean, with approximately 2,750 acres of land devoted to a variety of residential, commercial, and resort uses. The gated community is located on the southeast coast of Puerto Rico. Palmas del Mar has more than six miles of Caribbean Sea frontage, including approximately three miles of continuous sandy beach. The remainder of the water frontage is comprised of secluded beaches and rocky outcroppings, offering sweeping views and protected coves.

The inland portion of Palmas del Mar presents a diverse topographical landscape providing an extensive array of land use designs ranging from custom hillside residences to clustered housing developments fronting golf courses and other recreational amenities. Adding to the tranquility of the development, the preferred means of transportation is by golf cart, rather than automobile.

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Palmas has a 162 slip marina, a new worldclass yacht club equipped for 142 yachts and 20 mega yachts, an equestrian center, two 18 hole golf courses designed by Rees Jones and Gary Player, a 20-court tennis center, beach clubs, a Pre-K to 12th grade English language school, a 60 acre tropical forest, and 14 restaurants - all within a golf cart ride.

Development opportunities

The approved Master Plan for Palmas del Mar provides for flexibility in the transferability of density within the approved development. The development is divided into five primary sections. The master infrastructure in the Resort Core (RC), Central Palmas (CP), and Palmas Plantation (PP) sections have essentially been completed.

These three sections include 258 acres owned by the Company and common area improvements, including a sewage treatment plant, green areas, access roads and a beach-front park.

The remaining land inventory is primarily contained in two tracts. The first piece, the South Palmas tract is referred

PP-4 Puerto Rico Residential Report | H1 2020

Future Regional Retail Mixed Use Development

Future Hotel Site

CP-7 Parcel

PP-3 Parcel

Parcel

New HIMA Hospital Squedule to breakground 2020

Mix Use Senior Living Development Opportunity

PP-5 Parcel

Community Retail Opportunity

Resort Core Town Homes Limited Service Hotel Opportunity Resort Core Town Homes / Hotel / Condos / Oceanfront Senior Living Opportunity

to as Guayanez. This parcel is located on the south end of the development and is entitled for approximately 1,960 housing units on its 416 developable acres. The second piece, the Buena Vista / El Morro parcel, is located on the northern end of Palmas and contains 339 developable acres and entitlements for approximately 1,850 units. The entitlements described herein represent the allowable density that has been allocated to the individual parcels; however, the Company retains the flexibility to transfer density and the total allowable units are not reduced if a parcel is developed with less than its allocated density. Any unused density is accumulated in a land bank parcel for future distribution.

The following undeveloped parcels are available for sale or lease: At Central Palmas (CP-7) This area of the development is located off of Palmas Drive to the west of the tropical rain forest and has complete infrastructure in place, Parcel CP 7 is entitled for 60,000 square feet of retail or commercial space. This section of Palmas is nearly fully developed.

At Resort core (RC-1A) The Resort Core is situated along the primary beachfront

RC-1A Parcel

of Palmas and runs from the tropical forest south to the marina area. This area is mostly developed and the Company’s remaining land in the Resort Core totals 6.3 acres with all infrastructure in place. The holdings include Parcel RC 1A, a prime 3-acre parcel that lies adjacent to the beach. The balance of Parcel RC 1 is under development with lodging and residential product.

At Palmas Plantation (PP-3, PP-4 and PP-5) The main entrance to Palmas del Mar is located within the Palmas Plantation section of the property. The remaining land in this section contains 213 acres and is entitled for 441 units. Excluding parcels PP9 and PP9A which lie north of the Candelero River, the major infrastructure in this area is essentially complete. Palmas Plantation also contains the site of the existing Palmas del Mar Sales Center, which is located on parcel PP 1A. Parcel PP3 is currently zoned for 80,000 square feet (12.9 acreage) of medical office development, and parcel PP 4 has been zoned for a 100,000 square foot (25.59 acreage) medical facility with 200 beds. In addition, parcel PP5 has been designated for school, church, fire station or other such institutional use (11.77 acreage).

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Puerto Rico Residential Report | H1 2020

Opportunity Zones

and Incentives

There is a two percent import tax in Puerto Rico, which is often, in addition to shipping costs, are often blamed for the Island’s relatively high retail prices. The Island also imposes an 11 percent sales tax, the highest in the United States. The Puerto Rican government emphasizes that the high taxes are a major source of revenue; however, they continue to drive the cash-based economy and depress trade activity on an island with a reliance on imports.

