Electronic copy available at: http://ssrn.com/abstract=1397621

THE FLORIDA STATE UNIVERSITY

THE COLLEGE OF BUSINESS

MORE THAN A CANAL: REAL ESTATE INVESTMENT IN PANAMA

By

BRENT WILLIAM UNDERWOOD

A Thesis submitted to the

Real Estate Department

in partial fulfillment of the requirements for graduation with Honors

in the Major

Degree Awarded:

Spring Semester, 2009

Electronic copy available at: http://ssrn.com/abstract=1397621

______________________________

Dr. G Stacy Sirmans

Thesis Director

______________________________

Dr. William Christiansen

Outside Committee Member

______________________________

Mr. Stephen Bailey, Esq.

Committee Member

Electronic copy available at: http://ssrn.com/abstract=1397621

More than a Canal: Real Estate Investment in Panama

Abstract

In 2008 the older portion of an 86 million “baby boomer” population in the U.S. entered retirement age

and became eligible for social security. Because of the recent economic downturn, this population is

poised for retirement on what are now diminished savings. For this and other reasons, an ever-

increasing proportion of baby boomers is looking abroad for lower costs of real estate. Many countries

could have been examined as possible destinations; however the country of Panama was selected for its

unique real estate investment opportunities. The research methodology analyzing real estate in Panama

for this thesis is primarily qualitative. The research material is derived from industry-related books,

journal articles, and data gathered from interviews with industry participants. The findings indicate that,

even with the overall global economic downturn, Panama is still an attractive location and provides

many benefits to those seeking to maximize their investments in real estate.

TABLE OF CONTENTS

Chapter 1: Introduction _________________________________________________________ 4

Chapter 2: Country Overview _____________________________________________________ 5

Section 2.1 Panama Canal & Expansion ___________________________________________ 6

Section 2.2 Political Overview __________________________________________________ 10

Section 2.3 Economic Overview ________________________________________________ 12

Section 2.4 Tourism___________________________________________________________18

Chapter 3: “Baby Boomers” _____________________________________________________ 19

Section 3.1 Recent Downturn on Baby Boomer Retirement __________________________ 21

Section 3.2 Second Home Market _______________________________________________ 22

Section 3.3 Baby Boomers Living Abroad _________________________________________ 24

Chapter 4: Panama Residential Real Estate ________________________________________ 27

Section 4.1 Why Panama? _____________________________________________________ 27

Section 4.2 Incentives ________________________________________________________ 28

Section 4.3 English and USD ____________________________________________________ 30

Section 4.4 Market Overview ___________________________________________________ 30

Section 4.5 Product Trends ____________________________________________________ 33

Section 4.6 Real Estate Construction _____________________________________________ 35

Section 4.7 Recent Market Slowdown ____________________________________________ 37

Chapter 5: Risks and Hestitations in Investing in Panama Real Estate ___________________ 41

Section 5.1 Boom or Bubble? ___________________________________________________ 41

Section 5.2 Volatility of Second Homes ___________________________________________ 42

Section 5.3 Hestitations _______________________________________________________ 42

Chapter 6: Conclusion __________________________________________________________ 47

Bibliography _________________________________________________________________ 49

More than a Canal: Real Estate Investment in Panama

Chapter 1: Introduction

Countries in various stages of development can offer unique opportunities for real estate and other

types of investment. The relative price of real estate in these countries can attract investment from

foreign sources, such as investors from the United States. Investment in foreign real estate may follow

from incentives that are not purely financial, such as an investor’s interest in part-time residence. For

example, the large number of American “baby boomers” set to retire within the next ten years creates

an increased interest in these developing nations, as these investors seek to use their retirement savings

to maximize their standard of living in retirement. Many countries could be explored for possible second

homes or retirement destinations; however, in order to accurately examine the full opportunities

present, the focus of this thesis will be on one country: Panama.

During the past several years Panama has been consistently rated as one of the top ten countries for

retirement.1 Panama has experienced a flourish of real estate investment in recent years, and is poised

to see more as the population of U.S. “baby boomers” retires. The Panamanian government realizes this

value to foreign investors and provides numerous incentives to invest. At the same time Panama’s

government is non-intrusive, essentially creating a tax and investment haven.

This thesis will examine first the investment atmosphere in the country of Panama. This will include a

political and economic overview. The next chapter will focus on the demographics and trends within the

“baby boomer” population. The following chapter will discuss real estate investment, with focus

primarily on the retirement home, touching upon the current driving forces, incentives provided by the

government to foreigners and overall market. The final chapter will examine risks, hesitations, and

considerations associated with investing in Panama.

1 "Top 5ive Places to Retire Abroad." SmartMoney 10 May 2007: 21.

Chapter 2: Country Overview

Country Overview

Panama is located in Central America between the countries of Costa Rica to the north and Colombia to

the south. It is at the southern end of the Central American isthmus and forms the land bridge between

North and South America. The nation forms an S-shape and runs from east to west with a length of 772

kilometers (480 miles) and a width that varies from 60 to 177 kilometers (37 to 110 miles). Panama has

an area of 77,381 square kilometers (29,762 square miles) which makes it slightly smaller than South

Carolina. This area consists of 75,990 square kilometers (29,340 square miles) of land and 2,210 square

kilometers (853 square miles) of water. The nation borders the Caribbean Sea on one coast and the

Pacific Ocean on the other. The 80-kilometer (50-mile) Panama Canal cuts the nation in half and joins

the Atlantic and Pacific Oceans. The combined coastlines of Panama are 2,857 kilometers (1,786 miles)

long. The nation's border with Costa Rica is 330 kilometers (205 miles), and its border with Colombia is

225 kilometers (140 miles) in length. Panama's capital and largest city, Panama City, with a population of

827,828, is located on the Pacific coastline of the country. The second largest city is Colón, located on

the Atlantic coast. Colón has a population of 140,908.

Panama Canal

The Panama Canal is a man-made canal which joins the Atlantic and Pacific oceans. As one of the largest

and most difficult engineering projects ever undertaken, it had an enormous impact on shipping

between the two oceans, replacing the long and treacherous route via the Drake Passage and Cape Horn

at the southernmost tip of South America. A ship sailing from New York to San Francisco via the canal

travels 9,500 KM (6,000 miles), well under half the 22,500 km (14,000 mile) route around Cape Horn.

