Dominican Republic Investment Strategies

General Factors

A general mood of optimism justifiably surrounds the real estate market in the Dominican Republic. Aside from being the largest and most varied of the Caribbean islands, the Dominican has become a major tourist hotspot, each year welcoming increased numbers of visitors, via its well served international airports. The fact that this island comes at a fraction of the cost of other Caribbean destinations makes it a natural favourite amongst tourists and investors alike.

With the tourism industry booming, foreign investment is at an all-time high with a huge amount of redevelopment and construction underway, in turn boosting the country’s economy and infrastructure. Resort complexes, golf courses, roads, restaurants, schools and medical services are among the massive infrastructure refurbishment programmes coming into effect all over the island, bringing with them renewed interest in the island’s great investment potential.

Of major appeal are the luxury off-plan developments now going up particularly along the eastern shores of the island where some 70% of buyers are from the USA. With the easy access afforded by charter and scheduled flights to the island, these properties are also increasingly attracting Europeans and Canadians. The resorts sit beautifully amongst exceptional natural beauty and offer all the facilities expected by today’s exacting tourists. The winning combination of prime resorts and affordable prices allows year-round profits to be made from rental yields as well as from longer term capital growth.

Many of the new projects feature tempting guaranteed rental and low entry investment options but investors know that current prices will not remain at these levels for long – they will inevitably go up, while a finite supply of beachfront property means the highest profits are to be made by those who act now. So affordability and an emerging status are main characteristics to Dominican Republic real estate. Meanwhile, a stable and growing economic climate with proactive government policies underway mean all types of investors can look forward to lucrative returns.

Economic Factors

Two main factors are contributing to economic expansion in the Dominican Republic: one is tourism growth, largely due to the government’s success at transforming the tourism sector into one of the most dynamic of the Dominican economy. Under the 2008 – 2012 Tourism Plan, a massive 5 million annual visitors are targeted for 2012, representing an increase in tourists of around 170,000 annually. Well located tourist accommodation of all kinds is therefore set to continue to be in high demand.

The second factor is government agenda, which firmly focuses upon attracting investment into the country to upgrade the existing infrastructure and supply all that is required of a well served Caribbean destination. The Dominican Republic receives World Bank aid, in addition to assistance from the Inter American Development Bank and the EU. Foreign Direct Investment (FDI) has been increasing (up from $1.02bn in 2005 to $1.18bn in 2006 and then 1.39bn in 2007, with 2008 predicted to be well over 2 billion dollars). Ongoing investment is evident in the Free Trade Zones around the country as well as new real estate projects, with obvious positive effects on the local economy. Some of the international business giants on the island now include Wal-Mart, and Donald Trump, as well as famous hotel groups such as Four Seasons, Conrad, Fairmont and Ritz Carlton – all reassuring signs of international confidence in the Dominican Republic.

A low cost of living and favourable exchange rate with European and US currencies means the Dominican Republic is attractive to investors. The cost of maintaining and managing Dominican property is lower than on many of the other islands, while you can enjoy just the same tropical attributes. In 2008 inflation comes in at 5.8%, down from 8.20% in 2007, further indicating bright prospects for buyers in the Dominican.

Political Factors

A stable representative democracy has dominated the government of the Dominican Republic for several decades. Such stability has lent itself to growth in the economy and the tourism industry in particular. The government has encouraged the growth of Free Trade zones and tourism, giving rise to a surge in the service sectors.

The government reflects the US system and the president is elected every four years as both the head of state and head of government. Legislative power belongs to the government and the two chambers of the national congress.

Proactive government programmes and strong trading ties with other countries such as America and the UK make it a viable investment destination and holidaymakers, expats, retirees and investors are welcomed. As tourism increases, foreign relations are growing stronger, eg. the UK reopened its Embassy, encouraging growing numbers of British investors seeking a stable setting for their property purchases.

Natural Factors

The Dominican Republic more than qualifies for the term, “Jewel of the Caribbean”: its azure waters, tropical forests, mountains and the pre-requisite powdery white beaches make for a dreamlike location. One third of the Dominican Republic’s 869 miles of coastline comprises spectacular beaches that are regularly voted by the tourist industry as amongst the top five beach destinations in the world. Meanwhile, the Caribbean’s highest mountain range can be found in the Dominican.

