Boom Panama: Exploring Panamanian Real Estate
In the new century, Panama has established itself as a player in international real estate investment. The country’s economy continues to grow year on year. Foreign Direct Investment is still coming in. There are a variety of potential moneymaking real estate sectors. In short, Panama is more than holding its own during despite today’s global investment uncertainty.
However, prospective investors should be aware of some very important changes affecting real estate investments in Panama in 2009.
The basics are the same
Foreign investors have chosen to put money in Panama because:
The economy is strong. Panama has shown strong growth for the past five years (over 11% in 2007 and over 9% in 2008, 3.5% predicted this year).
Foreigners have the same rights to property and business as nationals.
Panama uses the U.S. Dollar for currency.
Tax breaks and exemptions are available.
These pillars may be adapted somewhat but the base for solid opportunities show no signs of change.
Enter Ricardo Martinelli
This year Panamanians elected Ricardo Martinelli, a self-made millionaire who owns businesses including supermarkets, banks and agricultural companies. Martinelli and his party hold the majority of seats in the National Assembly. This allows him to implement his reforms, three of which affect real estate investment.
The first reform focuses on reviewing development and concession agreements to make certain taxes are applied to all and—in a major change from before—they get paid (in order to get money for infrastructure and social improvement projects). This is not an idle goal; Martinelli has already temporarily shut down some major real estate development projects in the Amador Causeway and has taken on the merchants of the Colon Free Zone, which is Panama’s second largest moneymaker. Some of these actions have lead to payment schedules and increases, and some are still in the “But I’m innocent” stage.
Second, Martinelli has begun the process to change Rights of Possession (ROP) property into titled property. If and when this is completed, it will have a huge impact on buying real estate in Panama. Buying ROP has always been a riskier move, but some prime land could be obtained at bargain prices. Now the inverse is a possibility. It should be noted that the prospect of titling ROP is making some who have purchased ROP nervous.
Finally, a flat tax of 1% is being introduced on real estate. According to the La Prensa newspaper in July 2009, “Property tax would decrease from 2% to 1% for those who willingly update the value of their properties in the civil registry…. The 2% real estate property tax is the highest of the region, we will be more competitive with the 1% tax incentive.”
In another article, La Prensa gives these comparison rate for taxes in Latin America: Colombia pays an average tax of 0.75%, 0.25% in Costa Rica, Guatemala 0.56%, and in Mexico and Venezuela 0.6%.
Martinelli still has five years in office, so watch for more business-based reforms to come.
Financing is available but the rules have changed
Due to a conservative lending and investing policy, Panama’s International Banking Center has weathered the world financial crunch very well. Be that as it may, financiers are being cautious in order to protect their position.
Latin Business Chronicle (LBC)describes the current bank situation as “extremely liquid. Nevertheless, the Panamanian and foreign banks have assumed a defensive posture as the foreign correspondent banks have cut the lines of credit to all the local banks. This has resulted in the continuation of real estate projects that had already started, but with more stringent credit policies. The developers have to come up with their part of their investments upfront, and any cost overruns have to be met by the developer.”
In addition to what LBC describes above, foreigners attempting to obtain financing should also be aware that LTVs are dropping, so getting 70% is doing very well. Also, it is important to remember that financers in Panama fund renovation and construction; they do not usually lend for the purchase of raw land.
On a final financing note, private funders from the U.S., and to a lesser extent other countries, are still doing deals in Panama. LTVs run about the same as above, and more than sweat equity up front is the norm.
The condo and residential craze is over – at least for now:
Estimates for new condos and high-end residential units currently available, under construction or slated for construction are at 12,000+. There is no MLS system in Panama as of yet, so real median prices for units are hard to determine. What is certain is that prices have dropped, but not bottomed out. Speculators are trying to get their deposits back. New sales and rentals are stagnant.
On the flip side, some great deals can be negotiated—but make certain the building is completed!
Commercial properties remain strong
Megaprojects
Big commercial development is moving ahead. Some examples are:
The $5+ billion Panama Canal expansion.
A new terminal for Panama’s Tocumen International Airport.
A new convention center.
Panama Pacifico, a 1,400 hectare, mixed-use free zone, located in the old Howard U.S. military base.
The giant Metromall, under construction near Tocumen.
Hotels
Hotel rooms are a hot sector. In 2007, Panama climbed to second place in the world in hotel occupancy on the Deloitte Global Ranking Index, with 84.7% occupancy. For 2008, international branded properties in Panama City performed at about 78% occupancy and an average daily rate of near US$175 per night, according to Rogerio Basso, a hospitality analyst with Ernst & Young in Miami.
Nineteen major projects comprising 4,119 rooms were in development as of the close of the third quarter of 2008, according to the Portsmouth, New Hampshire–based Lodging Econometrics. Many more have been started since and most agree that even more rooms will be needed.
Offices
Finally, there is a chronic shortage of Class-A office space due in part to Panama’s Law 41 initiative for multinationals. Again the numbers are sparse, but availability is estimated down from 30% last year to 3% now. Naturally, lease rates have risen accordingly.
And the winners are
They can still be both you as an investor and Panama as the place you invest in. You simply have to dig below the hype to find the real story as it exists today. Can you say ‘Due Diligence’ anyone? And, welcome to Panama.
