Panama City Condo Market Analysis |
 |
 |
 |
| Written by Daniel Quesada |
| Thursday, 11 September 2008 14:28 |
 An in-depth look at the current real estate scenario in Panama City in layman's terms: focusing on the recent past, present, and near future for Panama City high-rise condominiums. While there might have been a small window to buy Panama condos and profit off them, is it still a lucrative investment? High-rise condominiums in Panama City have been en vogue over the last couple of years. It's like all the developers went to the same "how-to build a high-rise" seminar and decided to give it a shot in Panama City in a big way. You can't look in any direction without seeing the open-faced monstrosities being erected: yes, the Panama City high-rise residential market is hot!!! Errr... well, it was hot. Let me explain. I came from California, where I experienced a real estate "boom" and subsequent bust from 2002-2006. I saw it, I lived it, I drank the Kool-Aid. I also learned my lesson. There is a really good story, which some people tell me is true, about JP Morgan, the famous investor, and his shoe-shine guy. While getting his shoes shined one afternoon, he heard the shoe-shine guy giving stock tips and boasting about how he would make a fortune in the stock market. JP Morgan subsequently took this as a sign and sold off all of his holdings right before the market took a dive. About a year ago, I had a friend tell me a story of how a stripper tried to sell him a condo in Orange County in 2006 at the market's hottest point, right before it collapsed. These are patterns, signs from a higher power; and I recently had mine. I was in a cab two weeks ago driving through Punta Pacifica, a nicer neighborhood in Panama City riddled with high-rise condos, and a cabbie asked me what I did here in Panama City. After I told him he tried to sell me a multi-million dollar lot in the city. He tried to convince me that I could build a high-rise and make a fortune. He pointed at all the new buildings and told me that everyone was making money. I'm not joking, he had these flimsy business cards and everything. I almost threw up. People keep asking me what I think is going to happen, so I thought I would take the time and write it down. The following is my analysis of what I see happening with the high-rise condo market in Panama City. Hold onto your seats. There are more than 100 condominium towers reported to be in some stage of construction in the Panama City market representing in excess of 20,000 units (I've heard estimates as high as 30,000). Of these, about 20-30 developers are actively selling, primarily aimed towards the foreign market. These projects represent around 7,000 units, 5,250 of which have been sold or reserved over the last 3 years. At first glance you might think, "Wow, but 1,750 sales a year is great!" Until you think about it and dig deeper. Let's be optimistic and say new product absorption (the yearly amount of new sales in a region) grows to about 2,000 per year. With nearly 14,750 units left, that means it will take 6-7 years to absorb all the planned product, NOT including re-sales. This could end up being longer unless the market continues its red hot streak. I am now hearing rumors from brokers I know dealing in that market that things are "slowing down." Brokers were mumbling the same thing behind closed doors in California at the end of 2006. If it slows down like people are saying it is, I suspect many of these 20,000 will never even get out of the ground. The truth is, as we all know, the world market is depressing, and it is naïve to think the high-priced Panama City high-rise market is immune to a down-turn. But that's not enough to conclude this market will slow down, so let's think about it a little deeper. Here are some more facts about the Panama City high-rise market: · Most sales have occurred since 2004 (when real estate worldwide was hot) · Most units range between 100 m² - 200 m² · Most units are priced today between $300,000 - $600,000. · The median price today per m² is $3,000. Now we all wish we could have bought a unit back in 2004 when prices were still affordable and rode this bubble up. Wouldn't it have been great to invest in California real estate in 2000, or tech startups in the mid-late 90's? I have heard countless stories of people who bought a great ocean view unit in a nice area pre-construction for $150,000 that they "say" is worth $450,000 today. When I ask if the unit has been delivered yet though, they tell me it won't be ready until next year, but not to worry, they plan on selling it before then. So basically they are sitting on "equity" that has not been realized yet. They realize that profit when, and only when, they sell. These are speculators, and the reason that the term "bubble" even exists. They came to Panama years ago and have been pumping this market higher and higher ever since. Now here's the problem. Most developers have taken deposits that represent a fraction of the original sales price and have recognized them as "sales". They use these sales as collateral for the construction financing and to establish that there is indeed a market for their product. They say, "Look at all the pre-sales we have, the market is hot and everyone wants to buy!" But would people have bought if the developers didn't give these buyers years before they had to close? Easy money created the bubble in the U.S. market and this same type of easy money is what created the boom here in Panama. Developers carried the financing here to promote sales, and speculators bought in. Now what defines a real sale? In my book, there are generally two types of buyers: 1. End Users - Someone who can afford to pay the full price and agrees to pay that price for the unit. This is the real demand, a good sale. 2. Speculators - The bubble creators, people who can't really afford to pay the full price but are planning on leveraging their small deposit and flipping their unit to either another