Real Estate’s Rollercoaster Ride in Panama

For a small country, Panama has a large real estate sector. From colonial historic centres to high-rise penthouses – Panama City has it all. And for those who venture outside of the capital city, there are beachside resorts and mountain villas on offer. The impressive range of properties, coupled with relentless price rises, attracted local and international capital during a 15-year boom at the start of the 21st century. But prices had already started to stagnate when the pandemic hit in 2020, sending the sector into freefall.

The impact of the downturn hasn’t been the same across the sector. There are hotspots that are doing well, while other segments seem doomed for at least another decade. The government and developers are responding with various initiatives to react to the ‘new normal’ while investors are discovering different ways to invest in the sector.

Structural flaws

Regular LatAm INVESTOR readers will remember William R. Herron. The CEO of property appraisal firm, Panamericana de Avalúos, Herron appeared in the last two LatAm INVESTOR Panama Reports and back in 2018 he predicted the impending real estate depression. Of course, he couldn’t foresee the pandemic, but now it has happened he is frank about its impact on Panama’s real estate market.

“Panama´s real estate market has never experienced such a dramatic price drop and it is creating an unprecedented buyers’ market”, says Herron. “The high end – and by that, I mean anything over $400,000 – is really struggling. By September 2019, there were ±40 months inventory of luxury apartments, which reflects that the sector was slowing down even before the pandemic. Today, this number is estimated at ±90 months, which means at the current rate of sales it would take seven and a half years to sell the available stock.

“The luxury downturn is particularly marked in Costa Del Este and Santa Maria, where $600,000 apartments are experiencing discounts anywhere from 10 to 15% of their listed prices but apparently even that, isn’t enough to get the ball rolling. This dramatic price drop has also been experienced even in established areas like Punta Paitilla, Punta Pacifica as well as most high-end projects throughout the city, where the values that results in our appraisals in today’s market conditions, are less than the owners’ - and promotors’ – expectations. It is also lower than the prices paid by the first buyers prior to the pandemic. This situation puts us on a cross road, as its hard for someone to understand that properties purchased two or three years ago, not only did not experience a capital gain but in fact have decreased in value.”

The fact that investors are sitting on real losses is also a worry for the banks, explains Herron, because it means that their ‘safety cushion’ on property loans isn’t as comfortable as they had thought. “Understandably the depressed market has changed banks’ lending criteria. Before the pandemic, banks would consider financing up to 80% of the value of a project (with the land fully paid). Nowadays, under the same terms and conditions, they are more likely to finance just 50%. Another crucial difference is that banks will not reimburse any payment loan until the promoter has already paid out his percentage on the project, as the conditions agreed. Moreover, banks will often require a quarterly ‘cost to complete’ analysis to avoid surprises and make sure that the project can indeed be completed with the available funds.”

Bright spots

One of the advantages of Panama’s diverse real estate offer is that not all property segments suffered alike. “The lower-end apartments – anything under $150,000 – are performing well, due mainly to subsidised loans and tax breaks offered by the Government”, says Herron. “There is a real pent-up demand in this segment. In terms of areas, Casco Viejo, is the part of the city that is recovering most quickly. One factor is that Panamanians are rediscovering the benefits of the historic old town, which in recent decades had been a hot spot for foreign investors. And as international travel opens up following the pandemic, we can expect the return of international buyers. The thing with Casco is that even though the square metre cost can be quite high – up to $3,500 in some cases – the apartments are not that big. So, with $500,000 you can buy some of the best apartments available. That’s a big contrast to Costa del Este and Santa María where bigger apartments range from 225m² to 700 m² with costs from $3,000.00/m² and up.”

