FAQ: Is it safe to invest in Panama?
Tuesday, August 14 2007 @ 12:34 PM UTC
Contributed by: Don Winner
Answer: Ah, the ultimate $64 Billion Dollar question. The question being asked by everyone, every day, all over Panama and around the world. How long will the construction boom last? Will the bubble burst? Can I safely invest my money in Panama or will I lose money if I do? In reality the only thing you can do is follow the news and trends, keep your ear to the ground and make your own personal decisions as to the relative safety or risk of investing in this market. (more)
Date Of Information: 14 August 2007
Moving Target Alert: This subject is always a moving target as the situation on the ground changes, develops, and matures. There are factors and influences both large and small that tend to push the day-to-day perceptions this way or that, and to make the market look more or less attractive. But remember that the market Panama is Titanic-like - it simply can not turn on a dime. There will be warning signs, things like barking dogs and other "canaries in the coal mine" that will probably telegraph the impending sea-change when it eventually comes. There are a lot of people diligently standing watch on the lookout for icebergs who will sound the alarm.
The Chicken Little Distraction: - The problem is that some people are so risk-averse that they are sounding the alarm now when there's no real fundamental reason to do so. Sorting through the traffic and selecting the message over the noise will be the challenge. Take the time to analyze the messengers and consider the potential for bias. Someone who has decided to sell and leave Panama for personal reasons, for example, might sound like a "Chicken Little" on Panama when in reality they are simply justifying their own personal reasons or decisions not to invest.
Speculators Still Hanging It Out There: The only people exposed to high levels risk in this real estate market are the investment speculators, those who are pumping money into real estate investments with the intent to sell them later for a significant profit. Consider the following --
- End Users Are Relatively Safe: Those who are planning to buy and move here as end users don’t really care all that much about short term market fluctuations because they will buy and hold for a long time. If you're buying your retirement home, who cares if the paper value of that property goes up or down while you own it and are using it. Market fluctuations only really matter to those who want to buy or sell. Owners just ride out the bumps.
- Builders and Promoters Are Covered: Builders, construction companies, and sub-contractors exposed to very little risk in this market. In this category I lump everyone who has anything to do with the actual physical creation of the building, tower, development, or structure - the construction companies, sub-contractors, concrete and material suppliers, heavy equipment rental companies, architects, and all of the other service providers who create the "real" thing that is to be sold. They have almost no risk because they generally get paid when they do the work and are not performing any services for a promise of future payment. They get paid today, and if the bubble bursts tomorrow, then they will talk about it while they are spending their money on holiday in Greece. As long as the market keeps going they just build one building, sell it, and move on to the next. Worst case scenario is that they get stuck with some inventory that they will have to dump at a discount. The good news is that cement doesn't rot.
- What About The Banks: (Not Tyra Banks, the other kind...) Banks live in a world of risk management. Banks simply make the money available, financing the projects that will be built. They protect themselves extensively with tight performance contracts and they watch over the projects they are financing like a hawk. They don't just hand over the money in one big check but rather dole it out as needed, according to the advances made on the ground at the construction site. And before they agree to finance or back a project the promoter usually has to show a stack of signed contracts for a good percentage of the building sold at pre-construction prices. The profit break even is usually about 50% of the apartments or space, meaning that a builder has to sell half of their project before they can get financing to build because that's what they need to sell in order to break even. The other half of the project is pure profit for the builder. That's why you can get lower prices on pre-construction deals - they need your money in order to build the building. Once it's up in the air, they jack the prices on the rest of the units and rake the profits into their bank accounts. In any case, the banks are not exposed to a whole lot of risk because in the end of the day their investment is backed by the property that's under construction and the stack of pre-construction contracts held by the promoter.
- Real Estate Agents: The first guys to whine loudly about the cancellation of the Ice Tower project on Balboa Avenue was the Tribaldos real estate agency. They got hurt because they promoted and sold that project heavily and have a lot of time and effort invested in the sales and customers they brought in. Now that the project has been "restructured" they are not going to be collecting on all of those sales commissions they thought they were going to be making. Ouch. Double ouch. All of the real estate companies I talk to daily tell me "thank God we were not promoting that project" because their businesses and reputations would be put at risk. They have to pick and choose what they promote because if they sell the wrong stuff they could get hurt.
- Individual Big Investors: One guy who got hurt was a Spaniard (forget his name) that invested millions of dollars in the Palacio de la Bahia project, which was cancelled last year. He poured a lot of money into the project and the last I heard he was threatening to sue for damages. I don't know what became of that, but the lesson learned for the rest of us is to spread your risk around. If one building gets cancelled, then you can only get hurt so bad. If that same Spaniard had spread his millions of dollars around to twenty different projects then he would only be worried about one. Well, two if he had a unit in the Ice Tower, but if that was the case he would already have a refund check in his hand. This is the "all your eggs in one basket" risk management scenario.
- Individual Focused Service Providers: Chu Diaz was the architect for the Palacio de la Bahia project. His firm spend thousands of man hours on that project and as far as I know they are still in mediation/arbitration with the promoter, trying to get paid for the work they did on the building. Eventually he will probably get paid, but there has been damage to his reputation and business, so he was exposed to some risk.
- Back To The Speculators: So, speculators are really the only ones left. In order for a speculator to lose money (actually register a loss on the books) they must find themselves in a position where they are forced to sell a property for less than what they paid for it. If they only make $20,000 when they hoped to make $100,000 they might be disappointed with the performance of their investment, but they still registered a gain. If they sell their property for exactly what they paid for it then there is no gain or loss, and the only actual loss is the time value of money which could have been more constructively invested elsewhere. So, even the speculators have to be stuck holding large positions in a falling market, and not have the capability of riding it out. Again, forced to sell for less as the definition of a capital loss. Not a little more, not the same (break even), less.