Although the concept of a canal near Panama dates back to the early 16th century, the first attempt to

construct a canal began in 1880 under French leadership. After this attempt failed and saw 21,900

workers die, the project of building a canal was attempted and completed by the United States in the

early 1900s, with the canal opening in 1914. The building of the canal was plagued by problems, such as

disease (particularly malaria and yellow fever) and landslides. By the time the canal was completed, a

total of 27,500 workmen are estimated to have died in the French and American efforts.2

Since opening, the canal has been enormously successful, and continues to be a key conduit for

international maritime trade. The canal can accommodate vessels from small private yachts up to large

commercial vessels. The maximum size of vessel that can use the canal is known as Panamax; an

increasing number of modern ships exceed this limit, and are known as post-Panamax or super-Panamax

vessels. A typical passage through the canal by a cargo ship takes approximately 8-10 hours. In fiscal

year 2008, 14,702 vessels passed through the waterway with a total 309.6 million Panama

Canal/Universal Measurement System (PC/UMS) tons.3

On average, 50 ships per day travel the Panama Canal. The largest commodity that is shipped through

the canal is grain. However, the canal is a major shipping route for oil, the number-two commodity in

volume (17 percent of total volume). Each day, approximately 600,000 barrels of oil are shipped through

2 “A History of the Panama Canal” Panama Canal Authority, 2009

3 “PANAMA CANAL TRAFFIC -- FISCAL YEARS 2006 THROUGH 2008” Panama Canal Authority, 2009

the canal. A large amount of coal is also transshipped and accounts for 6 percent of total volume. In

fiscal year 2008, the canal generated US$569 million in tolls and an additional US$50 million in revenues

for the government.4 About 10,000 people work for the Panama Canal Authority, which oversees the

operations of the canal.

The Panamanian government received US$931 million in revenues from the CFTZ in 2008.5 This special,

but distinct, part of the service sector in Panama is the Colón Free Trade Zone (CFTZ). The area was

established in 1948 at the Atlantic entrance of the Panama Canal. The CFTZ is a trans-shipment area

where foreign companies import products to be re-exported to other nations. In 2008, the CFTZ

received US$4.9 billion in imports of which US$4 billion were re-exported.6 Most exports are sent to

Latin America. The largest exporters to the CFTZ were Hong Kong (27 percent), Japan (13 percent), the

United States (11 percent), South Korea (10 percent), and Taiwan (8 percent). The majority of exports

went to Colombia (27 percent), Ecuador (9 percent), Panama (6 percent), and both Venezuela and the

4 “Panama Canal Authority: Independent Auditors Report 2008” Deloitte-Panama, September 30, 2008

5 “CFZ Spurring Economic Growth” BusinessPanama, Feb. 9, 2009

6 “Colon Free Trade Zone” Focus Panama, 2009

United States (5 percent each). These figures are not included in the overall trade statistics for the

nation. The products that were imported to or exported from the CFTZ included electronics (22 percent),

apparel (17 percent), textiles (7 percent), footwear (5 percent), and jewelry (5 percent).

Expansion of the Panama Canal

A study commissioned by the Panama Canal Authority (or ACP - the autonomous government body that

runs the canal) showed that an expansion would not only be beneficial to the country’s economy, but

without it the famous trade route would languish and lose its key market position in world shipping.

The Third Set of Locks Project is a megaproject that will expand the Panama Canal more than any

previous expansion since the Canal's construction. The Panama Canal Authority proposed the project

after years of study. Panamanian President Martín Torrijos presented the plan on April 24, 2006 and

Panamanian citizens approved it in a national referendum by 76.8% of votes on October 22, 2006. The

project will double the canal's capacity and allow more traffic.7

Without the expansion, which will add a third set of wider locks to ease congestion and accommodate

the newer, larger vessels for transport, the Panama Canal is expected to hit its maximum capacity this

year, 2009. This would have stalled further growth and added to the already long waiting lines at the

locks -driving business to other trade routes, such as the Suez Canal in Egypt.8

“Without an expansion, the Canal would face new competitors as well as permanent and irreversible

changes in trade patterns in which Panama would stop being relevant as a global maritime route,”

concluded the ACP.

7 “Panamanians back canal expansion” BBC News, October 23, 2006

8 “Proposal for the Expansion of the Panama Canal: Third Set of Locks Project” ACP, April 24, 2006

With the expansion, however, the country’s gross domestic product (GDP) is now expected to more than

double by 2025, adding up to 50,000 jobs and increasing business investment in the Canal Zone by 40%.

Since the project cost would be a heavy burden on the Panamanian economy, the Panama Canal

Authority (ACP) has not ruled out introducing increases in tolls in 2010, by which time it is optimistic of a

global economic recovery. The ACP still considers itself a major cost-saving to shipping lines, even after

doubling the tolls it charges container line per teu in the last five years. Still, the ACP feels it is cheaper

than alternatives, including Suez and the US west coast ports. Nevertheless, the ACP has been forced to

cut its volume forecast for the year 2009 due to acceleration in the global slowdown in trade. Previous

ACP predictions pegged volumes at 303m PC/UMS tonnes for 2009, representing a 2% reduction in line

with the small contraction felt during 2008. With little sign of the economic difficulties in the US coming

to an end, however, the ACP has cut its forecast by a further 3%, which would represent a 5% reduction

on last year’s figures. But the ACP is confident it will be able to weather the storm being felt in the main

international trade lanes. The canal accounts for around 5% of world trade.9

9 “Panama Canal Project: Golden Goose or White Elephant?” Credit Suisse, June 2, 2006

Political Overview

Panama has maintained good relations with global powers and international bodies in an attempt to

ensure trade and business. Ties with the United States of America have helped in developing economic,

social, and political and security matters. Today, many Panamanians go to the US for higher education

and for other training courses. Similarly, many American citizens, retired employees of the Panama

Canal Commission, and people holding citizenship in both the countries also reside in Panama.

The Panamanian government's successful enforcement of intellectual property rights in the economic

investment sector, has allowed it to sign a Bilateral Investment Treaty Amendment with USA and then

another treaty with Overseas Private Investment Corporation. To strengthen its grip over money

laundering and crimes, both local and international, Panama brought about significant reforms in 2000.