“Because Casco is, in essence, a tourist area, the economic reactivation has been faster than in other parts of the city”, says Anabela Fábrega, CEO of Inmobiliaria San Felipe, a property developer that specialises in Casco Antiguo. “Take our project as an example. We began preparing the sales campaign of Plazuela de Alfaro project just before the pandemic struck. Our public launch was scheduled for March 2020. We had to postpone that when it became clear the pandemic would stop everything. Indeed, I spent the lockdown boosting our digital capabilities, hosting webinars etc before we could return to work in September 2020. So, we launched Plazuela de Alfaro in September 2020 and I was surprised how quickly sales picked up. By early 2021, I had sold 50% of the project and was able to secure financing for construction. It wasn’t easy, because banks here had to manage a debt repayment moratorium during the pandemic that made them cautious about opening new loans. But we could make it happen as our sales give the project solid financial foundations.”

K.C. Hardin, the founder of Conservatorio, a fellow Casco property developer, believes the area proved its resilience. “The market in Casco performed in a similar way in the pandemic as it did back in the Great Financial Crisis of 2008 to 2009. When the market goes down in a historic district, you see transactions fall to almost zero. Rental prices fall too but people don’t sell historic property at a discount. Perhaps they are more emotionally attached to it. There is such a limited supply that you don’t see the market reset prices in the way that happens with a more commoditised property product. I think it’s a healthy reaction as it shows that property-owners in Casco Antiguo are long-term holders.

“We sold five luxury apartments, which go for around $2million each, during 2021. We didn’t sell any during the lockdown but as soon as things opened up in January 2021, we saw the demand recover.”

Historic renaissance

Property developers in Casco Viejo are not simply happy to have survived the pandemic – they want to thrive after it. There are four major private projects within Cascothat have a combined value of more than $100million - the largest private investment made in Casco since it was declared a Unesco World Heritage site in 1997, says Anabela Fábrega. “One is Hotel la Compañía, which is in the centre of Casco, in between 7th and 8th Streets.  The project takes up a whole block, with four buildings and a large central patio. It will have 88 luxury rooms plus five restaurants on the ground floor.  In addition to the tourism and commercial aspect, it will be very interesting from a cultural point of view because it is in an important historical site and will recreate spaces in their historical context.  

“Then there is Hotel Casco Viejo – a Sofitel Legend Hotel with more than 200 rooms. This hotel will be the biggest in Casco. Meanwhile Hotel La Compañía will be part of the Hyatt Unbound Collection – so we will have two international luxury hotels in Casco. The other two projects are residential. One is Santa Familia by Conservatorio Group. The project is located at the centre of Casco and occupies a complete block. And then you have our project, Plazuela de Alfaro, which is located at the entrance of Casco and is started construction in January 2022. That is part of a master plan that includes the restoration of seven buildings with residential and commercial units,

“When you consider that Casco is a small area, it’s clear that those four large construction projects will create a very positive impact over the next two years.”

Hardin shares that optimism, noting other factors that should boost Casco. “There are a couple of important developments that will cause a renaissance for Casco. Panama has just delivered a new cruise ship terminal, that will help attract more tourists to the country. There is also a new convention centre, that should do the same. Within Casco Antiguo, we have a new road entrance that will improve mobility.”

International and local demand

It’s clear that Panama has plenty to offer investors, but it is less clear who will be buying these apartments. It’s noticeable that even Herron, who has long been bearish on the property market, sees some grounds for optimism. “Panama has an unbelievable way of bouncing back. I have seen the property market, indeed the economy in general, do it over the years. At one point the arrival in the early 2000’s of high-end Colombian and years later Venezuelan buyers saved us but I don’t see any more of those coming. The Venezuelans who wanted to leave were a good influx keeping a steady demand. The last two or three years have been slow, although Chile’s recent election results and the coming Colombian elections later this year, with a communist party leading the polls, may create new opportunities to get the ball rolling. We have seen some Peruvians ‘window shopping’ for property, following the election of a socialist there in 2021, but it didn’t translate into much demand because Peruvians don’t have the same affinity, or closeness, with Panama that Venezuela and Colombia have.”

