This is Grandpa — in Panama for the Winter
I will start with the Bottom Line:
There are a lot of good deals and desperate sellers in Panama City right now. For those who are willing to sniff around and make offers, we believe you can become a millionaire in two or three years –right here.
Background– A construction boom and real estate bubble for Panama City condominiums lasted from 2003 until approximately 2007. Tens of thousands of units were designed and sold off-plan to speculators, typically before the developers broke ground.
Speculators signed up for pre-construction units so fast that local developers were encouraged to design, build and sell more condo towers– and to keep raising prices. Each building was more luxurious, higher and better than the last. During this 4-year boom, sales prices for Panama City condos more than quadrupled from $800 per square meter to up to $3,500 per square meter. This was very high for Panama, but still cheap by international standards. In London or Monaco, the best properties can sell at $50,000 per square meter. If you look at a photo (to be included) of the Panama skyline, it is very futuristic – as if Manhattan was rebuilt this year.
Getting back to recent history: The first of these condo towers were completed and delivered prior to the global slowdown. Early speculators were able to ‘flip’ their units to other speculators and a few end-user buyers. With low down payments and 100% price increases, flipping a deal could yield a 1,000% profit in a year or two.
Today that party is over. Just as in Southern Spain and Dubai, there was been massive overbuilding in Panama City and nearby resort areas. Note: Some rural areas of Panama were completely unaffected by the boom. Interior farms or fincas that are off the beaten track can still be had for incredibly low prices. But my readers (like you?) will probably be interested in hot deals in popular downtown waterfront areas like “Avenida Balboa” or Punta Paitilla.
Almost overnight, demand for the high-rise condos evaporated. Speculators who had made small (or not so small) down payments were (as of 2008) left holding an empty bag. Major developers, such as local and foreign investors who were putting up the still unfinished Trump Tower at Punta Pacifica– the biggest, classiest building in town — were destined to default on their obligations and they will probably file for bankruptcy. Donald Trump himself, never invested a dime in the project … We hear that he just got paid very handsomely for the use of his name.
The Trump Tower sales people are irrationally exuberant — but we assume they are desperate to move their huge inventory of unsold or defaulted units as big discounts from the original prices. Legally they are in a mess with many lawsuits pending. Undeniably, it is a great building, but it was built as a high-maintenance structure with huge public spaces and facilities that apparently require much higher Home Owner Association fees than are common in Panama. Even with the standard 20 year real estate tax exemption, the maintenance payments for owners could be 5 times what similar buildings charge. We worry that once the Trump units are sold, these charges could and would be raised to even more than the rental value. The Trump Tower was over-built, over priced, and over here, it’s almost empty.
BACK TO HISTORY:
In the last days of the boom, to support every increasing asking prices, buildings started to be identified with internationally known names. Example?
Familiar names like the “Hard Rock” Hotel & Condos were planned, financed and built by local real estate people. Foreigners, mostly super rich Colombians bought mortgage bonds to finance the construction. Investors are all now hurting. Why? Because developers and new owners are sitting on around 10,000 unsold units with few buyers in sight. To avoid an immediate write down and huge loss for the investors, many condos are still on the books — listed for sale at high boom era prices. Needless to say, there are no buyers at the “old” prices. Era Realty has decided to cash in by holding distress sale auctions. Minimum bids are about 1/3rd of the old prices. Bargain hunters are bidding.
The global economic slowdown has impacted Panama City’s condominium market more than many other real estate markets around the world–Dubai, Las Vegas and South Spain however could be even worse off. Why? Because the overhang in unsold units is in the hundreds of thousands. As mentioned, the 10,000 or so units in Panama could be absorbed if more Venezuelans fleeing Communism decided to relocate here. They are coming, but not fast enough.
Tighter demand coupled with reduced credit availability has created serious downward price pressure. In addition to reduced demand, there will be an increase in the supply of high-rise luxury condominiums. Many new towers still under construction as of early 2012 will be completed this year and offered for sale in an unresponsive market. Developers who hoped to get $3500 per square meter, are getting offers of under $2000.