Panama is an active member of United Nations General Assembly and several other United Nations

bodies. Panama was elected in November 2006 to serve on the UN Security Council. Panama is also an

associate member in several financial institutions such as the World Bank, the International Monetary

Fund and the Inter-American bank.10

Panama is affiliated with the Organization of American States (OAS) and it was a charter associate of the

Rio group. The Rio group or the Group of Eight (Latin American Economic System) (SELA) was

established in 1975 to promote economic development and social co-operation among Latin American

countries. Panama was suspended from the league of SELA in 1988 because of its domestic political

structure under the leadership of Manuel Noriega. The country regained membership status in

September 1994, after the implementation of an improved democratic political system.

Panama is an integral part Inter-American Tropical Tuna Commission. It is one of the club affiliates of the

Union of Banana Exporting Countries. Panama is also a chapter of the Central American Parliament also

known as PARLACEN and Central American Integration System (SICA). At the 1994 summit of the

Americas Panama formed an allied force with its six regional neighbors. This alliance, known as Conjunta

Centroamerica-USA (CONCAUSA) was designed to promote economic development in the region.

As a member of International Criminal Court, Panama has a bilateral agreement of protection with the

US. This shows the strong cultural relationship between Panama and the US. In 2007, the US and

Panama launched a joint regional health worker training center. The main aim of the center is to provide

good healthcare to the workers residing in Panama and Central America.11

10

“Panama Wins U.N. Security Council Seat” Washington Post, November 7, 2006 11

“Panama: Political and Economic Conditions and US Relations” CRS Report for Congress, 2008

Economic Overview

The International Monetary Fund has predicted that Panama will be the fastest growing economy in

Latin America in 2009. It was the second fastest growing economy in Latin America in 2008, after Peru.12

Much of the economy is service based, with banking being the main industry of the country in monetary

terms. Panama depends largely on its privileged geographical position: the economy is based on a well-

developed services sector, including the Panama Canal, banking, insurance, government, the trans-

Panamanian oil pipeline, and the Colón Free Zone. Both the Panama Canal and the monetary regime

anchored in the use of the US dollar spurred the rapid development of the service economy. The unique

dollarization within the monetary system played a significant role in the creation of an International

Banking Center and the Colón Free Zone.

12

“IMF World Economic Outlook” International Monetary Fund, October 2008.

Economic growth will be bolstered by the Panama Canal expansion project that began in 2007 and is

scheduled to be completed by 2014 at a cost of $5.3 billion - about 25% of current GDP.13 The expansion

project will more than double the Canal's capacity, enabling it to accommodate ships that are now too

large to transverse the transoceanic crossway. This increased activity should help to reduce the high

unemployment rate. Strong economic performance has already reduced the national poverty level to

29% in 2008; however, Panama still has the second most unequal income distribution in Latin America.

The government has implemented tax reforms, as well as social security reforms, and backs regional

trade agreements and development of tourism. Not a CAFTA (Central American Free Trade Agreement)

signatory, Panama in December 2006 independently negotiated a free trade agreement with the US,

which, when implemented, will help promote the country's economic growth. GDP for 2008 was $19.74

Billion, with GDP-per capita being $11,900. The GDP growth rate achieved in Panama was 8.5% for 2008,

ranking 18th in the world in growth for that year. Investment accounted for 24.9% of GDP. The services

industry dominated the GDP percentage, accounting for 77.6% of GDP for 2008.14

The Panamanian economy is small, open and shows a high duality: The export-oriented service sectors

exert a dominant role in the GDP accounts but have limited linkages to the rest of the economy,

including their relatively poor contributions to tax revenues and employment. The exchange rate is fixed

(the U.S. dollar is legal tender) and there is full financial integration of the banking system with the rest

of the world. Deficits in the current account of the Balance of Payments – even as high as 10% or more

of GDP which have not been infrequent - do not have the negative implications one finds in other

economies since they cannot take place unless there are specific sources of financing, usually capital

inflows associated with major foreign direct investment or bank lending. The monetary system imposes

a large degree of fiscal discipline. Public deficits may not be sustained unless the Government obtains

13

“Panama Canal Project: Golden Goose or White Elephant?” Credit Suisse, June 2, 2006 14

“The World Factbook” CIA, March, 2009.

voluntary financing from third parties either external or local. This system also implies that external

shocks, like hikes in the price of oil or international financial crises, have to be absorbed in the real

sectors by a decrease in production and employment and not through price changes.

Banking System

Another unique characteristic of the Panamanian economy is its banking system, whose local loan

portfolio to the private sector amounts to 88 per cent of GDP, the highest proportion in the region,

followed by Chile with 82 per cent.15 Even within the last year of turmoil, Panama’s banking sector

experienced significant growth in both loans and deposits. The total credit portfolio amounted to $31.1

billion, a growth of 20.8 percent from September 2008 compared to September 2007, while total

deposits amounted to $37.5 billion, an increase of 24.1 percent. Credit to the private sector was $21.2

billion, a 19 percent increase from 2007.

Panama Lending by Volume

16

15

“Latin America Financial Overview” The Sovereign Society, 2009 16

The World Bank, April 1, 2009

As stated, the US dollar is the official currency and, with the exception of limited coinage, it is the

numeration for personal and corporate transactions. Likewise, Panama has no central bank, thus it is a

perfect dollarized emerging economy. This system provides certain advantages to the Panamanian

economy: 1) there is no foreign exchange risk that outside investors would have to take into account; 2)

inflation is very low, usually below that of major countries; 3) there is absolute freedom of movement of

capital in or out of the country; and 4) to a degree it limits the size of public sector deficits.17 On the

other hand, the absence of a central bank and of reserves implies a loss of income for the authorities,

there is neither a lender of last resort nor any tools to fend off, at least in the short term, the impact of

external shocks. On balance, the system has served the country well and is an effective mechanism for

development.

