The Tribune

By NOELLE NICOLLS

Tribune Features Editor

nnicolls@tribunemedia.net

For a country that abhors idolatry on the basis of its Christian faith we certainly do have a lot of sacred cows. The second home industry is one of those darlings. To some, the foreigners who own second homes in the Bahamas are “defenseless” babes, used as “easy targets” by Bahamian-first nationalists. The latter may be true to some extent, but I feel no sense of obligation to defend second home owners; as far as I am concerned, they need neither my care nor concern.

That being said, my advocacy for the encouragement of a domestic industry of second home ownership is not driven by nationalism or anti-foreigner fundamentalism. It stands on two basic principles.

If the tourism industry in the Bahamas is to grow and remain viable in the context of fierce global competition it needs ever increasing Bahamian participation, specifically at the level of ownership, both psychologically and materially.

If Bahamians feel marginalised in the industry they will not be fully invested in its success. If they feel isolated from opportunity they will not contribute the fullness of their talents and skills to its development. And we badly need Bahamian innovators to step out of the shadows to help respond to the current industry crisis.

If we do not alter the tides, not only will our industry suffer economically, but the antagonistic relationship between the owners of industry and everyone else will continue; at best, antagonism could give way to resignation and indifference, or worse, a self-absorbed every man for himself posturing, none of which is constructive for our national development.

It is not about nationalism, it is about development and opportunity.

There is no question, Bahamians participate in the tourism industry in large numbers as employees. But any business will tell you, there is no comparison between an employee who is truly invested in the job because they believe in the vision and feel a sense of ownership, and an employee who is simply collecting a pay cheque: the latter being dead weight, although a necessary evil. Likewise, there is no comparison in the outputs produced by an employee with nothing invested and a business owner who has staked his or her entire fortune.

If more Bahamians felt a sense of ownership in the industry, at either the psychological or material level, it would only serve to improve the industry. It is that simple. It would not be a panacea, but it could broaden the investment base and create a more stable domestic economy that would be less susceptible to the shocks of global capital.

We are foolish to only give the full force of our faith to foreign direct investors; while they do create opportunities for Bahamians, whether it comes as a second home or a mega-million dollar resort campus, they are no special elixir for our economic woes. So we must pursue concurrent strategies and encourage domestic industries to grow; we must value domestic capital, no matter how small it might seem in comparison.

Far from being about false nationalism, my call for greater participation in the domestic tourism industry is about development and opportunity.

Domestic tourism is not going to fill rooms at Baha Mar, but it could fill rooms in a bed and breakfast in Acklins or a villa in Cat Island. Imagine the economic impact on the Family Islands if Bahamians did not travel to regattas and homecomings. If Bahamians travelled more within the country’s borders, notwithstanding these signature events, we could generate greater economic activity in the Family Islands, while instilling a deeper sense of ownership in the tourism product.

Other destinations are doing just that. Domestic tourism in the United States, for example, increased by 8.1 per cent in 2011, according to US government statistics, which is not good news for the Bahamas. One of the ways we could respond to the market is look at how to stimulate domestic travel and domestic investment.

My call for a domestic industry of second-home ownership is consistent with an interest in stimulating development and capitalizing on opportunities in the marketplace. It is precisely because of the success achieved by foreign second home owners in crafting a niche market from private vacation rentals that I recognise the opportunity for Bahamians.

Rental houses can charge up to $15,000 per week and more in some of the islands, although the average is probably around $2800. For a second home owner that provides a nice cushion to maintain the vacation property and provide additional income. For a Bahamian that could be a sustainable livelihood.

Year after year, the market for vacation home rentals is proving itself in the Family Islands, so instead of only promoting traditional hotel ownership for Bahamians, perhaps we should prioritize the domestic industry of second home ownership, the natural extension of which is private vacation home rentals.

The barriers to entry are lower while the return on investment is potentially higher. There are already Bahamians in the real estate market, who could easily enter at the low and mid-range side of the rental industry or implement upgrades to attract the highest value rentals. A domestic industry would have other direct and indirect benefits, as there would be a lower outflow of profits unlike the high earnings repatriated overseas by foreigners.

Despite our industry’s maturity, Bahamian owned resorts in the Family Islands are not thriving en masse. Many are simply surviving. The situation is made worse because they are now under the threat of competition posed by vacation home rentals, primarily owned by foreign or white Bahamians.

