Why I Won’t Buy in Panama City

Dear Reader,

I've lived in Panama City for the last three and a half years. And I started studying the real estate market here four and a half years ago. I love living in Panama City, but I still haven't bought a property here.

And you shouldn't either-until you read this.

Sure, you'll see those headlines about Panama's strong economy (forecast growth this year: 5%). And you'll hear the talk about all those multinational companies relocating their regional headquarters here (Caterpillar, Proctor & Gamble), and the properties their workers will need. Next it's the mega-projects…the new Metro, port expansions, and the granddaddy of them all, the Canal Expansion. The argument goes like this. A country with all these positive factors must have a strong real estate market. Therefore buying property for investment here makes sense.

But that's simply not the case…

Back in late 2004 and early 2005, prime city waterfront condos in Panama were selling for $668 a square meter pre-construction. Fast forward to 2008, and those now-completed condos had price tags of $1671 a square meter. Then the cracks started to show. And I'm not talking about shoddy construction…

The asking price for new pre-construction condo projects on Avenida Balboa reached $2340 a square meter in 2008…but they were alongside those brand-new, finished units for $1671 a square meter. Built by the same developer, with the same amenities, finish quality, and views (and located only yards apart)-it didn't add up.

Why would anyone pay $2340 a meter…taking a calculated risk and waiting three years for delivery…when they could buy the same unit, finished, for $669 a meter less?

The answer is, they didn't.

That price differential flagged up a market anomaly…a sign that something wasn't right. The city condo market was saturated, hence over-supplied. Then the economic slowdown in the US hit. Americans comprised up to half the buyers of prime city condos at the height of the boom. That pool of buyers dried up. Coupled with that, banks here tightened their already conservative lending policies, leaving buyers without the funds for purchasing property.

So the market slowed.

It hasn't crashed Florida-style, though. You don't see foreclosure auctions (the banks handle foreclosed properties so discreetly, you're unlikely to know that your neighbor's in foreclosure, unless he chooses to tell you). You don't see properties advertised at 50 cents on the dollar, either. A chunk of property owners (Venezuelans and Colombians) don't want or need to sell. They see their Panama property as a safe haven for parking money…a better bet than banking in their home countries.

What you do see are fire sales, from owners (usually American) who bought preconstruction 3-4 years back, and now can't afford to close. Their circumstances changed…or the banks' tightened lending means they can't get financing now. They stand to lose the 30% of the purchase price they've paid to date if they don't close, and they're looking to claw some of that back. And to do that, they're offering properties in some cases for less than they agreed to pay 3-4 years ago for pre-construction. Yet their units are now finished and ready to move into…

So, my advice is this:

• Don't buy here for investment right now.
• Don't buy pre-construction (it always carries a risk…which is not worth taking in a stagnant market).
• Don't buy for flipping, or short-term capital appreciation.
• Don't expect the double-digit short-term rental yields we saw in previous years.

More completed condos come on the market daily. Their owners can't sell, so they decide to rent. Many property managers won't take on new condos. They're trying to shore up occupancy rates for existing owners. Hotel occupancy is down around the 50-60% mark (from a high of 84.7% in 2007). The hotel lobby wants short-term condos (which they see as unfair competition) registered with the tourism authority, and paying the 10% a night tourism tax. Worse than that, they want a minimum 45-day stay in short-term rentals. We're still waiting for a decision on this.

Having said all that, buying in Panama may still be right for you. If your plan is relocating to Panama, or spending a chunk of the year here for the longer-term, then buying here makes sense. But look around, and find yourself a fire sale-a property at an unbeatable price. There is no MLS (Multiple Listing Service) here, so you'll have to contact different real estate agents to see what they have.

P.S. Don't get me wrong. Panama is by far the best country in the region for living, setting up a business, or moving with a young family. It boasts the only truly cosmopolitan capital city, the best infrastructure and medical facilities in Central America…all with a very exotic Latin flair. I love living here but Panama's not an investor's market right now.