Economic Freedom

Panama's economic freedom score is 64.7, making its economy the 55th freest in the 2009 Heritage

Index. This score is essentially unchanged from 2008, reflecting a decrease in monetary freedom that

offset slight improvements in business freedom and freedom from corruption. Panama is ranked 10th

out of 29 countries in the South and Central America/Caribbean region, and its overall score was above

the world and regional averages.18

Foreign Direct Investment

Panama’s Foreign Direct Investment in 2008 reached $2.6 billion, an increase of 25.9 percent ($494

million) over the previous year, according to a report by the Comptroller General of the Republic. It

should be noted, however, this increase was primarily due to the purchase of Banistmo by HSBC. This

large inflow of foreign capital entering the country in 2008 was one of the keys to the country's

17

“Mises Daily: Panama Has No Central Bank” David Saied, April 26, 2007 18

“2009 Index of Economic Freedom” The Heritage Foundation, 2009.

continued growth. Without the capital infusion, the gross domestic product could not have grown 9.2

percent and the country would have had serious problems in financing its increasing deficit. Although

foreign direct investment grew last year, Panama’s trade deficit widened. The country's exports grew

slightly, rising by 1.6 percent, but imports jumped by 30 percent. 19

Fitch Rating

In late 2008, the Fitch rating agency came out with a BB+ positive rating on Panama with the canal

expansion project driving the economy. As with most credit ratings, this relatively high score makes it

easier for Panama toborrow money for the canal and other projects. However, with the recent

controversy regarding credit rating agencies, many investors may discount this rating. "Credit-rating

agencies use their control of information to fool investors into believing that a pig is a cow and a rotten

egg is a roasted chicken. Collusion and misrepresentation are not elements of a genuinely free market "

- US Congressman Gary Ackerman"

"The smooth functioning of global financial markets depends, in part, upon reliable assessments of

investment risks, and Credit Rating Agencies play a significant role in boosting investor confidence in

those markets. The above rhetoric, although harsh, beckons us to focus our lens on the functioning of

credit rating agencies. Recent debacles, as enunciated below, make it all the more important to

scrutinize the claim of Credit Rating Agencies as fair assessors."

The Fitch rating report went further: Panama's macroeconomic and structural strengths will continue to

set it apart from 'BB' peers. Higher savings and investment, partly due to the ongoing Canal widening

project, should help Panama maintain stronger economic growth this year relative to the global

slowdown, and also compared to regional peers. As such, Fitch believes that Panama should be able to

absorb future increases in public debt related to the expansion of the canal without precipitating

19

“Latin Business Index” Latin Business Chronicle, March 3, 2008.

downward pressure on the ratings given its growth prospects and the expectation that fiscal discipline

will be maintained even during an election year.

"Panama's key credit metrics continue to strengthen, with growth averaging 8.8% for the five years

ending in 2008, one of the highest rates in the world," according to Theresa Paiz Fredel, Senior Director

in Fitch's Sovereign Ratings team. This has contributed to the convergence of per capita income with

that of low investment grade sovereigns. "As a result of Panama's robust growth performance, as well as

its improved fiscal and external position, the country is well situated to face a reduction in external

demand and international capital flows," added Paiz Fredel, also from Fitch.20

Tourism

Tourism has remained strong in the past few years, even as the world economy has taken hits. The

number of tourists visiting Panama from January to October 2008 totaled 1.23 million. This was an

increase of 153,000 (14.2 percent) over the same period last year. In October, 25,000 more tourists

visited Panama compared to the same month last year, representing a growth of 25.4 percent.

Especially noteworthy was the number of tourists entering by sea which, coinciding with the October

launching of the new cruise season, increased 83.5 percent in comparison to October 2007, despite an

accumulated 12.2 percent decrease in tourist arrivals by sea for the year. Meanwhile, the transit of

tourists by land through Paso Canoa, on the country’s border with Costa Rica, increased 13.9 percent.

The main route of entry continues to be the Tocumen airport though, which 75 percent of the total

number of tourists passed through during the first 10 months of the year.21

20

“Fitch Affirms Panama's L-T Foreign & Local Currency IDRs at 'BB+'; Outlook Positive” Wall Street Journal,

February 26, 2009 21

“Tourism Statistics” Association of Caribbean States, March 2009.

This data seems to suggest that Panamanian tourism is not being affected by the global economic crisis,

at least not at the moment. In fact, between August and October, when the financial crisis heightened,

the arrival of tourists to Panama was 342,562, 19.7 percent higher than the same period last year.

Economic Summary

Currently, Panama has other assets that can provide a solid base to launch a sustained process of

economic growth. These include the Canal itself and the opportunities that could be derived from its

expansion as well as land and other assets of the former Canal Zone adjacent to the waterway. The

modernization of Canal ports, privatized in the late nineties, and the network of broadband connections

with the rest of the world and their local loops add to the potential for exploiting the geographic

position of the country. These elements, jointly with the tradition of exports of goods and services, the

banking industry and the monetary system are what make the Panamanian economy prosper year to

year.

Chapter 3: “Baby Boomers”

North American Baby Boomers & Retirees

Developers around the world have looked to the baby boomers to justify demand for myriad real estate

development genres, including lifestyle communities, urban condos, and full service resort destinations

– and with good reason. The “Baby Boom” generation (the 76 million Americans and 10 million

Canadians born between 1945 and 1964) represents a cohort of the population that is significant

because of its size, age demographics, and wealth.

The baby boomers also have considerable buying power, with a median income of $64,700 and a

median net worth of $146,000; 6.6 million households of boomers own at least one second home.22 This

population group is also savvy to investing their money in real estate, making ownership of second

homes one of the fastest-growing sectors in the real estate industry. As this generation nears the

retirement age (the first baby boomers turn 62 this year), it should be analyzed where and how this

22

“NAR Baby Boomers and Real Estate” National Association of Realtors, November 26, 2008.

group will spend their money and a growing number believe that they will look further South than

Florida and California to more affordable real estate in Central America.

The demographic also enjoys traveling. According to a 2008 study from the AARP, Boomers and Matures

(born before 1946), represent a sizable market for the travel industry. More than 81 million adults aged

42 and older are planning to travel in the next year, and collectively they plan to spend $126 billion on

their next trip alone.23 While many may desire only to visit a country, there is a growing population that

wishes to make their foreign destination a more permanent piece of their life, with either a retirement,

or second home. This population also has recently been traveling with greater frequency to Central

America, another indicator of the potential of Panama as an investment destination.