The answer is not to create artificial protections for Bahamians, but to help Bahamians respond to where the market demand has shifted. We might as well accept – if this is to happen on a substantial scale there needs to be a deliberate policy initiative to facilitate the shift.

From I know myself, the second home industry has been a space understood as the domain of foreigners. That is the context under which it has been discussed and policy has been set. So it is understandable that some small Bahamian hoteliers would see the industry as a threat not an opportunity.

In this instance, however, the threat is not a virus to be flushed out. The industry simply needs to be shaped and organised in a strategic manner so that one segment of the market is not undermined by the other, and so that Bahamians now can benefit from the opportunities across the board.

After all, it is in our national interest to diversify the economy, and we can do this by broadening the base of our tourism product and bringing in new sources of capital, specifically from the domestic market.

David Ralph, director of the Abaco Chamber of Commerce, is a strong advocate of the second home industry. And in Abaco, his research documents a number of benefits brought to Abaco because of the industry, such as tax revenue derived from real property tax, which Bahamians do not pay in the Family Islands. His analysis, however, has one vital flaw, because Mr Ralph sees the industry as “an equal-opportunity” space.

In Mr Ralph’s view: “The opportunity exists for Bahamians to buy a cay in the Exumas or elsewhere and allow it to be rented for $300,000 a week as David Copperfield has done [in Musha Cay]. Should we tell him to cease renting as well as the others in this business with lesser investments? Hope Town and Green Turtle Cay each have rental houses in the $10,000 to $15,000 per week range.

“This is an equal-opportunity business model that any Bahamian can copy. Get a piece of land, build a house, advertise for tourists and put money in the bank. If you do this on a Family Island, you get the benefit of a property tax exemption so you start off with an advantage the foreigners do not enjoy,” said Mr Ralph.

I have to patently disagree. It is flawed to think that “equal-opportunity” truly exists just because there are no overt barriers. Wealthy country club investors already have a head start in the industry by virtue of their long-standing participation; they can take large risks and absorb larger loses; plus they have more direct access (amongst their friends and business associates) to the prized target market. Not to mention, they have had the unwavering support of the Bahamian government.

Mr Copperfield’s success as an example of the readily available opportunities that exist for the domestic industry is simply out of touch. And if we are honest, Abaco itself is not exactly a mirror of the other islands, particularly to the South.

David Copperfield is in a different league when it comes to the average Bahamian business person or aspiring hotelier and home owner; not only because of his colour quotient and his celebrity status, but also because of the size of his pocket book. Mr Ralph might be rolling like that, but many Bahamians trying to get into the business are not; not even the political mucka mucks have it like that.

David Copperfied owns not one, two, three or four private islands. He owns an entire chain. There are 11 islands in Copperfield Bay in the Exumas.

Not to say Bahamians cannot achieve parity, but let us not be so delusional or cowardice that we cannot call a spade a spade; if we want to broaden opportunity for Bahamians and stimulate development on a wide scale in the area of second home ownership we have to create policies to nurture, encourage and promote investment not for the super wealthy, whether it be Bahamian or foreign, but for the more modest Bahamian investor.

That being said, research done by Mr Ralph in 2002 and updated in 2006 is very instructive. And it points to the delicate situation that has evolved, in which the rental house market is arguably undermining the existing national policy interest in hotel promotion.

The Hotel Encouragement Act provides a number of exemptions and concessions – on customs duties, real property tax and others – to Bahamian and foreign investors to fulfill its stated objective of encouraging “the construction of hotels in The Bahamas.”

When second homes were simply second homes there was no conflict with the government’s hotel policy: homes were homes and hotels were hotels. However, at some point the market shifted and second homes morphed inconspicuously into vacation rental homes. The shift is not surprising, as a limb extending naturally from the stem of a tree: “Filling these houses with guests when the owners are absent increases their economic value. Empty houses, like empty hotel rooms, create no revenue or value to the community,” stated Mr Ralph.

Even though hoteliers receive concessions and foreign home owners do not, it has been of little consequence. Foreign home owners have not needed the concessions, and perhaps most importantly, the demand has shifted away from hotels in many instances. In Abaco, “there are far more rooms available in rental houses and our visitors seem to prefer the relaxed atmosphere of a private home,” stated Mr Ralph.

