Saturday, September 01, 2012
I went to one of the malls in Panama last Saturday afternoon. Big mistake. It was packed. I picked my way past the crowds of shoppers filling the walkways. I popped into stores and popped right back out again, figuring I’d go back another day when it wasn’t so hectic. I wanted to grab a juice, but the lines for service at the little cafes looked way too long.
It’s my idea of shopping hell. But it’s also a sign of Panama’s increasing prosperity. Unemployment is at an all-time low. Salary levels are up. The middle class is growing - and spending more. The mall I visited is expanding. A second mall in the city has more than doubled in size since I moved to Panama five years ago. A huge new mall between the city and the airport opened in late 2009; there’s another new mega-mall west of the city.
It’s not just malls and shopping. Panama’s on a roll. You’ve probably heard about the mammoth $5.25 billion project to expand the Panama Canal. Once completed in 2014/2015, the Canal is expected to generate $2 to $3 billion a year in profit for the government. The government has already approved the creation of a sovereign wealth fund to save the surplus revenue.
Other big projects underway include a new airport on the coast, airport and port expansions around the country and a new metro system in the city. It’s not much fun trying to get anywhere in the city right now. Work on the metro is causing traffic gridlock.
Even the city’s historic district isn’t immune. A project to upgrade the water and sewage systems and put utility lines underground means closed streets and tricky access to some of the main plazas and tourist spots.
There’s construction everywhere you turn - new residential complexes, new industrial parks, and lots of new hotels.
Despite the short-term traffic chaos, the picture for Panama is rosy. It’s so good in fact that the government is introducing new options to make it easier for foreigners to move to Panama and work here. The country is short of workers at pretty much every level.
But what about Panama’s property market? It’s thriving - in the sector aimed at the local market in and around the city. A friend is currently creating a housing community west of the city for local middle-class buyers and he can’t build the houses fast enough to keep up with demand.
For the high-end city market, fancy beach homes and the niche highlands market, it’s a whole different story.
That high-end sector of the market boomed in 2004-2007. Around half the buyers were North American. The rest mostly came from other Latin American countries; they reckoned buying property in Panama was a safer bet than banking back home.
These luxury properties were priced out of the range of the average Panamanian.
Prices in many locations for these top-end properties more than doubled in the boom years. The higher prices pushed pure investors out of the market. The economic slowdown in the U.S., combined with losses in stock markets, bank holdings and retirement funds cut the number of second home buyers with ready cash. And a lack of home equity in the U.S. and tighter lending policies by Panama-based banks ruled out finance as an option for most.
So the number of American buyers dropped. The first to notice the impact was the niche highlands market. They saw fewer potential buyers than in previous years. And only a tiny fraction of those potential buyers actually went on to buy.
The city faces another problem. There’s a lack of buyers plus an over-supply of high-end city condos. That translates to a very soft market. Average prices per square meter/foot in prime city locations have fallen in the last three years. But there’s no sign of a crash. You don’t see properties advertised for 30 cents on the dollar. That’s because developers usually prefer to sit on unsold inventory rather than slash prices. Banks handle foreclosures discreetly. And a chunk of Latin owners don’t want or need to sell.
But fire sales, mostly from U.S. owners, crop up regularly. These owners want or need out. They’re hard to find (Panama doesn’t have a multiple listing service) and they tend to sell fairly quickly once they’re listed.
The standby of renting instead of selling is also less attractive. The competition in this sector is from other condo owners and thousands of new hotel rooms in the city. Rentals aren’t generating as much profit as they did back in 2007/2008.
So, should you buy in Panama right now? I’d say no if you’re looking to flip, get short-term appreciation or double-digit rental yields. Don’t buy pre-construction; it’s always a risk and a risk that’s not worth taking in a stagnant market. Don’t buy in a private community or condo tower with a lot of unsold units. You may wait a long time for the promised amenities, or you might not get them at all; and there may be a lack of funds to cover routine maintenance and repairs.
But if you’re looking to relocate here or buy a vacation home that you’ll hold long-term, then Panama is still a great option. Just don’t over-pay. Asking prices are often unrealistic. Treat them as the starting point for negotiation. Ideally, look for a fire sale. That way you’ll build in a cushion from the get-go.