24

23

“Who is Ready for Retirement, How Ready, and How Can We Know?” AARP Research Report, Sophie Korczyk,

January 2008. 24

“A Snapshot of Boomers Travel and Leisure” AARP, 2006.

Recent Downturn on “Baby Boomers” retirement

The economic crisis now affecting the entire globe has put renewed focus on baby boomers, and how

they will handle the falling stock market, decreased home values, and weak job prospects in retirement.

During the past 12 months, retirement accounts have lost $1.6 trillion or 18.3 percent of their value.25

The Congressional Budget Office puts the figure at $2 trillion over the past 15 months. Individual 401(k)

participants' average losses ranged from 7.2 percent to 11.2 percent in the first nine months of 2008,

according to an Employee Benefit Research Institute analysis of 2.2 million participants.26 These losses

disproportionately affect baby boomers because they have less time to recover before retirement. In

addition, older adults were major benefactors of the housing boom. Between 1998 and 2006, the

inflation-adjusted median home equity for adults ages 55 and older increased by 42 percent.27

25

“How Is the Financial Crisis Affecting Retirement Savings?” The Urban Institute, December 10, 2008. 26

“The Impact of the Recent Financial Crisis on 401(k) Account Balances” Employee Benefit Research Institute,

February 2009. 27

"Housing bubble correction could be severe" US News & World Report. June 13, 2006.

But now baby boomers are feeling the pinch of housing declines. The average home price fell 6.3% from

January 2008 to January 2009.28 Finally, the easiest solution to a declining 401(k) balance and falling

homes values is to work longer. Working one additional year typically increases annual retirement

income by 9 percent.29 But contracting credit markets could weaken the labor market, thus limiting

employment opportunities for older adults. For those reasons and others, retiring abroad looks more

enticing, especially when combined with the incentives foreign countries, such as Panama offer to

encourage real estate investment.

Second Home Market

More and more baby boomers are purchasing second homes as investments. Historically, Supply and

Demand for the US 2nd home market has been difficult to track; however, the US National Association

of Realtors (NAR) in the past few years began publishing a study to track that market. In 2005, when the

first results were collected the study concluded that the US second home market is much bigger than

what analysts believed it was: in 2005, second home sales accounted for one third of all home purchases

in the US. According to NAR, the survey data also shows that more people are buying second homes as a

way to diversify portfolio investments: in 2005, 63% of second homes were purchased as investment

properties, while the remainder was considered strictly vacation homes. Recently, as with all real estate,

the 2nd home market has taken a hit, although it remains a significant portion of the market. In 2008,

the combination of vacation- and investment-home sales accounted for 30 percent of all existing- and

new-home transactions.30 Similarly, the 2nd home trend is moving abroad, as evidenced by an

increasing interest in investment tours and conferences occurring in such places as Costa Rica, Panama,

and Mexico.

28

“U.S. MONTHLY HOUSE PRICE INDEX” Federal Housing Finance Agency, March 24, 2009 29

“Does Work Pay at Older Ages?” Urban Institute, December 5, 2004. 30

“2008 Second-Home Sales Decline; More Buyers Pay Cash” NAR, March 30, 2009

While the tourism sector may develop to be a major contributor to the economy, perhaps even more

significant is its role in stimulating foreign investment. Many tourists return to invest in land and

properties. The tourism component is the first step in the foreigners’ decision making process; once they

have visited 2 – 3 times, they come back to look for a second home or investment opportunity.

Foreigners come to Panama and find it surprisingly “livable”. Given the US’s 100 year presence, Panama

boasts a mature infrastructure, widespread English, and drinkable tap water. Panama, like other Central

American markets, has in recent years realized the tremendous value of the baby boomer market, and

has expanded its real estate offerings. These countries have implemented numerous policies and

incentives as a way to open up their second home markets. For good reason they see this as an

economic development tool. These transplants are not only a powerful form of foreign direct

investment, but also provide employment for local workers and attract even more foreign visitors to

their host countries. Migration studies have shown that interstate migration in the United States (e.g.

New York to Florida) has found that migratory streams play a large role in redistributing wealth among

states. As the influx of retirees has drawn up home prices in Costa Rica and Mexico, officials in

Nicaragua, Panama, Honduras, and Belize are working to lure this demographic to their countries.

Encouraged by the growing number of foreign tourists with an interest in Panama, as well as the media

speculation touting the next baby boomer haven, the residential tourism sector has continued to grow.

To further fuel the development flurry, in early 2005 the government re-instated two year tax

exoneration for new real estate construction. This law, which has been used in past administrations to

boost construction, allows for a 20 year tax exemption on property tax for all new residential projects

that obtained construction permits before September 2006 and complete construction before

September 2009.

Baby Boomers Living Abroad

Estimates made by organizations such as the Association of Americans Resident Overseas put the

number of nongovernment-employed Americans living abroad anywhere between 4 million and 7

million, a range whose low end is based loosely on the government's trial count in 2006.31 Focusing on

households rather than individuals (and excluding households in which any member has been sent

overseas either by the government or private companies), a series of recent Zogby polls commissioned

by New Global Initiatives, a consulting firm, yielded surprising results: 1.6 million U.S. households had

already determined to relocate abroad; an additional 1.8 million households were seriously considering

such a move, while 7.7 million more were "somewhat seriously" contemplating it. If the data collected in

the seven polls conducted between 2006 and 2008 are fairly representative of the current decade, then,

by a modest estimate, at least 3 million U.S. citizens a year are relocating abroad.32

Currently about 25,000 American citizens live in Panama. Those citizens include many retirees from the

Panama Canal Commission and individuals who hold dual nationality. This ranks Panama the #4

destination for Americans living abroad in North and Central America, directly behind Costa Rica.33

Over the past decade, private ownership of housing has dramatically increased around the world, with

many countries experiencing ownership and building booms. Housing in many western European

countries is expensive, relative to other foreign countries. But housing in a number of countries on this

list is quite affordable when compared to the price of homes in large U.S. metropolitan areas.

According to a study by the National Association of Realtors, the median price for a second home in the

US in 2008 was $80,000 and the mean value was $197,341. The data also showed more expensive

second homes are owned by white, married, and college educated households.