He chronicles a long list of examples showing why it is more lucrative in Abaco to own a vacation rental not a hotel, and why vacation rentals benefit the economy more than hotels.

“House renters stay for one or two weeks, giving them more time to explore. Their visits are longer than a typical hotel visit. The house guest gets much closer to Bahamian life and culture… House guest frequently rent the same house year after year… they visit repeatedly and have more sense of belonging to the communities,” stated Mr Ralph.

“A failure of one or more properties does not severely impact the entire system. Note the closure of the hotels on South Eleuthera and West End years ago... foreign management not needed for rental houses and all labour requirements are satisfied locally… house owners are able to react quicker to market fluctuations than a resort which reacts to major decision by a chain of command… rental houses are more conducive for families as conditions are less formal,” he stated.

If these are true conditions of the market, which I accept them to be, then I cannot imagine why anyone, in particular a small business person, would opt to open a hotel over a vacation home?

If the government is to deliberately promote a new domestic policy for home rentals, which is where the economic opportunity seems to lie, then it will need to fundamentally rethink its existing hotel policy, and seriously examine the tax structure for the industry. Ultimately it will need to create an equitable tax structure that stimulates growth in the industry and maintains or increases government revenue.

If Bahamians entered the vacation home market wholesale this would present a major challenge for a few reasons. Bahamians do not pay property tax on homes in the Family Islands. Although the government introduced a guest tax for vacation rentals in its 2009 legislation, its primary means of revenue collection from foreign second home owners (who make up the vacation rental market) is real property tax.

The 2009 amendments to the Hotels Act, the Real Property Tax Act and the International Persons Landholding Act created an incentive system where property owners could register to collect a guest tax and receive a rate concession on their real property taxes. Based on the legislation, the registration for this system seems voluntary. Needless to say, there has been virtually no buy in. Sources say the government understood this would likely be the result, and was comfortable simply collecting property taxes, which generates sizable revenue.

But if there is no mechanism to collect guest taxes or real property taxes from Bahamian vacation rental homes the revenue impact on government would be negative. And if Bahamians hoteliers (many of whom, truth be told, do not qualify to access the concessions) are paying room taxes and vacation rental homes are not, would it be an equitable system?

In addition to addressing this problem, whatever decisions are made, they will now need to be contemplated in light of VAT. Who will have to pay and who will be exempt, if at all? The current rate being floated for hotels is a 10% VAT.

As of now, industry advocates are divided about whether or not the government should simply treat vacation rental homes like hotels in all respects. Mr Ralph is not an advocate of such a policy. He believes “rental houses should not be equated to hotels”. But others in the industry support such a move, seeing it as the only equitable solution.

Whichever way we move, serious thought needs to be given to the changing dynamics of the business, and serious priority needs to be given to the encouragement of domestic investment. Without question, we need to stimulate domestic capital and ultimately broaden our tourism base.

The tourism industry is changing rapidly and the Bahamas needs to respond better, at the policy level and entrepreneurial level.

At the 2012/2013 World Travel Monitor Forum in Pisa, Italy, global travel experts identified important trends in the travel market. Chief among them was the demand for “more authentic travel experiences” by consumers, who are looking for experiences in “remote yet easily accessible [places], which offer hard and soft adventure. Soft adventure tied to cultural, artistic, culinary, historic experiences.”

They are looking for experiences that allow friends, family and like-minded individuals to interact more “while showing a strong desire to interact with local communities”. Travellers are looking for “diverse new experiences”, including in the area of adventure travel.

The market trends all point to opportunity for the Family Islands, and more specifically opportunity in the vacation rental home market. What seems clear is that hotels will need to consolidate and/or become more specialized with unique experiences that do not simply create beds for bums. And Bahamians will need to enter the vacation rental home market if they want to eat some of the pie that the foreigners are getting fat off.

So although Mr Ralph may feel I fit into the category of people who complain about foreign house rentals out of “envy” and an “unwillingness to make a similar investment” or work to promote their properties, he and I are not as far from agreement as it may seem.

From the outside looking in, the second home industry appears to be a lucrative space. For that I see opportunities for Bahamians and developing our economy; not by creating insular protections, but by fostering expansion in the business and new developments in the dynamic market place. But I recognize there are some fundamental issues to address should we choose to move in this direction at the policy level.