The Merchant Marine Act of 1920, commonly referred to as the “Jones Act,” requires goods shipped between the U.S. ports to be transported on ships that are build, owned, and operated

by United States citizens or permanent residents, which limits the capabilities of Puerto Rican merchants while increasing their transportation costs by an estimate of nearly USD 1.2 billion annually. The Jones Act turned 100 years old on June 5, 2020, and there is currently an effort led by Utah Senator Mike Lee to repeal the act.

Opportunity Zones On December 22, 2017, the Opportunity Zones Program was enacted and added to the tax code by the Tax Cuts and Jobs Act in order to spur investment, encourage economic development and job creation in distressed communities.

The Opportunity Zones Program is designed to drive longterm capital to rural and low-income urban communities throughout the U.S. and its territories and uses tax incentives to encourage private investment in impact funds.

Qualified Opportunity Zones are specific geographical areas in the United States and Puerto Rico that were designated by the Federal Government. The zones are designed to spur economic growth development by offering tax benefits to individuals and institutions that invest eligible capital into the zones.

How they work: 1.

2.

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Sell asset for capital gain Invest some or all of gains in a qualified opportunity fund within 180 days from the day in which the capital gain

3.

would be recognized for federal income tax purposes.

All incentives are linked to the duration of the qualified investment.

Opportunity Zones are designed to spur long-term investments in low-income urban and rural communities through investment via Qualified Opportunity Funds (Form 8996). There are 3 types of qualified opportunity zone properties, including businesses, which must be located in Qualified Zones: 1.

2.

3.

Qualified Opportunity Zone Stock Qualified Opportunity Zone Partnership Interest Qualified Opportunity Zone Business Property a. 50 of total gross income must be from active conduct of business in QOZ b. Intangible property must be used in the active conduct of the business c. Less than 5 percent of the business can be attributable to non-qualified financed property d. Principal business cannot be gambling/alcohol sales

With the Opportunity Zone (OZ) designation an investor interested in investing in a business in Puerto Rico can expect a ted deferral of all capital gains invested in a Qualified Zone Fund (“QZF”). Additionally, investing in an OZ in Puerto Rico could potentially eliminate up to 15% of the deferred capital gains (10% if the investment is held for at least 5 years and 15% if held for at least 7 years in a QZF). Moreover, an interested investor may eliminate all taxes on all capital gains earned on the amount invested in a QZF if he or she holds such investment for at least 10 years. The Incentives Code provides for a 18.5% fixed income tax rate, a 100% tax exemption on dividends and distributions to its shareholders, 25% tax exemption on municipal license tax and property tax and up to 25% tax credits for OZ projects in Puerto Rico.

95 percent of the Island qualifies as an opportunity zone. See the green area of the maps on the next page.

Puerto Rico Residential Report | H1 2020

Opportunity Zones in Puerto Rico and the U.S. Virgin Islands

Opportunity Zones in the San Juan Metro Area

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Puerto Rico Residential Report | H1 2020

Incentives New Home Buyers Incentive (HBA) The government of Puerto Rico has approved a new relief fund administered by the “Departamento de la Vivienda”, available for first home buyers in Puerto Rico. Under the fund’s guidelines, eligible residents would be granted $25,000 towards a first-time home purchase. Families with members that are considered “essential” to the rehabilitation of Puerto Rico such as teachers, health professionals, and public security, among others would be granted up to $35,000 toward the purchase of their primary residence. This financial assistance program is meant to cover closing expenses and prompt mortgage payments, with the broader goal of increasing homeownership rates that will enable the longterm economic viability and sustainability of communities affected by Hurricanes Irma and María throughout the Island.

In addition, the incentive is designed to encourage essential recovery personnel to continue to live in communities, help reduce emigration, and to improve job retention and

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productivity. Primarily; however, the incentive was enacted to increase housing acquisition opportunities for low and moderate-income families and families with urgent needs in Puerto Rico.

Financial Services Act 273-2012, also known as the “International Financial Center Regulatory Act”, regulates the organization and operation of international financial institutions authorized by the Office of the Commissioner Institutions to operate in Puerto Rico. The Incentives Code provides tax exemption decrees, among other benefits, to international financial entities (“IFE”). The export of services is an economic activity that has been identified as one of the key pieces for the economic development of Puerto Rico and financial services employ the largest number of people per business under the tax incentives. The IFE tax incentive is primarily used by international banks, investment funds, hedge funds and family offices. IFEs are in general subject to a 4% fixed income tax rate, 50% exemption of municipal taxes and 75% exemption on property taxes.