31

Association of Americans Living Overseas (AARO), 2006. www.aaro.org 32

“American Relocation - The Other Side of the Migration Story” New Global Initiatives, 2009. 33

US Department of Defense, 2005 estimate.

The study also reported that the mean and median years the household had owned the second home

were 13 and 10 years, respectively. For those below age 65, the typical second home had been owned

for 6–10 years, which when combined with the fact that 60 percent of second homes were owned by

those under age 65, suggests that for older households the typical second home was purchased when

the adult members of the household were in their 40’s and 50’s. This means that the peak time for

second-home purchases for the Baby Boomers is now, as that generation currently is in their 40’s and

50’s and the leading edge is even into their early 60’s.34

An important issue surrounding second homes is the extent to which they are viewed as complements

to leisure consumption or as investment properties. Another survey from NAR provides four key pieces

of information that shed light on this indirectly. First, to help understand the importance of second

homes as an investment vehicle the study looked at the amount of household wealth currently in the

form of second house equity. For the typical second-home owner, 13 percent of household wealth was

in the form of equity in the second home.35 This portfolio share declines with education and is relatively

constant across age groups. This suggests that to the extent second homes are held for investment

purposes, wealth tied up in such homes only represents a very small portion of the typical owner’s asset

portfolio. Thus it appears that second-home purchases are not a main driver of investment decisions of

older households.

The data also divided second-home owners by the number of weeks per year spent in the home. More

than half of these owners spent two weeks or less. Only about 17 percent spent more than a quarter of

the year in the home. 36

34

“2008 Second-Home Sales Decline; More Buyers Pay Cash” NAR, March 30, 2009 35

“NAR Baby Boomers and Real Estate” National Association of Realtors, November 26, 2008. 36

Ibid.

Most second-home owners make limited use of their homes: one-half spend 2 weeks or less and two-

thirds spend 4 weeks or less per year in the home. Also, only 12 percent of owners intend to sell their

main home and eventually occupy their second home. Most second-home owners either inherited their

homes or purchased them with cash. Second-home mortgage originations comprised only about four

percent of overall mortgage market originations.37

37

Ibid.

Chapter 4: Panama Residential Real Estate Investment

Why Panama?

There are a number of reasons driving this demographic to look beyond US borders to make an

investment in a second home. Perhaps the most significant reason is the more affordable cost of real

estate, as well as an overall lower cost of living. Buyers who before were buying in the familiar senior

enclaves of Florida and Arizona have discovered that those markets, although cooling off, have become

unaffordable. In the fall of 2006, Prima Panama, a local real estate consultancy, conducted an internet

survey to assess the motivations and preferences of foreign buyers in Panama. The 275 respondents,

mainly from the North America, overwhelmingly stated that cost of living was their main motivation in

moving to Panama. While other factors, including the dollarized economy, proximity to home, and tax

advantages were considered, most foreigners come to Panama because they could both buy property

and live cheaper than they could at home.

38

38

“Fewer Americans Expect a Comfortable Retirement” Gallup Poll, May 6, 2008.

According to a recent Gallup poll, only 46% of US residents expect to have enough money during

retirement, a concern which has pushed some to shop around for a more affordable place to spend their

golden years. The lower cost of living in Panama allows retirees to have amenities that they could not

afford in the US, including golf memberships and hired help, in addition to more affordable medical

care.

Incentives

In addition to a cheap cost of living, Panama followed Costa Rica’s lead in implementing a retiree

program to offer special benefits for foreign residents and retirees. This is known as Panama’s Law No. 3

and according to International Living, is the best retiree program across the globe. It is also one of the

drivers that compelled the travel magazine to rank Panama top on its Global Retirement Index.39 The

law currently has 2 types of visas for foreigners who wish to reside in Panama:

- The pensionado visa: allows foreigners to remain in the country indefinitely, provided they are

retired (no longer employed, at least in Panama) and receive a government or private pension of

$500 per month

- The rentista visa: similar visa applicable for those who do not receive regular pensions. Visa

applicants must place an amount of money (currently around $225,000) in a five year CD at The

National Bank of Panama in order to yield $750 in interest per month – essentially creating their

own pension. Visa holders considered to be of retirement age (age 55 for women, 60 for men

are entitled to the same discounts as Panamanians. These incentives include 25 – 50% discounts

on entertainment and restaurants, 25 - 30% discounts on transport including bus, boat, train

39

“International Living: 3 Great Places to Live and Retire Abroad” American Chronicle, June 27, 2006

and domestic air fares, 25 - 50% off hotel stays, significant discounts on hospital bills,

prescription medicines, and up to 50% discounts on closing cost for home loans.40

Visa statistics reported by Panama’s Migration and Naturalization Directorate show that in

the two visa categories most likely used by retirees—the pensionado and rentista described above—the

number of visas issued to individuals from the United States more than tripled between 2003 and

2007. Other visa categories for which retirees might be eligible—investor visas for small, regular, and

forestry businesses and economic self-sufficiency visas—have also grown. Data from January to March

2006 indicate that this trend is likely to continue among visa categories open to retirees: Almost the

same number of visas was issued in the first three months of 2006 as in all of 2003. Pensionado visas

made up the bulk of the increase, accounting for 90 percent of the selected visas issued to immigrants

from the United States between 2003 and March 2008.41

In 2006, the US Migration Policy Institute produced a study entitled “American Emigrates: US

Retirement Migration to Mexico and Panama,” which studied data relating to senior migration and

conducted focus groups of adults who had migrated to these countries. According to the study,

members of every focus group in Panama were quick to bring up the benefits offered to pensionado visa

holders, stating that nearly all US retirees in Panama were aware of the discounts and made use of them

on a daily basis. The study also indicates that some retirees who were interested in retiring to Costa Rica

have moved to Panama instead, as Costa Rica significantly scaled back the incentives associated with

their pensionado visa within the past 5 years.42

40

“Top 5ive Places to Retire Abroad” SmartMoney, May 10, 2007 41

“American Relocation - The Other Side of the Migration Story” New Global Initiatives, 2009. 42

“America's Emigrants: US Retirement Migration to Mexico and Panama” Migration Policy Institute, September

2006.