Many permits were issued during the last year of the boom. Buildings were started then. These big projects could not be abandoned because even if demand evaporated and the developers went bust, big insurance companies had issued “completion bonds” to insure the buyers and the City that the projects would not be abandoned. That brings us to today!
Condo speculators whose buildings were delivered in the last twelve months were told to pay up the final full payments. There are often no end users to be seen, & no more speculators taking deals for flipping. Thus, many of the amateur speculators who thought they had a sure way to double their money fast, are now walking away from their deposits. Who are they? Typically retirees, MDs and airline pilots – all the usual suckers. … Some attractive long term mortgages previously offered are still there, but at lower loan to value ratios and at higher interest rates.
AN UNPLEASANT CHOICE FOR INVESTORS
Buyers who still have the cash to close their deals will be stuck with overpriced Condo units they never intended to occupy. No way to flip for a quick profit any more. As of now there are few, if any buyers at the old “list prices.” The very few units that are still selling (in the best neighborhoods with triple A water views), move out at in actual sales closer to $2000 per m2. Though some exuberant salespeople will claim otherwise, even the very best property is not selling at anywhere near $3500 & up per m2. Thus, the last waves of boom-time buyers are deep underwater. They have an unpleasant choice to make: They can close the deals they had contracted for and end up owning apartments worth up to 40% less than they paid. More sensibly they can walk away from deals and lose their deposits.
Depending on when they bought, these deposits could range from 10% of the price to 35% of the total price. In some cases, if the pre-construction contract was made early enough—like 2006 — when list prices were lower—the buyer may get out at near his cost and thus, maybe even gain back a portion of his deposit. But time is running out for these people.
OPPORTUNITIES IN DISTRESS SALES
Therein lies the playbook that we (Grandpa) recommends. Look for these distress deals. My personal consulting clients can get guidance, but IF YOU HAVE EXPERIENCE IN REAL ESTATE, you really don’t need me. It is just a matter of looking at the FISBOWS (for sale by owner ) and the REOs (foreclosed properties held by banks, developers, etc.). Also, by attending auctions you will get an idea of the real values as opposed to the inflated list prices some sellers still are hoping for.
Some developers can hold on a while longer because of the cash flow from forfeited deposits, and the few closings that still happen. But many are falling like dominoes. They are defaulting on their bond payments or bridge loans – the constructions loans that were supposed to be paid off by the now vanished hoards of eager buyers. The better developers who are not hanging on to pipe-dreams of a speedy recovery, may be willing to bend over backwards to help their buyers. If you have or can develop negotiating skills, the deals are there: Trades, special furniture & appliance packages. More? Maybe an extra parking space worth $35,000. You can even ask for help in getting residence and passports. What will it take for both sides to be happy? Deal making is something Grandpa has done 250 times over for himself and a few consulting clients.
ARE PANAMA’S ECONOMIC FUNDAMENTALS STILL STRONG?
For starters, there is much less of an overhang of unsold housing inventory than in the USA, Dubai or Spain. In another article I explained the fact that literally millions of wealthy individuals are looking for new citizenships and residences in uncrowded, relatively safe places like Panama or Campione, Italy. Crime rates in Panama are less than in USA major cities. There is no racial strife.
Ten or fifteen thousand luxury units are too much for Panama local buyers to absorb. It is a poor country with only 3.5 million inhabitants. But the buyers are not going to be locals. And the potential market is infinitely more than what has been tapped so far.
As mentioned, Venezuelans with serious money — escaping Communism– are coming in. Hundreds a day. Many Colombians are super rich, and they too want a bolt-hole. Canadians and Americans are still arriving by the thousands. For Americans, Panama is familiar ground. The currency is USA dollars. Prices are well below stateside rates for everything: Cars, groceries, electronics, restaurants –even “companionship.” The water is safe to drink — unlike every other country South of the Border. With a little push and good publicity from the likes of Grandpa and his colleagues, they will open their wallets for suitable deals in Panama, suitably packaged. Russians and Chinese are also sniffing around .They have already snapped up a few of the best properties and business deals.