speculator (the "greater fool" theory) or to an end user. Their goal is to profit on the spread using relatively little money down. When you look at an overheated market like Panama City high-rise condominiums, speculators tend to be the majority of the buyers. They loved it because they could leverage their deposit and ride the boom with relatively little money at risk. Why is this a problem? Eventually a time comes when these speculators will have to get out. They must make a decision to either: · Prescribe to the greater fool theory; find another speculator dumber than them to buy the higher priced unit. · Find an end user to pay the inflated market price, which is the preferred exit, but the most difficult exit. Many times the real demand is different (i.e. at a lower price) than the speculator's price. · Walk from their deposit and let the developer have the unit (or the bank, if the developer has construction financing, which many do). Remind you of anything (Miami, California Real Estate Markets ...)? Now I believe this will happen sooner than later. Why do I believe this? Well for one, because the banks in Panama have tightened their belts already, and justifiably so. If you saw the titanic sink (think Bear Stearns, Freddie Mac and Fannie Mae) would you sail in the same direction? I don't think so, and neither do these banks. Many banks here will only lend on units up to $1,500 per m². Remember that the average unit in many of these high-rise condos is $3,000 per m² or higher. That means buyers will have to cough up nearly 50% of the down payment to get financing from now on in order to actually close. Ouch. Another unique characteristic of Panama is that it doesn't have a secondary market for mortgage backed securities, in essence making the amount of money available to lend limited. This is causing a natural barrier to growth. Who knows, maybe in the future Panamanian banks will sell mortgage backed securities to raise more capital in order to continue to lend more money and further fuel real estate, but right now this is not the case. There is just not enough money in these banks to lend to everyone, especially at radically inflated prices, so they are just not doing it. But then why hasn't the bubble burst yet? The answer is that it is being propped up by developers carrying the financing. Deposits range generally from 10% - 30%, meaning 70% - 90% of the money for these units has not been paid yet. AND they are carrying this money interest free to buyers while they build the towers, which are taking years to complete. This type of financing is artificial, and not sustainable. Eventually the period of time will come when the developers will ask to be paid and the buyers will have to close. What happens then? This creates a legitimate trigger for the bubble to burst. I believe that we will see the market change dramatically as these high-rise buildings are delivered (this is the trigger) and the developers come to the buyers in order to collect the remainder of the purchase price. A percentage of the deposit buyers (I believe a good percentage) will need to make a decision and will find it very hard for them to find someone to hand the grenade off to. Now that the unit is delivered, someone has to pay (the speculator, the new buyer, or the bank, and we know the banks nor the speculators want to pay). Once all of these units hit the market, and buyers are forced to actually pay full price for the unit, the inflated prices now become harder to deal with. As I stated earlier, the banks won't pay, the speculators won't want to pay, and the end user will start wondering why the hell they are paying $500,000 for a condo in Panama when they could just as easily be paying that much in New York, London, California, or Miami where wages are higher and infrastructure better. So who will pay these prices? That is a VERY good question. Are there enough people that will pay these prices for high-rise condos in Panama City? I'll tell you one thing, the Panamanians aren't buying them. And with the U.S. market suffering like it is, is it feasible to believe that Americans are going to foot the bill? The truth is that the demand exists, but at a lower price. Prices must depress and I believe that in this market segment, they will until the real supply meets the real demand. This is the bubble bursting, and the result will be that prices will come down for these units. Another grim truth is that many Panamanian developers have never been through a true real estate cycle before, so many don't know what it is like. This is new territory for them. Many of them are about to learn a very valuable lesson. Now don't get me wrong, there do exist economic factors supporting long-term growth in Panama (I will be reporting my findings on this later), and there are places where you can still find a good buy, but you must do your homework. Real estate growth is cyclical and regional. It goes up and it comes down based on market factors, and over the long run we hope it does so in an upward trend. I have been guilty of looking the other way in the past, but this time I know better. I have seen the signs, and this time I'm not drinking the Kool-Aid. Daniel Quesada is a Real Estate Development Feasibility and Planning Expert who offers consulting based out of Panama City Image Credit: www.condohotelcenter.com/images/essenza3.jpg
Set as favorite
Bookmark
Email this
Hits: 2808 Trackback(0)
Comments (16)
  written by kent , September 12, 2008 am testing the comment field here
report abuse
vote down
vote up
Votes: +0
 written by AW , September 12, 2008 I think you ignore the reality of "replacement costs" for high-rise condos. Construction costs never go down and that's 60-70% of the cost. Everyone thought there would be a fire-sale in Miami with huge price cuts - there wasn't. Instead a few groups put together billion dollar buyout funds and bought hundreds of units at their "replacement cost," or the lowest someone else could create new units for.