English and the US Dollar

When investing in a second home abroad, many retirees naturally gravitate towards a country with

familiarities. For this reason, the English spoken in Panama, as well as the US dollar being the country’s

currency make a strong appeal. Because of the US presence in Panama, English is widely spoken and

many Panamanians culturally identify with US customs (i.e. Panamanians also celebrate Thanksgiving).

Panama uses the U.S. dollar as its legal tender, virtually eliminating any currency exchange risks to

foreign residents living there. The country has maintained an annual inflation rate of fewer than three

percent for the last 40 years. With the US dollar as the currency, it not only reduces the currency risk, it

allows an ease of transactions among retirees who do not have to engage in currency conversion.

Market Overview

The residential real estate market in Panama can be split into two separate markets, both from a

product as well as a market standpoint: Panama City, and everything else, or the country’s “interior.”

Property in the interior is generally grouped by its geographic feature: beaches, islands, highlands. This

section will separate each of these markets to better characterize development trends, amenities,

demographics, land costs and sales prices common in each area.

Panama City

The port of entry for most foreigners into Panama, and subsequently into the real estate market, is

Panama City. Panama City is the capitol city, and a city reminiscent of major cities in the United States.

Real estate in the city is characterized by luxury high rise condominiums, many with mixed use

component including hotel, marina, or casino. Panama City sees a higher concentration of Latin

American buyers than anywhere else in the country – qualitative research shows that Venezuelans and

Columbians especially are buying upwards of 50% of the City’s real estate. The majority of new units are

being constructed in four affluent neighborhoods: Avenida Balboa (17%), Punta Pacifica (30%), Costa del

Este (13%), and San Francisco (22%).43 Panama City has seen both the greatest amount of construction

and appreciation in the real estate market.

Pacific Coast Beaches

Approximately 1.5 hour west of Panama City along the pacific beach coast is one of the fastest growing

areas for the residential tourism market. These beaches have long been popular with Panama City

locals. Recently the beaches are increasing in popularity with foreigners due to their proximity to the

city and Tocumen airport. Some of the beach communities increasingly popular for residential tourism

developments include Coronado, Rio Mar, Santa Clara, Playa Bonita and Playa Blanca. Beyond local

Panamanians, the Pacific Beaches attract a mix of Latin Americans, North Americans, and Europeans.

The major problem with the beaches in the area of the canal and just past the canal area is the debris

that washes up on the beaches. Part of the debris is from the city itself and another contributing factor

is the ships waiting to transit the canal. Recently Panama City began a cleanup project for Panama Bay

which will include a new water treatment plant and sewage system for the city. Perhaps with the

cleanup project, this area will be experience an increase in investment.

Boquete and Highlands

The Highlands of Panama, most notably in the Chiriqui province bordering Costa Rica, have seen an

increased interest from the international community in the past 5 years. North American retirees

especially enjoy the spring-like climate and natural resources that the area boasts, including National

Parks and rainforests. Many consider the Residential Resort Community “Valle Escondido” as the

catalyst for the recent North American retirement migration to Panama. Boquete is a city-sized town in

the Chiriqui Province. Because of its altitude (about 1,000 m above sea level) its climate is cooler than

43

“Latin America's real estate Panamania” Fortune Magazine, July 5, 2007

the lowlands in Panama, and has become a place known for a pleasant escape from the heat. Its natural

environment has made it extremely popular with tourists from all over the world, especially for eco

tourism. Since the golf and spa resort was developed as the first master planned community in Boquete

a few years ago, the area has been rated the #1 best offshore retirement destination in all of the

Americas by the American Association of Retired, and listed in the top 5 retirement destinations

according to Fortune Magazine and International Living. Today, there are more than 40 master planned

communities under development in the Chiriqui province. Boquete’s increasing popularity has driven

real estate prices there, however neighboring areas including David, Volcan, and Cerro Punta are gaining

popularity, and still remain attractively priced. Additionally, a potential airport expansion in David to

accommodate international flights could have a profound effect on this market within the next five

years.

Closer to the city, yet still cooler than the beach, located in the province of Coclé, is the town of El Valle

de Anton. Only two hours from Panama City, El Valle has become a popular weekend retreat for city

dwellers. This area has also been the site of many new master planned communities. Notably, Doce

Cerros Coastal Development. The 75 acre Doce Cerros project, with its 55 lots of 1/3-2/3 acre in size is

typical of the developments in the area, and most are about the same size. These communities not only

appeal to foreign residents, but to wealthy Panamanians who desire a weekend retreat from the city,

yet cannot travel the distance to Boquete.

Bocas del Toro

The archipelago of Bocas del Toro in Panama is situated on the northwestern coast of Panama in and

around the Bay of Chiriqui. This area has recently become a popular tourist destination with Europeans

and North Americans given its proximity to Costa Rica. This region of Panama is considered the most

geographically diverse in the Caribbean, boasting coral reefs, rain forests, and unspoiled beaches.

Consequently, Bocas del Toro is developing their eco-tourism industry to offer jungle tours, river tours,

island tours, bird watching and turtle watching expeditions. Development here is highlighted by the

development on Red Frog Beach, arguably the boldest undertaking for development in Panama. Many

developers are watching and waiting, to see if a full-scale retirement community can be constructed and

sold on islands that are mostly still inhabited by local Indians.

The Azuero Peninsula and San Blas Islands

These two areas of Panama have far less development, tourism, and infrastructure than in the above-

mentioned markets, but are becoming reportedly popular with Europeans. While much of the Azuero

Peninsula has largely been deforested and supplanted by farms, the beaches are mainly undeveloped

and have become surfing enclaves. The areas on the peninsula are mostly being bought on a speculative

basis; under the assumption development will branch outside the current areas in the near future.

Similarly undeveloped are the San Blas Islands, which consist of an archipelago of nearly 400 islands off

the eastern Caribbean coast of Panama. The islands are inhabited by an indigenous tribe, the Kuna Yala,

and most of the existing accommodation is simple. There is significant protection, mostly environmental

which prevents most developers from viewing this area as an area of interest.

Product Trends

Master-planned communities which boast amenities, services, and activities have been very popular for

foreigners moving to Panama. Depending on where they are located, these communities typically offer a

number of housing types, ranging from single family to low to mid rise condominiums; many

communities often offer a hotel component.