There will be many more tenants seeking temporary rental accommodation too. Capital-intensive projects like the Panama Canal expansion are already responsible for burgeoning economic activity. The Panama Canal project —due to corruption and mismanagement —is way over budget and way behind schedule, but French, Chinese, English and other foreign companies are sending their technical people over to Panama City to get in on the multi-billion dollar action. Then there are the Colombians. Some of the money spent here may be tainted, but for developers and landlords they don’t look or smell. They just rent or sell!
Additionally, many multinationals have already, or are establishing regional headquarters or major operations in Business Friendly Panama. Panama is a popular destination for foreign business people involved with these projects. Then too, Panama is very friendly to retirees. They can buy or rent inexpensive yet gorgeous condos in beach areas — often at the price of a garage in their home town. A three hundred dollar gourmet dinner in Zurich can be had in Panama for 10% of the Swiss price.
BANKING & LEGAL SERVICES
Almost every major bank seems to owns a skyscraper office or three– here in Panama. They have a new information exchange treaty with the USA. Without a good introduction, “Toxic Americans” won’t get in the door. But be aware —there are secret doors if you know the right people!
Local employees in banking tend to be incompetent by Swiss standards – more like those in the Isle of Man and Cayman. But then they are paid only one-quarter as much. Their work gets done. Eventually.
Interest rates paid here tend to be more than double USA and Europe rates. Lots of local quirks, but I will save that information for later reports or chapters in my upcoming Panama Today (P.T.) Report. Panama Bearer share corporations and foundations are still available. So are user friendly freighter, yacht, aircraft and other legal registrations.
Lawyers? Ask me before hiring one!
HOTELS & SHORT TERM RENTALS
Due to swelling tourism statistics and a growing segment of business travelers, hotel occupancy rates in Panama have traditionally been quite high. The most well run hotels operate at full capacity for several months at a time. Despite new competition from apartment owners renting out “short term,” the better hotels are still showing reduced, but decent returns on investment.
Given an excellent rental market for transients, smart property investors are renting short term. With no market to flip condos, the better units can still generate a decent return by competing with hotels in the short-stay rental market. Grandpa started out in a $250 a night hotel room. But a week later, he was renting a large 3 bedroom well furnished skyscraper apartment overlooking Panama Bay for $1800 for a month. Gourmet kitchen, pool, Internet, garage, doorman –all included. Less than half the hotel room price with five times the space!
The Empire Strikes Back . . .
The local hotel owner’s association recently bought and paid for some new laws to keep apartment owners from competing with them. You can buy laws in Panama. They have the best cops and lawmakers that money can buy. The Trump Tower Hotel did even more. They put restrictions on short term rentals of condos in their building — in the fine print of their deeds. Owners of apartments in Trump theoretically can’t sublet . They can rent only with Trump approved lease forms — for one year or more…Many owners are suing Trump for this and other reasons. Their public relations have been a disaster as those who bought apartments try to wiggle out of their deals.
Panama itself is not very diligent about enforcing its many laws, so most business people will be able to skate around them. However, for any visible ongoing business deals in Panama, one needs a well connected “fixer” or work-around guy to keep the government out of your hair.
The idea of renting an apartment instead of a hotel room is very popular with travelers.
Why pay $250 or more per night in a hotel when you can pay $70/night or less for a furnished and infinitely homier apartment? The idea of vacation apartment rentals recently took off in Panama just as it did in similarly situated Barcelona (Spain) and London. The local Panama craigslist.org website and the local newspaper La Prensa are now full of short term apartment rental listings. Many real estate agents are also specializing in property management . Short term rentals are the fastest growing segment of the market. Don´t believe me? Just Google “Apartments for rent- Panama City, Panama.” Watch out for Panama City Florida listings that will appear. They are in the USA.
