How To Profit From The Panama City Hotel Boom

The Leading Edge

Friday, 13th June, 2008.
Waterford, Ireland

Dear Leading Edge Reader,

There's a Panama City real estate play delivering among the strongest and most reliable rental returns I have ever seen. I have been a regular visitor to Panama City for nearly five years. Up to the middle of last year I would call one of my favorite hotels a couple of days before traveling. I never had a problem getting a room and never paid more than $128 per night.

Ronan McMahon

Those days are gone...

There isn't availability…and when there is, you would pay at least $180 per night. Last December I tried to book a hotel room for a visit in January. I was told that there was no availability until May at the first two hotels I contacted. Extensive searching for an apartment rental was unsuccessful. I was lucky to find a hotel room for $285 per night.

Panama 's visitor numbers are growing at a much faster rate than its supply of hotel beds. Visitors are coming from the Americas and Europe for vacation, to buy real estate, to do business, or to work. Multinationals are setting up regional headquarters in Panama and the big infrastructure projects are drawing in skilled labor and contractors. In recent years developers have made a killing from the property boom selling condos. Official stats indicate that hotel occupancy for hotels of 100 rooms or more is running at more than 90%. I personally have seen the books of two, 80-bed apart-hotels that had occupancy in excess of 95% last year. Both said they could fill their beds twice most nights this year.

Last year IPAT approved 40 hotel projects and is currently reviewing 18 applications. There are about 10,000 hotel beds in the pipeline. This will take a couple of years to be delivered and all the time visitors numbers will continue to grow. Assuming Panama continues on its current path (which I think it will), supply will be at least five years catching up with demand.

Boom times for Panama 's hoteliers. You, too, can profit from the Panama City hotel boom even if you don't have the capital, expertise, or time required to be in the hotel business.

How? Buy a hotel room.

Under a typical condo-hotel program a developer will construct a hotel and sign an agreement with a hotel group to run the premises. The developer then sells the units to individual investors. Revenue from the hotel operation is pooled and divided between the hotel operator and the owners of the individual units. Splits between owner and operator can be as high as 70/30 in favor of the owner although the big name, high-end operators will typically take a bigger cut.

If you go down this route it's important to take a medium-term view of where the market is going. You need to be satisfied that demand for your unit will hold as the supply of hotel beds increase. The location and target market segment needs to be right. Of course, you should also check out the hotel operator. Who are they? What is their track record? What is their commitment to the project? Ensure you aren't paying too much on a square meter basis for your unit and do conservative math to guarantee you get a good rental yield. Condo-hotel deals are thin on the ground in Panama City.

The new Hotel Nikki project, located on Avenida de Balboa, will be Panama's first six-star service condo-hotel. Think Miami South Beach trendy opulence and you're getting a picture of the Nikki franchise. Prices for a 60-square-meter unit start at just under $300,000. Due for completion in 2011 owners here will also be entitled to four weeks usage every year. For more information, contact: Sophya Nuñez; e-mail: snunez@pathfinderinternational.net .

A second strategy to profit from the under supply of hotel rooms is to buy a condo and make it available for short-term rental. Many International Living readers who bought in buildings like Bayfront on Avenida de Balboa have made their units available for short-term rental. In this case the developer (Bern Group) has set up a rental management business ( www.pmsolutionspanama.com ) to cater to the needs of their purchasers. A condo furniture fit-out package is available to owners wanting to rent their units on a short-term basis. Expect to pay $20,000 for the fit-out package. The Bern Group is also a major hotel group in Panama City , allowing them to channel overflow from their hotels to short-term condo rentals. IL readers using this service are seeing net rental yields of up to 15% based on their original purchase price. Resales at Bayfront are available from around $220,000 through Maurice at Palmetto Realty (e-mail: cembelanger@palmettorealy.biz ) and Yvonne Lohrer of Bern Rental Management; e-mail: ylohrer@bernhotelspanama.com ).

Even based on today's purchase price, net rental yields are in the region of 10%.

IL reader and UK native Adam Miller saw what was happening and took it a step further. Adam has been buying high-end condos, giving them a luxury fit-out and throwing in a full concierge service and a fully-stocked kitchen. Adam's company, Fushion Lofts ( www.fusionlofts.com ), charge up to $345 per night in one of their luxury condos and are seeing occupancy in the region of 80%. Contact: andre.gayle@fusionlofts.com.

The vast majority of new supply is targeted at the top-end of the market. In each of the examples above we're talking nightly room rates of $200 and more. There is a growing, un-serviced gap in the market for mid-range hotels. Think Marriot Courtyard. There is a big opportunity in this space. Frequent business travelers and mid-range vacationers want clean and convenient hotel beds in the $100-a-night-range. There is a big opportunity in this space. Offer this and watch out for the stampede.

Wishing you good real estate investing,

Ronan McMahon,
The Leading Edge