Puerto Rico Residential Report | H1 2020

Export Services Incentive (Formerly Act 20) The Export Services Incentive is intended to promote the exportation of services by providing great resources and opportunities for U.S. companies to bring their business to Puerto Rico and make it a service center for the World. It also promotes academic and private sectors development and research by granting exemptions and assistance with energy costs to companies willing to invest in the growth of these key areas. To become exempt, the business needs to apply for a tax concession via a tax exemption decree considered a contract with the Office of Industrial Tax Exemption of the Government of PR. The decree will be secured during the term, 20 years with possible 10-year extension, regardless of changes in the law itself. To qualify, the business cannot have any previous connections, dealings or nexus with Puerto Rico.

acronym in Spanish) established in Puerto Rico. PYMES are defined as businesses with an average volume of business of three (3) million or less during the three (3) previous tax rate and a 100% exemption from property and municipal taxes during the first years of operations. After the initial five (5) years, these businesses will enjoy a 4% income tax rate and a 75% and 50% exemption for property and municipal taxes, respectively.

Individual Resident Investors (Formerly Known as Act 22) The Incentives Code encourages the relocation of individual investors to Puerto Rico and seeks to attract new residents to the Island. It offers a significant tax exemption on passive income generated or accumulated once the individual is a bona fide resident of Puerto Rico. As in Act 22, passive income, including interests, dividends, and certain capital gains are 100% exempted from Puerto Rico income taxation.

New small and Medium Size Businesses The Incentives Code recognizes a new tax benefit afforded to new small and medium-sized businesses (“PYMES�, by its

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Puerto Rico Residential Report | H1 2020

CDBG-DR Funding Community Development Block Grant Disaster Recovery Program (CDBG-DR) Funding Allocated to Puerto Rico Due to the substantial damages to life, property and Puerto Rico’s housing and other critical infrastructure caused by Hurricanes Irma and María in September 2017, Congress passed the “Supplemental Appropriations for Disaster Relief Requirements, 2017” (Pub. L .115-56, approved on September 8, 2017), as subsequently amended by Pub. L. 115-72 as well as the “Further Additional Supplemental Appropriations for Disaster for Relief Requirements Act, 2018” (Division B, Subdivision 1 of the Bipartisan Budget Act of 2018) (Pub. L. 115-123, approved on February 9, 2018) through which, jointly, approximately a total of $20 billion of CDBG-DR funds were allocated to Puerto Rico. CDBG-DR funds are subject to federal oversight and a tight fiscal control on the part of the U.S. Department of Housing and Urban Development (HUD). HUD has appointed a Federal Financial Monitor to oversee the grant administration and disbursement process for CDBGDR funds assigned to Puerto Rico. Locally, the Puerto

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Rico Department of Housing (PRDOH) is the Puerto Rico administrative agency responsible for managing the CDBGDR program. The PRDOH works in close collaboration with the Central Office of Recovery, Reconstruction and Resilience (COR3). The COR3 is a Puerto Rico government agency organized in December 2017 as a division of the Public-Private Partnerships Authority in order to identify, manage and coordinate available funding sources for infrastructure recovery projects in Puerto Rico.

Generally, CDBG-DR funds cover a variety of disaster recovery activities, including housing redevelopment and rebuilding, business assistance, economic development and revitalization, infrastructure repair such as repairs and upgrades to Puerto Rico’s power plants and electric grid, which suffered significant damages as a result of the hurricanes. The amount of $2 billion in the CDBG-DR funds allocated to Puerto Rico have been assigned by HUD to restore, enhance and improve Puerto Rico’s electric power grid and systems.

In order to allow the release of CDBG-DR funds through HUD, Puerto Rico has adopted a “Disaster Recovery Action Plan” that sets forth the critical areas and proposed uses for CDBG-DR funds consistent with both CDBG-DR program requirements and Puerto Rico’s Fiscal Plan as submitted to the Financial Oversight and Management Board created by the Puerto Rico Oversight, Management

Puerto Rico Residential Report | H1 2020

the occurrence of informal housing and contributing to enhance the safety and well-being of Puerto Rico residents.