Here’s what happened regarding the short term rental laws:
Panama’s National Assembly recently passed “Resolution 52.” The intent of the resolution was supposedly to ensure that the government will collect taxes on transient rental income…Except that’s not what the law said. What Resolution 52 actually did is make it illegal for anyone to rent his/her property for a period of less than one year. The justification was that if you don´t let transients compete for housing, there will be more apartments for the masses.
Sorry, no minimum wage folks are going to move into the luxury towers unless the government confiscates them or puts in rent controls. And that won’t happen in Panama where the capitalists seem to be in firm control.
A few years ago the local legislature did something equally stupid and senseless with visa policy: At the time there were a lot of retired gringos and others who were living in Panama full time on a 90-day tourist visas. They did visa-runs to the border every three months, without ever applying for legal residency.
In its efforts to fix what was not broken, the government (under the then Tourism Minister) decided that tourists would only be granted a non-renewable one-visit per-year 30-day tourist visa.
This decision had the expected effect– real estate sales and tourism numbers cratered. Then the government reversed its policy in favor of the original 90-day visa. Shortly afterwards, they decided to give tourists a six month visas. That is where the law stands today.
The rational for the original short visa law was to reduce the number of low-income backpackers in Panama. Obviously, every dollar a German backpacker spends here, is a new dollar into the economy, with no increase in associated costs.
However, many wealthy foreigners, especially wealthy Canadian “snowbirds” 25,000 of whom were living here during the winters. They got very annoyed with this law. They were not interested in being restricted to 30 days a year after buying their expensive vacation condos with all kinds of enticements from the Panamanian Government. Politicians never seem to recognize the law of unintended consequences. The law was quickly repealed. And if it hadn’t been repealed, in our opinion it would not have been enforced.
Undoubtedly, the same thing will happen with the anti- short-term-rental law. Maybe hotel owners benefit, but it hurts the overall economy and makes crooks, liars and law-breakers out of landlords . If it is still in effect when you read this, the solution, the circumvention or work-around is simple: In your Internet or other ads, don’t mention any one-year lease. When the guest arrives, explain the law and how everyone gets around it legally. Your tenant signs a year lease. A small cash deposit is left with you the owner—or your manager. When the guest leaves, he legally abandons his lease — without personal liability. The landlord, keeps the deposit (which just happens to equal the amount of rent-days the tourist actually stayed).
Why Worry? There are always little glitches to overcome. The government (Grandpa predicts) will reverse this new law–if they have not already done so by the time you read this.
The smart money and Grandpa is very bullish on Panama’s future as the financial and business capital of Latin America. Florida and the USA in general are shooting itself in the foot with exorbitant taxes, rent controls, and criminal laws. Twenty percent of the entire USA population is considering moving out and “Escaping from America.” The same is true of huge numbers of individuals in Big Brother countries. Bottom line: There are plenty of undervalued distressed properties available here. Anyone who sniffs around and makes “low ball” offers can capitalize on them. There are also ways to get residence and citizenship . plus unlimited business opportunities. These opportunities are or will be the subject of other Grandpa Gems or reports.
WHAT TO DO WHEN YOU ARRIVE IN PANAMA
Use Grandpa’s 100 house rule. Look at 100 properties personally so that you know and understand the market. Then make offers (no money down and below market values) on all of the next hundred quality properties you see. Do that and during the next year, you should get at least five sweet deals. They will make you a millionaire and generate enough income for you to live happily ever after.
By owning top quality rental apartments you should be able to generate a respectable 10 to 15% year return on money. You can still borrow here at 6% or so. Owner 2nd mortgage carry back loans are not popular here yet. But if you make any offers these days, desperate sellers might listen.
As primary lenders must theoretically approve 2ndary liens, any deals might have to be structured with options or using corporations. For those readers who can afford it, Grandpa will hold your hand as your personal guru, guide and consultant. We will keep you from making stupid mistakes.
Check out my Panama Report here.
Grandpa in Panama – January 2012
Note: The idea for this article and much of the content warrants a thank you to Simon Black, a popular newsletter writer, and my buddies “Sandy” and “Panama Bob.”
Post your comments, thoughts, related personal experiences, corrections or questions below.