Often mistakenly referred to as "Poor Man's Puerto Rico," the Dominican Republic has its own distinct cuisine and cultural heritage. Its Latin mood makes it quite different from many of the other Caribbean islands which are more British and French influenced.
As the largest of the Caribbean islands, the Dominican Republic offers great diversity, both alpine and coastal, while avoiding the feeling of being bound to a small island.

One of the Dominican’s greatest natural assets, the weather is warm and tropical (average 25°C) and does not vary much from season to season. Rainfall is greatest between October and April so that tourism tends to peak from December to April. However, year-round appeal and a warm climate means holidaymakers visit throughout the year.

Although Spanish is the national language, English is widely spoken in business arenas due to the island’s ongoing economic ties with the USA. The fact that nearly one third of tourists in the Dominican come from the USA means that English is also spoken in many tourist and business environments.

Restaurants and nightclubs buzz with life in busy Santa Domingo, one of the oldest and most cultural cities on the continent. Cinemas, theatres, art galleries, museums and shopping malls, along with international restaurants and clubs can all be found in the city, while quaint, traditional villages dot the coastlines if you enjoy a quieter, more traditional pace of life.

Logistical Factors

As a major Caribbean holiday destination, the Dominican Republic is easily accessed from the USA as well as the UK and other European destinations. It has three major international airports with direct flights to the rest of the Caribbean and other destinations such as New York, Miami, Philadelphia, Panama, Venezuela, Aruba, Spain, Holland, Germany, Martinique and France. Direct flight time from the UK is about 9½ hours.

The main airports in the Dominican Republic are:

• (AZS) Samana, also known as "El Catey", located between Nagua and Samana on the north coast
• (JBQ) "La Isabela" airport in Santo Domingo, mainly for domestic flights but also receives some flights from other Caribbean islands
• (LRM) La Romana on the south east coast
• (POP) Puerto Plata, also known as "Gregorio Luperon" on the north coast
• (PUJ) Punta Cana International in the east, the busiest airport in the country
• (SDQ) Santo Domingo, also known as "Las Americas" on the south coast, near the capital city of Santo Domingo
• (STI) Santiago also known as "Cibao International" near Santiago de los Caballeros, the island's 2nd largest city

In line with the government’s drive to improve the transport infrastructure on the island, many new highways have been constructed connecting to the capital city of Santo Domingo. Bridges, tunnels and viaducts have gone up, and work is now underway to build and improve paved roads between the island’s smaller towns and less populated areas.

Short Term Investment

Key Opportunity

Strong economic growth (GDP growth 8.5% est. 2007), year on year is an immediately positive sign to investors, as is the government’s proactive intent to increase tourism to the island which is targeted to grow some 3.4% p.a. until 2017.
Major construction is underway to produce luxury beachside resort complexes catering for the exacting needs of 21st century tourism. Business tycoons are flocking to the Dominican Republic and Donald Trump believes in the Dominican Republic’s potential to the tune of $2bn at Cap Cana. Within just four hours of first phase release last year, record sales were made to the tune of $300m. This goes a long way to demonstrate today’s overwhelming demand for luxury property in the Dominican Republic.

With current property prices still lower than in much of the rest of the Caribbean, The Dominican Republic still offers investors the key opportunity to buy a lot more for their money than on the other islands. Capital growth is currently around 20% p.a. and, with the Wall Street Journal reporting predictions of up to 50% growth in the near future, shrewd investors are making the most of the situation. Current low entry prices and fast accelerating capital growth mean strong returns even in the short term.

Timescale

Average construction time on Dominican projects is 12-18 months. If investors are looking at the short term, the average term of the investment should be around 12 months from reservation to resale.

Payment terms for most projects at this time are 25% upon signing a purchase contract, followed by several stage payments or one balance payment of 75% at completion, depending on the particular development you choose. Buy-to-flip investors should of course successfully avoid the final payment if they manage to re-assign their property contracts prior to completion.

Level of Complexity

Short term strategies in the Dominican Republic are low in complexity due to the fact that there are no ongoing property costs applicable in terms of property management. The purchase consists of a simple capital investment with no need to progress to a purchase contract or make any finance arrangements.

Furthermore, in most cases, there are no charges made by the developer for assignable contracts, although this should always be checked on a case by case basis.

