Saturday, May 07, 2011
Panama's economy is soaring...but what about its rental market?
Dear Reader,
Take a booming economy, record levels of employment, mega infrastructure projects, and growing tourist numbers--in a capital city that's easy to get to. Add those factors together and you might think you have all the ingredients for a great location for a rental property, one that should generate high double-digit rental yields. But there is another factor that needs consideration, and that outweighs all the positives: supply. And this capital city has too much supply. It outstrips demand...and it's increasing daily.
I'm talking about Panama City, Panama. And that over-supply is why I recommended to attendees at International Living's conference in Panama last month that they should not buy a property right now in the city for rental yield. There's simply too much competition in this saturated market.
It wasn't always this way. Back in 2007, Panama became the world's #2 for hotel occupancy, with occupancy rates at 84.7%. A shortage of hotel rooms and suitable accommodation helped achieve that figure. Trying to find a hotel room in the city often proved difficult and not just in the high season for tourists. Much of Panama's "tourist" traffic was made up of business travelers. I recall times when there wasn't a room anywhere...because a leading sportswear company, or a church, had decided to have a conference or annual group meeting in the city.
But the number of hotel rooms is growing. Last September, the 645-room RIU opened. The condo-hotel, Megapolis, is heading for completion (its first phase has 300 hotel rooms and 555 condo units). Trump Tower is heading for completion with 369 hotel units and 600 condo units...along with Hilton, Westin, Hyatt and Marriott hotels at various stages of planning and construction around the city.
Last year Panama was #2 in another research report from STR Global, the company that ranked them #2 for occupancy in 2007. But this report was on hotel rooms in the development pipeline. Only Brazil (with 7,000 rooms) beat Panama's 4,589 rooms.
By 2012, Panama will have more than 27,000 hotel rooms. That's an increase of 10,000 rooms from 2009, when Panama had just over 17,000.
Apatel, the Panamanian Association of Hotels, calculates that if tourism numbers don't grow by 25% annually then hotel occupancy rates will fall to 50% in the coming years. Tourist numbers are currently "only" growing by 10% annually. Another challenge is that most tourists come here for business or shopping, staying only a couple of days on average. So not only do tourist numbers need to grow radically to keep occupancy rates up, but the type of tourist needs to change too. Panama's hotels need more vacationers that stay for a week or more.
It's not just hotel owners that are concerned. It's getting tougher for condo owners, too. More and more condos come on the market every day. With a stagnant sales market for prime condos in premium locations, owners that can't sell usually try to rent their condo.
This was a profitable business. But I've watched owners switch from short-term rentals, to long-term rentals in the last two years...slashing rental rates...and finally deciding to try and sell their units. It's harder now to find tenants and harder to keep them...and rental rates are falling. And there are still more condos under construction as we speak, that will come onto the market...leading to more saturation and a tougher market.
And that's the long and the short of it: there is no end in sight to the over-supply. Although buyers who bought in Panama early-in and paid relatively low prices per square meter can still make a good yield, it's much harder for new buyers entering the market now.
My advice: only buy in Panama City if you plan on living or retiring here (or as a bolt hole to escape the winter months back home), and holding the property long-term. Look for a fire sale, which will save you a big chunk off the "official" price per square meter. Don't rely on rental income to cover a mortgage and running costs...or regard it as a business opportunity for turning a fat profit. Instead, treat rental income as a nice extra...the icing, but not the cake.
And there are some interesting fire sales coming on the market in Panama. I'll bring you news of any that I think have potential. So stay tuned...
Margaret Summerfield
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Posted Under:
panama, rental yield, distressed
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