Aruba–AnAppraisersPerspectiveMy third assignment to Aruba recently with the first one in 2009. In many ways surprised to find much of Aruba remains the same. One of my favourite islands in the Caribbean – in large part due to the excellent infrastructure- good governance – stable democracy with little evidence of corruption. Aruba is essentially low density – with steady sunshine and tolerable traffic. With an average income of USD 28,924 (2014) per head, Aruba

has a relatively high standard of living, which reduces social risks. Aruba’s economy currently largely depends on the tourism sector. Over 85 percent of the economy depends on tourism, making Aruba the second-most tourism-dependent country in the world. This marked dependence on external economic conditions is a key reason why Aruban growth volatility has been among the highest in the region.

Furthermore, the tourism sector is highly dependent on the US, as 54% of the tourists come from the US. Aruba is particularly susceptible to downturns in the U.S. and Venezuela. While the fibre optic internet has been around since 1995, to have such high speed internet service at a rental condominium indicates how widely the service has spread on the island. The roads, utilities and basic infrastructure is first world and impressive. We note that wind power now contributes about 15% of the energy with more wind farms planned along with Solar energy generation at the airport. Good potential for developing a renewable energy sector. Aruba has competitive wages and low cost of importing –Features strong tourism numbers both current and historical and consistently about 5% of the Caribbean market. Active hospitality real estate market – with large investment sales and mortgage activity evident. Excellent standards for quality construction.

NotSoGood Government Debt

Aruba has high government debt 84%+ of the GDP The detrimental effects1 of very high levels of public debt for the Caribbean region find that at 55-56 percent of GDP the debt’s effect on economic growth turns from positive to negative. Although such thresholds are estimated to be higher for developed economies (80-90 percent of GDP) and emerging market countries (60-80 percent of GDP) , for small island economies like Aruba, a lower threshold seems appropriate given higher risk premium on interest rates (compared to advanced economies) and lower potential growth (compared to emerging market economies). Overdependence upon Tourism – Based on the 2013 report of World Travel & Tourism

Council, Aruba ranks second highest in the world on the contribution of tourism sector to GDP. Oil Refinery Restart? In 1929, Exxon completed what was then the largest oil refinery and storage facility in the world near the town of San Nicolas, Aruba: the Lago Oil and Transport Company. Shortly after, the Eagle Oil 1 Greenidge et al. (2012)

Refinery was completed on the western side of the island, and oil drove Aruba's economy for the next several decades. However, in 1985, Exxon closed the refinery due to a reduced worldwide demand for oil Later, Valero restarted operations and at the peak employed provided 600 direct jobs and accounted for up to 12% of GDP. The refinery closed in 2012 and has since been used solely as a trans-shipment and distribution centre. In November 2015, the government reached a “heads of agreement”2 with Citgo, the Venezuelan-owned, US-based refiner and distributor, to convert the plant to an “upgrader” to blend heavy, sour Orinoco crude with lighter oils for processing by other refineries. Most recently, the deadline to reach an Agreement between Citgo and the government was extended until 13 May 2016. The success of the project depends on Citgo’s cash flow and may be affected by developments in Venezuela. As envisioned, Valero, the previous operator of the refinery, will transfer it to a newly created Aruban state-owned company, which will lease it to Citgo to operate under a 15- to 20-year contract. Citgo would not be responsible for environmental liabilities that accrued under the previous owners. The creation of the state-owned holding company requires approval by Aruba’s parliament. This startup would contribute greatly to Aruba’s overall economy and provide much needed diversification. Balance of Trade – deficits Aruba recorded a trade deficit of 491.66 AFI Million in the third quarter of 2015. Balance of Trade in Aruba3 averaged -416.68 AFI Million from 2000 until 2015, reaching an all time high of -268.40 AFI Million in the second quarter of 2001 and a record low of -590.71 AFI Million in the fourth quarter of 2013. According to IMF estimates the current account balance will remain negative for 2016 at -4.1%

2 Fitch Reporting

3BalanceofTradeinArubaisreportedbytheArubaCentralBureauofStatistics

Highly structured and regulated labour market. With aging population - low labour participation rate – and shortage of skilled labour all factors that could be a constraint to growth

RealEstateRelatedIssues Real estate related statistics indicate that Aruba’s peak economic activity was in 2005 (1,584 permits) and has been in decline since that time. For example, construction activities are outlined following:

While apartments are the only real estate sector that has shown growth, we suspect that this relates to a very active timeshare market in Aruba, while the balance of indicators all appear to be declining.

Large number of commercial listings with few sales – most actual sale(s) appear to be distressed properties sold by auction except for hospitality related properties. Listing periods for most commercial properties (1.0 Million USD + ) appear lengthy – use of waybackmachine website confirms long standing listings. Non Disclosure island – lack of public information on real estate sales – Since sales normally reflect the meeting of minds of both vendor and purchaser on value issues, low volume markets coupled with a lack of sales information disclosure inhibit decision making and lengthen the marketing- listing process. Noted a wide range of capitalization rates and asking prices – with little supporting sales evidence. The few local appraisal reports reviewed seem to lack market evidence and rely upon largely upon cost accounting for support. Regional banks were most helpful in providing background information on commercial real estate. (both performing and non performing properties)

Two factors that seem to have a direct influence upon real estate investments – population and job growth – rate of FDI are outlined following:

NetFDIinArubabetween1990and2014isnegativeandtrendingdownward.4

Summary As my aunt used to say – Aruba has good bones –a solid and impressive base and infrastructure – paradoxically the very positive benefits afforded the citizens is also a contributor to one the major concerns regarding Government Debt. General real estate related indicators suggest relatively flat growth for almost 11 years, except in the hospitality and time share sectors. Realistic understanding of current markets pricing and a more open information system could shorten listing /marketing time for commercial property owners and improve lagging FDI. Informed vendors- purchasers could improve the volume and timeliness of transactions.