Once the full deposit payment is received, the ‘flip’ will normally take place at any stage after the signing of the purchase contract.

Key Risks

It is important for the investor to be aware of how attractive a chosen property will be to buyers when there is so much other construction underway. The more outstanding the chosen property unit is, the lower the investment risk.

A unit needs to be in a prime location to attract the buyer, for example a corner unit on frontline beach or golf location, alternatively a penthouse with outstanding views. A standard first floor unit with pool views will generally take longer to sell than a similar

Competition is another critical factor. If there is a large volume of construction or existing properties at the investment location, investors will need to keep a watchful eye on the potential for oversupply. In the Dominican Republic, there will be a large volume of construction in progress over the next few years, although there is a finite supply of beachfront units, the most popular property. End users will still be buying throughout this initial development phase and looking for the best completed properties now on the market.

Investors should bear in mind that the Dominican Republic is still an investor’s market: completion of the new infrastructure, including roads, hotels and tourist facilities is now underway and, while some are complete, much is still to be done, making now an ideal time to invest in this growing Caribbean market.

On a purpose-built tourist resort, it is important to ensure adequate and multiple facilities are on-site. The investor should remember that many unique residential complexes may not have on-site facilities and if this is the case, for practicality’s sake the development should not be situated in too remote a location.

Finally, if a buyer is not found prior to completion of the property, the buyer will need to be confident that the investment can be adapted accordingly and full completion achieved.

Return

Capital appreciation levels are at their highest early in an investment market. The Dominican has some of the lowest real estate prices in the Caribbean today, considering the quality and type of units that are available, and it is set to see some significant increases from current levels in the foreseeable future. According to IPIN research taken from developers’ conservative estimates, buyers could expect to see growth of around 20% per annum. With unit prices being secured at up to 30% below market value, investors could realistically be looking at returns of up to 50% once construction is completed.

For a short term investment opportunity, buyers may wish to consider selling before completion. The term used is to “flip” the property.

Please see the example below:

• A fully furnished unit is reserved for €112,000
• The investor pays 30% deposit of €33,600 upon signing the purchase contract, plus expected legal costs at this point of approx €1,100.
• Nothing further is scheduled to be paid before completion in 2 years. After year one of the investment, capital appreciation has realised at 20% for the year, giving the property a new value of €134,400.
• With capital appreciation continuing to perform at 20% per annum, the investor decides to instigate an exit strategy and attracts a buyer after 15 months .
• The property value is now €141,120. To attract a buyer, the price is discounted by 10%.
• Sale price is €127,008 less provision for 70% payment due at completion of €78,400 leaves a net return of €48,608
• Total capital invested is €34700
• Therefore the return on capital invested after 15 months is 40.08%.

NB: The real rate of return would be much higher than this if the property is purchased at below market value, as the property values would be higher but the capital outlay would still remain the same. For example, if the property was 30% below market value, the property value would be €160,000 instead of €112,000. Assuming similar growth rates the property value at 15 months would be €200,000. To attract a buyer, this could be sold at 30% discount leaving a net return of €61,600 after deduction of payment scheduled for completion. The return on capital invested now is 56.49%.

Financing

It is impossible to arrange a mortgage on a property that technically does not yet exist. This short term investment strategy is purely based on capital, although mortgage approval in principle will often be granted.

In order to cover all eventualities, investors must be confident they can complete if no buyer is found and a full purchase is necessary.

If necessary, consultations can be arranged on equity release from existing property.

Taxation

Income earned from property in the Dominican Republic is taxable whether or not the investor is a resident. Capital gains are taxed to non-residents at a flat rate of 27% on any gains made on properties in the Dominican Republic. This figure is set to decrease to 25% in 2009. Tax is subject to alteration depending on any double taxation treaties in place between The Dominican Republic and the investor’s country of residence.

Property purchase tax is not charged on short term investments, as the investor never actually takes ownership of the property by signing the completion documents.

Medium to Long Term Investment Strategy

Key Opportunity

Capital appreciation in the Dominican Republic is predicted to continue at a steep rate for at least the next decade. Off-plan prices are currently low and many pre-release prices offer deals at well below today’s market values. Development is concentrated around prime locations such as frontline golf and beach but, as time goes by, construction will move further from these prime positions, making later investments less effective. In general, the earlier the investment is taken on, the greater the capital appreciation an investor can achieve.