- Who's Gotten Hurt So Far? Believe it or not there were people trading the contracts they held on properties in the Ice Tower almost like stocks. The first investor bought his option at $1,500 per meter. The next guy comes along and buys it from him at $2,000 per meter. The third guy buys it at $2,500 per meter, and then the project gets cancelled. The third guy is only getting $1,500 per meter refunded, so he's out (actual loss) of $1,000 per meter. But guess what? It's a zero-sum game. The other two guys who made the profit by flipping the contract probably dumped it back into some other project, hoping to repeat their success, so the overall market does not suffer. The one guy who was speculating and who was caught holding the bag when the rug got pulled was the only one who really took a loss. And I know, it sucks to be the guy who spent two years waiting for the Ice Tower to get built, but they got a refund and their tangible loss comes down to missed opportunities. Bad call on your part to pick that project in the first place. Maybe one of the other 400+ projects would have been a better call. Lesson learned - stay away from very tall buildings.
The Bottom Line Remains The Same: If you're going to invest money in the Panamanian real estate market as a speculator then it's up to you, each individual investor, to do their due diligence, asses the risk, evaluate the trends, and then put the money in play (or not.) Almost everyone else is on pretty solid ground.
Is There Too Much Construction? Part of the analysis of this market requires the consideration of what you can see - there are currently more than 400 projects in some state of construction, approval, planning, or development. There are more than 40,000 overall units in the market. So, is that too much, just right, or not enough?
Where Are The Buyers Coming From? Answer - all over the world. Recently I learned that the most active buyers in this market are from Venezuela (#1), Colombia (#2), and Spain (#3.) One real estate agent told me that "the Venezuelans are coming in family units - they don't just buy one apartment but rather they buy three or four or five, one for their brother, cousin, or other family members." Many Venezuelans are quite simply bailing out of their home country because of Hugo Chavez. They don't like the way things are going and Panama is the most logical alternative. Colombians see Panama as a much safer alternative, removed from the drug-fueled violence in their home country. In Spain, the Germans are buying up the country so the Spaniards are taking their profits and moving to Panama. Oh yeah, there are gringos buying here, too.
The Baby Boom Isn't Going Away: There are 175 million people who are going to retire in the next ten years in the United States, Canada, and Europe. Many of them are empty-nesters with money who like the idea of moving to Panama to spend a warm and happy retirement. Panama is attractive to them for lots of reasons, full or part-time.
What About the Locals? How much of the construction is being purchased by Panamanians? Most of the real estate agents I talk to tell me that the current ratio is about 55% - 45%, foreigners to locals. So with some 40,000 units coming on line 22,000 of them will go to foreigners and the rest to Panamanians. That ratio has held pretty steady through the boom so far.
Will The Boom Continue? Logic dictates that there is more demand than supply so prices continue to rise. Ask yourself a few simple questions –
- Are prices going up or down? If they are going up then there is more demand than supply. Prices don't rise in an over saturated market.
- Are Interest Rates Stable? As long as there is a steady supply of money and credit and the banks are willing to lend for construction and end user purchases, then the market will remain relatively stable.
- Outside Factors: This is the biggest wild card on the Panamanian real estate scene - those things which have profound impact on the economy and indirect impact on the real estate market:
- The expansion of the Panama Canal ($5.25 billion), a project that will take at least ten years to complete.
- Large scale exploitation of mineral resources and mining such as the Petaquilla gold and cooper mines, which could eventually pump $10 billion dollars into the Panamanian economy and run for twenty years or more.
- Refinery Construction: Oxy and Dubai are going to build at least one refinery worth $8 billion dollars in Puerto Armuelles in Chiriqui.
- Spending on Nation-Wide Infrastructure Improvements: Panama is going on a spending spree of infrastructure upgrades and improvements worth probably another $3 billion at least, which will include projects such as the "Coastal Strip" expansion of Ave. Balboa, the extension of the Northern Corridor to Colon, and dozens of other highway building projects all over the country, large and small.
- The Cleanup of the Bay of Panama: This is another major project that will cost about $500 million dollars that will be spent over the next five years, which will result in a significant reduction in the pollution of the Bay of Panama close to Panama City.
- The Mega-Port: Talk has died off a little about the mega-port project that was going to be built near Farfan. But even if that project does not go, direct foreign investment in existing ports will continue at a good clip.
- The Pipeline Project: A Spanish group is proposing to spend some $40 billion dollars to build refineries, pipelines, and petrochemical facilities in Panama, pumping oil and products from the Colon side over to Taboga island. Yes, that's a $40 billion dollar project being proposed, or eight times the value of the expansion of the Panama Canal.
- The expansion of the Panama Canal ($5.25 billion), a project that will take at least ten years to complete.
No Pain, No Gain: There is no reward without some degree of risk. Everyone is doing exactly what you are doing – trying to decide if it’s safe to jump in the water and take a risk. Recognize that the primary factors driving the Panamanian economy are coming from heavy duty industrial foreign direct investment on infrastructure projects. The construction boom is a significant element of the Panamanian economy, but (believe it or not) the real estate market is not driving the train. Tourism certainly isn't, either. Watch the Foreign Direct Investment and money being poured into this economy, and as long as that keeps up then the real estate market will remain on relatively stable footing.
Copyright 2007, by Don Winner for Panama-Guide.com. As usual, go ahead and use whatever you want as long as you credit the source. Salud.