$20b of CDBG-DR funds were allocated to Puerto Rico.

and Economic Stability Act (PROMESA) approved by Congress in June 2016 to address Puerto Rico’s fiscal situation and its recovery . These critical areas, per CDBGDR program requirements, must address the general segments of housing, planning, economic development and infrastructure. Further, they must meet at least one of the following objectives, namely, benefit low- or moderateincome population segments, help to prevent or eliminate deteriorating areas, or satisfy an urgent need.

During the initial phase of CDBG-DR grant program in Puerto Rico after Hurricanes Irma and María, over $2 billion of the funds have been procured by the PRDOH and expended to address the repair, reconstruction and/ or relocation of single-family homes in Puerto Rico, including title clearance issues. Due to the tight fiscal controls imposed by HUD with respect to CDBG-PR program funding in Puerto Rico, the release of program funding on the part of HUD has been very measured. The authorization and release of CDBG-DR and CDBG- MIT funds allocated to Puerto Rico on the part of HUD is expected during the current and following years consistent with the proposed uses included in the amended “Disaster Recovery Action Plan” adopted by the PRDOH. This funding is directed at critical areas, such as in the economic development front, tourism and business marketing programs, strategic projects and commercial redevelopment, construction and commercial development loans, small business financing, incubators and accelerators, workforce training, urban and rural agricultural programs, among others.

On July 29, 2018, HUD approved the use by Puerto Rico of the initial $1 .5 billion allocation in CDBG-DR funding pursuant to the terms of the “Disaster Recovery Action Plan” filed by the PRDOH with HUD. Shortly thereafter, a grant agreement between both parties was entered into in September 2018. In February 2019, HUD approved an amended “Disaster Recovery Plan” filed by the PRDOH for the use of an additional $8 .22 billion of CDBG-DR funds.

In January 2020, HUD issued a notice in the Federal Register informing of the allocation to Puerto Rico of $8 .285 billion of Community Block Grant mitigation (CDBG-MIT) funds being made under the requirements of Pub. L. 115-123. CDBG-MIT funds are used with the primary purpose of strengthening the grantee’s program management capacity, financial management and internal controls. In the case of Puerto Rico, HUD has recognized the governance and financial management challenges faced by the jurisdiction. Therefore, the HUD notice contemplates that, in the case of Puerto Rico, these CDBG-MIT funds, their use and the satisfaction of the program’s underlying objectives may be accomplished through reforms in land ownership records and addressing | 19

Puerto Rico Residential Report | H1 2020

Affordable Housing Developments Affordable Housing or also known as “Public Housing Projects” in Puerto Rico is a subsidized system of housing units that primarily consists of multi-family dwellings where all exterior grounds are shared spaces. Offered only to certain low-income individuals, the tenant rent subsidizing system enables families to reside in a subsidized housing unit so long as their income complies with federal regulations. As of 2020, Puerto Rico has 325 public housing developments, which are mainly financed with programs from the US Department of Housing and Urban Development (HUD) and the US Department of Agriculture (USDA). The following are two examples of wellestablished public housing projects on the Island:

The Luis Llorens Torres Development Located in Isla Verde, 10 minutes from the Luis Muñoz Marin International Airport, the Luis Llorens Torres development is the largest housing project in Puerto Rico and The Caribbean. The development is an 800,000 square foot multi-family development erected in 1954 and named after the famous Puerto Rican poet Luis Llorens

Torres. Out of the 3,000 people that live in the community, half the population lives below the poverty line, and the median income is around 20,000 USD. The community includes multiple areas for recreational activities including a basketball court and baseball field, among others. In addition, there are two schools: Escuela Luis Llorens Torres with 354 and Escuela República de Perú with 247 students, which serve the community and residents near the development.

The Nemesio R. Canales Development With 1,126 Units, the Nemesio R. Canales public housing development is one of the largest housing projects in the island. The residential development experiences significant traffic flow due to its close proximity to one of the most visited shopping centers in Puerto Rico, Plaza las Americas. Named for the essayist Nemesio Canales who was well known for defending women’s civil rights, the community has several recreational areas, a church, and two schools.

Affordable Housing Developments Map

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Puerto Rico Residential Report | H1 2020

Outlook The past six months have been a tumultuous period on the island. Earthquakes, resulting power outages, and the global pandemic put a pause on nearly all tourism has certainly come as unexpected and unwanted surprises.