Rental demand is strong in the most popular locations, particularly to the east of the island at Punta Cana and Bávaro. Other hotspots include: Barahona, west of Santo Domingo and areas near Miches and Sabana de la Mar, near the Bay of Samana. The island is currently undergoing massive investment in facilities, infrastructure and resorts boding well for investors.

Running costs of property in the Dominican Republic are low which can easily be covered by rental income.

For long term investors, new changes in the Dominican law promise a fast track residency programme that can now be completed in 45 days. In addition, newcomers will receive a host of tax breaks such as reductions on mortgage and property purchase taxes, capital gains tax and car taxes. These additional benefits are expected to draw in increased numbers of investors in the Dominican Republic.

Dominican Republic property has great appeal amongst North Americans, Canadians and Europeans alike. Such global appeal makes the Dominican Republic an outstanding prospect for our investors.

Timescale

Average construction time on Dominican projects is 12-18 months. Investors can expect to see healthy rental returns on their investments within 2 years, depending on their chosen investment location. These returns will coincide with the completion of major tourist facilities and improvements to the infrastructure.

Although good returns can also be achieved on a short term investment strategy, the potential for even higher gains is strong with a mid-term strategy. Capital appreciation is expected to perform exceptionally well over the next ten years; therefore, the longer the term investors are able to leave their capital in the property, the higher their returns.

Level of Complexity

An ongoing investment in the Dominican Republic is no more complex than one closer to home. Investors will however need to have their full records maintained and ongoing taxation requirements will need to be met.

Full payment for the property needs to be made at various stages of construction prior to completion of the purchase when full costs will be applicable, of between 6% and 7% of the purchase price.

Investors on a medium to long term strategy will have ongoing payments to maintain, whether community fees, utility bills or loan repayments to fund the investment from another country. A Dominican bank account will also need to be opened and property management companies may be hired by the investor to take care of some ongoing payments and arrangements.

Key Risks

Medium to long term investment is lower risk than a short term investment, which relies on finding a buyer within a very short time frame. Providing the correct investment is made on a good quality project with multiple facilities, establishing rentals and eventually a buyer for the investment should not be difficult, although patience may be required as with any property market.

The Dominican Republic possesses a superb coastline, and many projects will be announced over the coming months/years, particularly in the prime beachfront investment locations. This means greater competition between investors. Choice of location and project is all the more important to early buyers while an inevitable influx of visitors, purchasers and rental tenants is beginning to hit the Dominican.

By appointing independent legal representation, you can be sure that all necessary paperwork is in place before signing purchase contracts.

Foreigners can own 100% freehold property the Dominican Republic, leaving no room for dispute.

Return

Capital appreciation in the Dominican Republic sits at a steady 20% p.a. but it is expected to increase dramatically with the release of many new projects and ongoing improvements in the country’s infrastructure. Conservative growth forecasts for the next couple of years indicate annual levels to remain at similar levels, while predictions from The Wall Street Journal reflect dramatic capital appreciation growth of some 50% p.a. for coming years. Increased public awareness across the globe of the low property prices and great potential of Dominican Republic will doubtless have a positive effect on the nation’s real estate market.

In order to maximise return, investors need to take up early opportunities in new developments, ideally at pre-launch prices or at pre-planning stage. Investors must expect initial pricing structures to be increased on projects after only a short period of general release. Trends indicate that developers are undervaluing units to encourage early purchasers, then increasing prices upon achieving a predetermined amount of sales. This is a highly lucrative opportunity for early investors looking for quick growth.

In addition, discount schemes, furnished options or other benefits such as exclusive allocations of prime units to IPIN are all effective ways to increase profit.