Indeed, Conservatorio is already benefiting from a recovery in international demand, says Hardin. “Before the pandemic our split between local and international buyers was 50-50 but all five of our 2021 apartment sales were to foreigners. There is strong demand from the US, where the emotional turmoil of recent years seems to have encouraged some people to look for a different way of life. We also saw strong interest from Peru last year, perhaps influenced by political events there. We didn’t discount prices, even when transactions slowed down, because we think we have a product that is in limited supply so people who want it – want it. We did create a seller financing programme for international buyers because we realised that some banks were less willing to lend to them.”

However, Fábrega says that Inmobiliaria San Felipe has experienced a different phenomenon. “An interesting, and welcome, development is that most of the buyers for this project have been Panamanian instead of foreign investors. I think it’s because the pandemic forced us to rely on digital marketing.  We had always relied on foreigners that contacted us through our website or that were visiting Panama and knocked on our door to enquire about buying a property. Before the pandemic that worked just fine but now, we focus more on digital marketing and there has been a huge upswell in interest from Panamanians.”

Real estate opportunities

The carnage at the top end of the market has created opportunities for brave investors. Mahesh Khemlani believes the real estate sector “is poised for a rebound once existing inventory is purchased, a process that could take 24 to 36 months.” Herron isn’t convinced. “The funny thing is that today, in spite of the existing conditions, most promoters are still offering properties at pre-pandemic price list, while negotiating on one-on-one discount of as much as 20%. However, in our opinion, the market has – or will be forced to – reorientate itself in the short term as 500 to 700 square metre (m²) apartments will have a very limited, if any, demand.”

Both men are positive on the lower-end of the housing market for homes worth $150,000 or less. “This is an area for investment in which there are important opportunities with very reputable companies that have been in the market for decades”, says Khemlani, “either through a direct equity investment in these companies or via a qualified investment in one of many real estate investment trusts (REITS).”

There are also Casco-focused REITs available. “Our fund, SURF”, explains Hardin, “gives investors direct exposure to rent-producing, stabilised commercial real estate in Panama. There is also a sustainable angle as most of our clients are SMEs, of which 70% are female owned. Moreover, the fund is committed to being carbon neutral by 2030. There is a 4% dividend projected for 2022 and we hope to increase that over time.

“Sophisticated private investors can also invest directly by buying an apartment. Our large upcoming project, Grand Central offers a range of properties at different prices. We are also open to working with institutional investors that share our long-term vision. We just want long-term holders that have strong sustainable principles. This is the best time to get in because Panama is still suffering some of the economic impact from the pandemic but the renaissance that I mentioned earlier will provide significant upside.”

Buying directly also brings non-financial benefits, such as quality of life, says Fábrega. “In Casco people live in a diverse and interesting international community, with an evolving cultural scene. We have museums, pop-up art galleries, lively bars, and some of the best-ranked restaurants in the city. For people who live in Casco walking around the historic streets creates a relaxed, enjoyable life that is difficult to replicate anywhere else in the city.”

Finally, you have opportunities outside of Panama City, the main one being tourism. “I see a lot of opportunities in tourism”, says Khemlani, “with a lot of investment flowing into Bocas del Toro and the Atlantic as well as the Riviera Pacifica, close to the Anton Valley.” José Ramón Icaza Clémen, President of Panama’s main chamber of commerce (Cámara de Comercio, Industrias y Agricultura) agrees. “Panama has a lot to offer in tourism. We have a sustainable masterplan that is based on research and conservation, natural heritage and historic heritage.”

You can’t blame investors for being alarmed by the freefall in some Panamanian property prices. Lots of international and local buyers have lost money and more will continue to do so. Yet contrarians will be excited by the price drops – sensing an opportunity, while others will be reassured by the relative stability of sectors like Casco Viejo. Throw in the incentives available for international investors and it is clear that Panama’s real estate market still has a lot to offer.