With uncertainty plaguing the global real estate market, two themes have emerged: the suppression of distressed asset prices, and the acceleration of previously expected processes.

Like other asset classes, the way people view their residence is changing. While the digitalization of our daily work has been an ongoing trend for decades, the COVID-19 lockdowns have accelerated this trend and tenants are reassessing their needs, often with opposing conclusions of either leasing more office space to enable social distancing, or eliminating leasing costs and having employees permanently work from their places of residence. This crisis has forced this issue, which should give landlords definitive answers as to who will and will not require office space over the next 1-5 years. This reassessment has; however, driven class A residential prices in Puerto Rico as former residents of large U.S. cities relocate to the island, further evinced by sold-out high-end furniture stores and month-long waits for Ikea deliveries.

A subjective pessimistic outlook would include the continuation of the recession from the end of pharma

manufacturing in 2006, with the 2019 growth as an outlier instead of an inflection point. Additional predictable (hurricanes) and less-predictable pandemics and earthquakes would continue to send literal and metaphorical shockwaves over the island, prompting the continued exodus of companies, resulting in a faster drain of the island’s commercial real estate market.

A subjective optimistic outlook would include new pharma and other manufacturing opportunities as the result of the desire to return manufacturing facilities from Asia in the interest of national security, and continued growth from 2019 and continued growth out of the decades-long recession. In addition, new public-private partnerships to reinvigorate public infrastructure, and stable governance with business-friendly policies that attract new businesses and residents to the island (including keeping local talent from leaving the island) will play a major role in an optimistic outcome.

These scenarios are dramatically different and reflect the island’s present position on the precipice of dramatic change. The next six months will prove pivotal in the island’s ability to recover from the first half of 2020 and continue the transition to a stabilized recovery.

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Puerto Rico Residential Report | H1 2020

Macroeconomic Overview

GDP Growth and unemployment rate Puerto Rico has experienced GDP contractions since 2004; however, GDP in 2019 saw its first growth in more than a decade, a bounce back from the 5.2 percent contraction the island experienced in 2018 which was partially caused by Hurricane María. Although, due to the negative impact of the global pandemic of Coronavirus it is likely that the economy will suffer another contraction in 2020. For the safety of the Puerto Rican people, like the rest of the world, the island was forced to lock down, which heavily impacted consumer and business spending while imposing a significant decline in tourist traffic to the island. Puerto Rico’s GDP is expected to suffer a 8.0% decline in 2020.

Rico’s government is offering support with the announcement of a $1.7 billion stimulus package funded under the US Cares act, including loans and direct assistance for small businesses, health and COVID testing funds, unemployment benefits, and assistance to the tourism industry. The government is taking steps to support its citizens, although it is not enough to completely cover the economic downturn.

Puerto Rico’s primary sources of GDP are Industry (51.2 percent of output), services (48.0% of output), and, to a limited extent, Agriculture (0.8 percent of output). Puerto Rico’s unemployment rate in 2019 was the lowest on record with an 8.5%, as a result of the global pandemic it is expected to almost double to over 16% for 2020. Moreover, Puerto

Real GDP vs. Unemployment Change 90,000.00

18.0%

80,000.00

16.0%

70,000.00

14.0%

60,000.00

12.0%

50,000.00

10.0%

40,000.00

8.0%

30,000.00

6.0%

20,000.00

4.0%

10,000.00

2.0%

0.00

2007

2008

2009

2010

2011

2012

Real GDP

22 |

2013

2014

2015

2016

Unemployment Rate

2017

2018

2019

2020

--

Puerto Rico Residential Report | H1 2020

GDP per capita Puerto Rico’s position as an unincorporated commonwealth of the United States of America is a significant strategic advantage for the island. It provides the island with fiscal backstop and enables the use of the United States Dollar as the local currency, while empowering the island with local political autonomy. Puerto Rico certainly faces political and economic challenges ahead; however, the strong foundation of the dollar-based economy and the backing of the US federal resources give Puerto Rico a significant advantage over its Caribbean and Latin American neighbors. Presently, the average household income in Puerto Rico is USD 55,500 (economic impact of cash economy included). Which is 9.3% lower than the average in 2019.

