Lacovia 10-storey revamp delayed over costs

(CNS): The first strata-backed redevelopment of an existing Seven Mile Beach condo community has been delayed. Construction on the Lacovia revamp, converting it into three 10-storey towers, was due to start this month, but although the start date has been rescheduled, “the project will be proceeding”, Kim Lund, the realtor and agent on the project, told CNS.

He said that “unprecedented increases in construction costs” have caused the delay and both the owners and developers are taking a “cautious” approach.

Lund, an owner and broker at ReMax, said that because this project is a redevelopment, it is different from a typical new development and so there are different considerations. In this case, the owners of the existing Lacovia apartments have agreed to a partnership with Bronte Development Ltd whereby, in exchange for allowing their existing apartments to be demolished, they will receive a new apartment in the redevelopment.

“The mechanics of the project are very different from a typical development where the developer owns the land and can sell all the apartments constructed,” Lund said. “The total cost of the redevelopment is funded predominantly from the sale of the additional apartments. Given the unprecedented increases in construction costs, caused firstly by COVID and its impact on the materials and labor supply chains and most recently the global macro and geopolitical volatility, we have adopted an extremely conservative and responsible approach to the redevelopment.”

Lund said that the construction budget had been “recalibrated to factor in a worst-case scenario that assumes that construction costs will remain at the current inflated levels throughout the entire redevelopment period and possibly increase further”.

Despite the cost challenges, Lund said that Bronte is fully committed to starting the Lacovia project as soon as it is commercially viable.

The price of construction materials has increased dramatically in Cayman over the last couple of years. Contractors have told CNS they have seen the cost of critical materials such as concrete increase by more than 100% and the shortage of things like steel is delaying projects. A piece of plywood that was priced for years at around $30 is now more than $100. As a result, any project priced before the pandemic, as is the case with Lacovia which secured planning permission in January 2020, will have to be re-priced.

The original estimate for the 96 apartments across three towers, 13 swimming pools and other facilities was $180 million. It is not clear what the new cost projections are but it could be as much as 50% more.

Lund said that Bronte is now working closely with its general contractor to put in place solutions to mitigate the construction cost volatility and to incorporate contingencies to ensure the successful
completion of the project. “The general contractor and Bronte are fully committed to the project and are confident that construction will commence once they are satisfied that the construction cost increases have been mitigated,” he said.

The risks in a redevelopment project are considerable, given that the owners are trusting the developer to demolish their home and replace it with a better one. If the demolition goes ahead but the rebuild drags on for years, or worse still the project folds, the owners’ loss is far greater than the loss of a deposit on a new build.

Lund said that the Lacovia owners have been very understanding of the unavoidable delay in commencing construction. However, when letters were circulated a few weeks ago about the delays, some owners contacted CNS to raise concerns. Some had already vacated their condos and put their belongings into storage in preparation for the start of construction this month.

But Lund said the majority of owners are extremely appreciative of the cautious manner adopted by Bronte, given the worldwide volatility. He said the new buyers also supported the decision and remain committed to their investment. “The upheaval in pricing and inflation is a global phenomenon, so the conservative approach by the developer is a prudent way to proceed,” he added.

When Lacovia announced its decision to redevelop the existing 3-storey condo buildings that were built back in the 1980s, it was the first existing strata to do so. But the idea was expected to catch on, not least because of the demand from the world’s wealthy elite for condominiums on Seven Mile Beach.

“Our current supply of available inventory on Seven Mile Beach is extremely limited,” Lund said, adding that with almost no development land available, redevelopment of this type of project could supply that demand. “Going forward, the strata redevelopment model will become more popular, as there are precious few raw land sites available for development on Seven Mile Beach and strata corporations are more aware of the value created by this type of redevelopment,” he said.

So far, however, the only other proposal on the agenda for a 10-storey redevelopment is at Aqua Bay condos, which was originally planned to be completed by the end of next year but has yet to receive planning permission. That complex was developed by Brian Butler back in 1987. At the end of 2020 it was announced that the strata had agreed to demolish the existing buildings and Butler would redevelop the 1.4-acre site with a single 10-storey apartment tower.

It is not clear yet whether or not construction costs, supply problems and now increasing interest rates will burst the Cayman property bubble. But there are significant concerns that the demand from overseas owners for condos is pushing up the price of land across Grand Cayman to unsustainable levels and is having a massive knock-on effect on the price of regular homes, resulting in an increase in homelessness.