While I don't know enough about the market conditions there - I agree that the majority of the units are just too expensive. We are seeing incredible demand in US cities for units priced under $300 PSF or $3,000 M2. The only way to achieve this is with a reduction in construction costs, which is very difficult. report abuse
vote down
vote up
Votes: +0
 written by Esteban , September 13, 2008 The Panama City condo market has has been running on fumes for a while now. This is not news to anyone but the most uninformed and naieve. Every building boom has it's bust. However, opportunities can still be found, they're just not obvious to a herd mentality. They don't come with glossy brochures and polished sales staff. Investors may need to take a longer time horizon rather than expecting to flip a contract for a non-existing highrise. For example, Santiago is admittedly is not Panama City, but it has lot's of room to grow. Smaller cities offer slower, more relaxed atmosphere that attract the retiree crowd and nature lovers. The surrounding rural areas offer breathtaking natural beauty, at prices from another era. Perhaps Panama is trending away from the urban condo toward the rural ranchito. Time will tell.
report abuse
vote down
vote up
Votes: +0
 written by Risa Levine , September 13, 2008 There are other areas to consider when investing in Panama. We live in the mountains about 60 minutes from Panama City and it is as close to paradise as you can get. Our area is called Altos del Maria. Take a look at our website and links: www.PanamaHouse.Info
report abuse
vote down
vote up
Votes: +0
 written by Notim Pressed , September 13, 2008 Your numbers are way off regarding pricing and new construction. Average ppsm is more like 2500. You're just looking at the high end of Punta Pacifica or Costa del Este. San fran, where I would say 30%-40% of the new construction is, is about 1600psm. Ave Balboa and Punta Pacifica are more like $3000-3500 tops, but they don’t comprise more than 20% of the total that’s available
Investors are putting down 30% real money, as opposed to the market in the US where buyers were getting as much as 105% financing so to compare the two is a bit silly. TO imply that the US is fueling this boom is naïve. What about Russia, Canada, and south America ( with Venezuela in particular )? Do you realize how many people are actually moving to panama and the mega projects that are under way? Do you realize the lack of new housing that exists, or at least failed to exist before two years ago. report abuse
vote down
vote up
Votes: +0
 written by Alexander Gershfeld , September 13, 2008 Although much of your assessment is somewhat accurate one must realize that it is important to compare apples to apples and not New York or Los Angeles to Panama City. You can not purchase a unit in either city which would even slightly resemble anything you may be able to buy in Panama. In 99% of US purchases tax abatements are nowhere near 20 years although some do approach 15 years especially in NY, you will, however, pay $639K for a 900 sq. ft. 2 bedrooms 1 ½ baths primitive condo (and that’s in Brooklyn). It is not accurate to compare Miami to Panama City, many will tell you ‘why’, I will not even go into that. You are correct about an overwhelming number of speculators, but they are necessary for any type of healthy RE Market place. I also will not go into issues such as desired profit margin by a developer in Panama (100%) or lack of professional brokers or banking issues, because I believe it is a learning curve.