2018 Real GDP per Capita (2010): $27,340 32,500.00

4.50% 4.00%

32,000.00

3.50%

31,500.00

3.00% 31,000.00

2.50%

30,500.00

2.00%

30,000.00

1.50% 1.00%

29,500.00

0.50% 29,000.00

0.00%

28,500.00 28,000.00

-0.50%

2007

2008

2009

2010

2011

2012

2013

GDP Per C api ta

2014

2015

2016

2017

2018

2019

2020

-1.00%

U.S . C PI ( Y oY % C h ang e)

Inflation 10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

-2.00% L A T A M

A v er ag e I nfla�on

U.S . I nfla�on

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Puerto Rico Residential Report | H1 2020

CPI vs. GDP in Puerto Rico 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

-2.00% C PI ( Y oY % C h ang e)

Government Balance Sheet Restructuring For the past few years, the Puerto Rico Electric Power Authority has been looking for support in managing the island’s transmission centers. In the past week, the Financial Oversight and Management Board (FOMB) extended a letter announcing an agreement between Puerto Rico Private Partnership Authority (P3A) and LUMA Energy to operate the transmission centers in the island. LUMA Energy’s goal is to transform and rebuild the PREPA’s transmission and distribution system into a modern grid with the ability to deliver reliable, clean and more affordable electricity to Puerto Rico.

The Puerto Rican government’s ongoing debt restructuring will proceed gradually, setting the stage for improved economic prospects in the years ahead. For the past few years, the Puerto Rican government has been primed for a massive sell-off of state-owned assets, including maritime ports, airports, housing, parking, water and power utilities, sewer systems, and waste management facilities. The FOMB is continuing to make gradual progress in restructuring the commonwealth’s USD 120 billion portfolio of public debt and unfunded pension liabilities. In June 2019, USD 35 billion of that debt was restructured into bonds worth USD 12 billion, payable over the next three decades.

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GDP Deflator ( Y oY % C h ang e)

Decreased Government interest costs, better planning, and improved utilization of tax revenues will provide the island with a more stable business environment. USD 1.4 billion of federal funds were approved in the second quarter of 2019, with an additional USD 8.2 billion released on January 15, 2020. These funds stand poised to pave the way for new economic activity, with the Hurricane Maria relief funds expected to begin impacting the economy this year.

8.2 b federal funds were released on January 15, 2020

Puerto Rico Residential Report | H1 2020

Featured

Article

Could modular construction be an answer to the housing crisis?

More factory-built homes are being manufactured each year – and as they shake off the negative connotations of 1950s prefab homes, they could be the key to meet the growing need for urban housing in Europe.

Thousands of modular homes are being built across the UK as cities gear up to tackle the housing shortage; eight of the top 10 housebuilders are now turning to modular construction in some form. Other players are joining the housebuilding industry too. Investor Legal & General launched a modular housing line that will deliver 3,000 homes each year, while dedicated modular housing developer Ilke Homes has announced a target of 4,000 homes in the next two years.

Modular construction is making a comeback as Europe’s urban areas grapple with growing populations and a shortage of housing

second world war. Units are constructed in factories, then shipped to construction sites to be assembled, slashing build times from 40 weeks to ten days.

“Modular construction has had more negative connotations, but certainly today, it delivers quality builds because units are constructed in factory-controlled conditions, offering far more precision and capabilities in design and execution than usual traditional construction methods,” says Barber-Lomax.

“Modular construction is gaining momentum as an effective means to build affordable housing – and we’re yet to reach its greatest speed,” says Tim Barber-Lomax, senior analyst for UK residential at JLL.

Contemporary modular homes not only generate less construction waste as the bulk of building occurs off-site, they’re often built to higher energy efficiency standards, making use of the latest green technology and architecture such as solar panels, rainwater systems and recycled materials.

The building methodology emerged in the 1950s as a way to quickly build homes desperately needed after the

A lower price point for cash-strapped buyers Lower costs due to reduced time and labour on construction sites are

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Puerto Rico Residential Report | H1 2020

a further advantage. Bristol-based Modulhus, for example, builds a two-bed house for £50,000, plus the cost of labour, land and fitting utilities.

“Modular construction has the potential to ease the housing crisis with new builds that can be built quickly – and crucially, are affordable,” says Barber-Lomax.