Please see the example below:

• A fully furnished unit is reserved for €112,000
• The investor pays a 30% deposit of €28,000 upon signing the purchase contract, plus expected legal costs at this stage of approximately €1,100.
• Nothing further is payable until completion in 2 years.
• At completion payment of €78,400 (70%)is required plus remaining legal fees and closing costs assumed as an additional €3,360.(3%)
• Upon completion of the purchase 24 months following initial reservation, the total capital invested is €116,460. The property value at this point, assuming 30% growth during construction is €145,600
• Over the following 3 years, the investor decides to rent the unit out via a local management company which generates funds to cover all ongoing costs and provides an income of €7,840p.a
• Capital growth during this time is assumed at 9%p.a.
• 5 years after making the initial payment, the decision is made to exit the investment. Having benefited from growth over this period, the property is now valued at €188,556.
• The investor sells the property at the valuation price. This represents profit on capital invested of €95,616 which equals 82.1%

This is an example to show appreciation potential. If the property is purchased at below-market valuation, the percentage return will be much higher. Using the above example, should the purchase price used be 30% below market value, the return would be a profit of €176,426 or 151.49%

Financing

Many off-plan developments in the Dominican Republic offer installment plans over between 12 to 60 months. The charges applicable vary according to developer and repayments are usually index linked. Developers often offer pre-approved mortgages for final payments and can sometimes offer the most competitive finance options to investors. These are certainly worth considering when looking at mortgage alternatives from your own country. Alternatively you may wish to arrange a mortgage independently.

75% - 80% LTV mortgages are widely available to foreign buyers in the Dominican Republic and if you are planning on raising a loan to finance your property, you will typically need to supply the bank with the following documents:

• Completed and signed borrower application including list of real estate you own
• Authorisation form to allow them to check your credit
• Completed and signed service agreement and disclosures
• Proof of income—Salaried employee: complete 2 years of tax returns; last 2 pay slips; work contract, work telephone number
• Proof of income—Self-employed: Complete 2 years of tax returns; reference letters, or other business documentation
• Proof of other income, such as rental income or fixed income: Rental agreements or tax returns to support other income
• Most recent monthly account statement from each mortgage account or asset account you own
• Purchase Agreement

The terms of your mortgage can be repayment or interest only and the loan could be raised in local currency, USD, GBP, Euro or CND. Typical lending periods are 15 to 20 years, or until age 65.

It is advisable to obtain mortgage approval in principle in order to be speed up the process when you find your dream property. It’s reassuring to know that your loan is achievable in principle, as you may need to make reservation payments for new properties prior to formally applying for the mortgage.

Taxation

Tax on Rental Income: If you are non-resident and earning rental income in the Dominican, you will be taxed at a flat rate of 29%, withheld by the tenant. For residents, income is subject to 20% withholding tax. The tax authorities allow no deductions for rental income.

Non-resident Tax/Corporate Tax

These are charged at the same rate and will be gradually decreased in the next few years: in 2008 the rate will be 27% and in 2009 it will decrease to 25%.

Capital Gains Tax

Capital gains arising from the sale or transfer of real estate in the Dominican Republic are classed as income taxable. The gains are calculated by deducting the original cost of the property (adjusted for inflation) from the gross selling price or market value. Currently, capital gains for non-residents are taxed at a flat rate of 27%.

VAT

(Impuesto sobre Transferencia de Bienes Industrializados y Servicios)

VAT applies to the sale of goods and services at all stages of production and is charged at 16% for property transactions in the Dominican Republic.

Inheritance/Wealth Tax

Currently inheritance tax is levied at 3% of the appraised value of the property, but if the beneficiary resides outside the Dominican Republic, the tax is raised to a rate of 4.5%.

The Dominican Republic’s law governs inheritance of real estate even if you are a foreigner and ensures that if you have a child, you must reserve 50% of the estate for him/her, despite the fact that you may have a will in your home country. It is wise therefore, to look into holding your real estate indirectly through a holding company.

Property Tax (IPI)

This tax applies to “luxury dwellings” and empty urban lots: the current classification on the luxury dwellings is that any home worth more than DOP 5,000,000 is considered to be ‘luxury’ for tax purposes and will be charged at 1% of the property value. Homes worth less than this threshold figure are property tax exempt.

Property tax may be avoided if a property is held by a corporation as it must pay a 1% tax on corporate assets. However, any income tax paid by the corporation will be offset against its tax on assets, so that if corporate income taxes paid are equal to or higher than the taxes on assets due, it will be exempt from taxes on its assets/property.

Be aware that ongoing bills relating to costs and taxes for your property are not usually sent to you, making them easy to overlook until such time as you wish to sell up and a fine has been added to the total debt. If you wish to avoid this situation, you are advised to keep well informed from the relevant authorities as to how much you owe each year and where you must pay.

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