I do not believe that future of Panamanian real estate market is up to the American Buyer but rather someone from so many different places who is looking for an opportunity in a more or less stable society. Personally, I think it is an incredible country with tremendous future growth potential in many different sectors, certainly including real estate. Infrastructure issues do need to be solved and I do believe they will be sooner or later, hopefully sooner. I do respect your point of view, we in Panama need that. (I have been a real estate developer, investor, consultant, broker and property manager for number of major companies, including my own, all over the US, including 17 years in New York City, for the last 26 years of my life) report abuse
vote down
vote up
Votes: +0
 written by Bernai Velarde , September 13, 2008 I enjoyed reading the article and agree with the author on the major points. As the global economy starts to slow down you will get less international buyers for the condo market in Panama. On top of that Panama has to compete with many other countries that have a lower cost of living. Panamanians are not buying-up the higher end condos (with very few exceptions). I have been out of Panama for many years but if their is a tight financial market in Panama as in the US and as is starting to happen in Europe, this will make it more difficult to sell the existing (and under construction) supply of apartments. I agree that the replacement cost for the apartments have gone up given the higher level of prices (inflation). I also believe that their will be a market correction, speculators will not be able to meet their dues and serious buyers can afford to wait.
report abuse
vote down
vote up
Votes: +0
 written by Allan , September 14, 2008 Having spent the last year looking at Panama city condos I have to agree with your most of your remarks. One thing that will excaserbate the problem is the lack of a MLS type listing service. There is no easy way to list and market used condos in Panama city. Once the resellers and speculators start to stampede people are going to get run over heading for the exits. This will happen. Panama city does not live in a vacumn from the rest of the deflating world.
report abuse
vote down
vote up
Votes: +0
 written by Patrick Archer , September 15, 2008 Finally, an excellent analysis of the Panama City high-rise house of cards. This market is downtown Miami 2005. When taxi drivers and strippers start pimping condos, you know the end is near. The local brokers are always the first to know, and Quesada says the Panama brokers are already aware this market is crumbling fast. I worked for one of these foreign developers who is building arguably the most garish high-rise in the Western Hemisphere. There was absolutely no interest from U.S. buyers for $400,000, 700-square-foot, 1 bedroom high-rise condos with no balconies (brilliant!) in a city 6-8 hours from most major U.S. metropolitan areas. The only buyers were gullible Europeans taking advantage of the exchange rate and thinking they would have guaranteed rental income for the foreseeable future and a shoebox unit they could flip for 30-50% upside upon delivery in two years. Dream on. The developers are sticking to mandatory price increases, so potential buyers will have some forced motivation to pull the trigger. But what good are mandatory price increases when buyers start to walk away from their deposits, foreclosures spike and the resale market is flooded with 20,000 unsold units? Not sure? Come on up to Miami and find out for yourself. Bookmark this article. The Panama high-rise market will implode by mid to late 2009. Those who think otherwise, just keep drinking the Kool-Aid and telling yourself Panama is somehow immune to the same cyclical factors that torched the real estate markets in California, Florida, Arizona, Nevada, Spain, Ireland, Estonia, Latvia, etc.
report abuse
vote down
vote up
Votes: +0
 written by Mateo , September 16, 2008 I think what everyone can agree on here (or maybe not) is that discussion about this topic is better than everyone holding their breath. There are obviously two arguments here: the developers/agents who stand by this boom and the skeptics/investors who are doubting it. Either way, I think everyone is better educated by hearing both sides of the gun.
report abuse
vote down
vote up
Votes: +0
 written by RK , September 26, 2008 I have been wondering for a while, how does one make money if one knows the price of condos is going to go down?
With stocks it's easy, you just short them or buy put options. What does one do with condos? report abuse
vote down
vote up
Votes: +0
 written by Max , October 03, 2008 Excellent post. Given the events of the last two weeks, any overbuilt market will be in decline sooner rather than later.
There is likely no worse investment in this market than high rise condominiums. While the US credit markets have been slowly coming to a complete freeze for the last year, European credit markets are going through the same process in a matter of weeks. Emerging markets will follow suit, especially an overbuilt, highly speculative one that is relying entirely on U.S. and European investors. Is there any reliable indication of what these units will rent for? Is there any demand for these units as rental properties at all? Offhand, i can't think of any other way to determine a price floor at this point, especially if an investor will have to hold onto them for a few years while demand recovers. report abuse
vote down
vote up
Votes: +0
 written by Peter the Great , November 13, 2008 Matt is eagerly awaiting for you in Panama when are you returning, is there any reason you dont go back to Panama
Peter report abuse
vote down
vote up
Votes: +0
 written by Steven , November 23, 2008 Don't say all that! there will be no burst! market will continue growing!
LOL I'm being sarcastic obviously. report abuse
vote down
vote up
Votes: +0
Write comment
|
| Last Updated on Friday, 12 September 2008 10:04 |
TrackBack URI for this entry
Subscribe to this comment's feed
Show/hide comment form