Such homes can be built on a much smaller footprint than traditional housing, allowing new builds to be assembled in land-scarce areas such as urban centres – and because the majority of construction takes place in a factory, it could also help alleviate the skills shortage in the construction industry.

Breathing new life into the housing market In turning to modular construction, the UK is playing catchup with other European countries. In Sweden, it’s long been used for housing, while Germany’s thriving modular market includes developers and buildings at numerous price points – including the luxury, glass-fronted homes of Huf Haus.

And building new homes is a priority. In England, the government has pledged to build 300,000 homes a year; last year, it reached 217,000 – but only a fifth of these were affordable.

Furthermore, the structure of the housebuilding industry means it is incapable of meeting housing demand, BarberLomax says. “Small-to-medium sized housebuilders are facing reluctance from banks to lend. This, coupled with rising land values and build cost inflation, is preventing new entrants joining this marketplace and build homes we so desperately need.”

The rise of modular construction, with its reduced costs and build times, is allowing smaller housebuilders to enter the market.

“Increasing the number of small housebuilders is something the government has been encouraging for years but with limited success,” notes Barber-Lomax. “Modular construction is acting as an enabler, offering easier entry into housebuilding for new developers. Precisionengineered homes means there are less errors and costly disruptions, plus the cost of development finance is reduced with faster build rates.”

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Opening the way for innovative housing Modular construction is increasingly used to erect temporary housing too – for example, in emergency situations or as accommodation for people struggling to find an affordable home.

In Rotterdam, the government is looking to meet a housing shortage through the construction of 3000 modular mobile homes, while in London, a 24-home “pop-up village” is designed to be de-assembled and relocated every few years to areas where housing needs outstrip supply.

And while critics have expressed concerns that factorybuilt buildings could relegate swathes of families to cramped, carbon-copy homes, this too is changing with the advent of technology-driven developers. Nu Living, for example, operates a series of modular projects whose digital blueprint allows buyers to configure future homes from a variety of layouts and design specifications.

Technological innovations are also set to transform modular homes further, such as a 3D injection process inspired by aerospace industries that would allow for stronger, lighter panels that can be flatpacked – and far more easily transported. The world’s first modular skyscrapers have also broken ground in Croydon in the UK. “Modular construction isn’t necessarily a silver bullet for the construction industry’s issues, but it’s close,” says Barber-Lomax.

Puerto Rico Residential Report | H1 2020

In the near future, modular homes will become increasingly common, designed for affordability and quality, while offering people the opportunity have a say in personalising their new homes. –Barber-Lomax

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Contact us for more information:

Andy Carlson

Oriana Juvelier

Henry Keenan

Market Lead - Country Manager Puerto Rico, Caribbean & LATAM - JLL +1 727 403 2503 andy.carlson@am.jll.com

Vice President Puerto Rico Sotheby’s International Realty +1 818 859 9932 oriana.juvelier@sothebysrealty.pr

Analyst Puerto Rico & Caribbean - JLL +1 415 308 0120 henry.keenan@am.jll.com

About JLL

About Puerto Rico Sotheby’s International Realty LLC

JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. JLL shapes the future of real estate for a better world by using the most advanced technology to create rewarding opportunities, amazing spaces and sustainable real estate solutions for our clients, our people and our communities. JLL is a Fortune 500 company with annual revenue of $18.0 billion in 2019, operations in over 80 countries and a global workforce of nearly 93,000 as of June 30, 2020. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.

Puerto Rico Sotheby’s International Realty provides home buyers with expert advice, accurate local market and property information, exclusive access to coveted properties on island and the highest level of service and discretion. We offer skilled and authoritative assessment of real estate opportunities in Puerto Rico, as well as exclusive access to some of the best properties on the market — some of which may never be available to the public.

Corporate office in PR: Jones Lang LaSalle Puerto Rico, Inc. JLL Puerto Rico Realty & Co., S. En C. | License Number: E-297 +1 787 777 5800 27 González Giusti Ave. Suite 101, Guaynabo PR 00968 www.us.jll.com/en/locations/puerto-rico

Corporate office: Puerto Rico Sotheby’s International Realty +1 787 523 6500 1052 Ashford Avenue San Juan, 00907 Puerto Rico Licensed [E-139] in Puerto Rico, Culebra & Vieques https://puertoricosothebysrealty.com/ @puertoricosir @puertoricosir

@JLLPuertoRico @JLL_PuertoRico

© 2020 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.