Communities in the Highlands typically are more intimate, offering 100 – 300 units; while developments

closer to the city are much larger: a recent development plans to build 5,000 residential units in Costa

del Este, a mixed-use concession land that is becoming increasingly residential between Panama City

and the airport. In recent years this area was mostly purchased by affluent Panamanians, and to much

lesser extent foreigners. However, most communities design their units with the foreigner in mind;

“even when they are abroad, American buyers still likes the American product – gated communities,

open kitchens, and stainless steel appliances.”44

Some key developments are coming to life in different parts of the country. Among these, the most

attention is centered on the Valle Escondido and Cielo Paraíso projects in Boquete, Red Frog in Bocas del

Toro, and Tucán Country Club outside Panama City. These projects will have houses within a “closed”

community, a hotel, an 18-hole golf camp, a tennis court, a club house, a spa and a gymnasium, among

other facilities. According to the plans announced by these projects’ developers, more than 4 billion

dollars will have been invested in the period 2005-2011/ Foreign residents of these projects will have

spent 3 billion dollars in local consumption. Tourism expenditures in these projects’ hotels would be

approximately 2 billion dollars. These investments and expenditures together would mean an injection

to the economy of about 10 billion dollars in that period.45

Due to the recent downturn in the overall market, a few new trends are also appearing among

developers:46

1) Developers are going to greater lengths to woo buyers

Developers, particularly those at early pre-construction stages, are pulling out the stops to generate

sales and maintain project momentum. From guaranteed rental agreements, free in-country tours

where all expenses are paid, lot/home packages where the home is built at cost, to attractive seller

44

Roberts, Glenn. “Real Estate Without Borders,” Inman News, May 18, 2006 45

“Raising The Roof” Prima Panama, July 2008 46

From a February 5, 2009 first hand interview with Casey Halloran, founder New World Real Estate, a

brokerage/development firm based in Panama City, Panama

financing, special programs for defaulting buyers and even buy-back guarantees. As one Panama real

estate participant remarked,”It’s a way sellers can drop their prices without really dropping their prices.”

Developers are aware of the impact of momentum. A stalled project is hard to re-start and prospects

quickly sense a lack of activity and progress.2) Plans are being scaled back, pushed back and offerings

altered

Months are being added onto construction time-lines for golf courses, clubhouses, restaurants and even

basic infrastructure work. Developers are no longer emphasizing trophy apartments and large

mansions. Instead they’re releasing simpler, smaller and more functional properties more in line with

the current economic mood. Some are fractionalizing existing real estate to offer a more accessible

price-point. There’s also more focus on green building, as elsewhere in the world, to appeal to a

demographic whose decisions take into account social and environmental considerations.

3) Re-sale properties offered for less than developer direct sales

Existing owners who are feeling the pinch are motivated to flip their properties and some are pricing

them well below developer prices. In situations where they purchased pre-construction, the price for

re-sales can be as much as 30-50% lower.

Real Estate Construction

The last 3 years in Panama has seen unprecedented growth and construction in Panama City and, to a

lesser extent, in the country’s interior. The growth is most concerning in Panama City, where a plethora

of high end towers are in the planning or construction phases. While the real estate boom was incited by

the perception of endless baby boomer population, it has recently been fueled by speculative buyers

who are looking for short term plays in the market. This activity, which will be discussed further, has

raised substantial concern in Panama and has caused many to question the fundamentals of the market.

In general, the construction sector tends to grow in the medium and long term; nevertheless, it grows at

a fluctuating or cyclical rate. Still, due to the greater economic dynamics, the construction sector has

also risen to relatively high rates, 30.4%, 16.0%, -0.9% and 17.5% during 2003, 2004, 2005 and 2006,

respectively.47 As a result of this boom, the demand of concrete and Portland cement is also increasing

rapidly. Due to the demand’s fast growing and to the possible widening of the Canal, concrete

manufacturers have already announced that they will expand the capacity of their clinker and concrete

manufacturing plants.

These high growth rates are the result of the unprecedented real estate activities boom in the heart of

Panama City (Punta Paitilla, Punta Pacífica, Costa del Este and San Francisco). Mostly, it is a prominent

offer of residential condos, mainly demanded by foreign citizens coming from the United States, Canada

and Europe, as a consequence of the retiring baby boomer phenomenon. Currently, there are more than

47

“Construction Booming, as Developers Dream” Business Panama, August 2007.

300 residential condos projects in Panama City. The value of such offer is estimated in more than 4

billion dollars.

This offer is estimated to be finished between 2008 and 2010; however, it is probable to be finished

after that period. With such boom of condos demand, it is expected that the Panama City foreign

population be significantly expanded, reaching one-third of the city’s total population.

The Recent Slowdown

Middle class and lower income Panamanians could be the benefactors of a rapid slowdown in the high

end real estate market. It is becoming more apparent that the construction boom is coming to an end,

especially in the luxury property end of the market, and many projects have been scaled down and in

some cases abandoned altogether due to lack of purchasers. In December 2008, the construction

industry registered a decrease of 38 percent and the situation looks grim for many speculators who

bought expensive apartments with the idea of flipping them and making a hefty profit. The Housing

Minister for Panama, Gabriel Diez confirmed that that was the case, when he said that, “constructions

projects with high economic value, such as luxurious condominiums have been hit hard by the current

economic global crisis, because the majority of their prospective buyers were foreigners.” Diez said that

“property developers have two options: some have decided to scale down their projects, while others

preferred to put them on standby until the situation improves. The ones that are already being

constructed have to deal with the Panamanian banks that are asking for pre-sales of up to 70 percent of

the project, before they will advance any money and they have been negatively affected.”The minister

said that although that end of the construction sector is depressed, the local market can assimilate

those loses if the property developers begin to build low cost housing instead of luxury buildings. Diez

pointed out that many property developers are slowing down the progress of the projects, to allow

them to raise more money and find buyers. This is more noticeable in the luxury apartment blocks of

downtown Panama City such as Balboa Avenue, Punta Pacifica and San Francisco. The Panamanian

Construction Chamber (CAPAC in Spanish) president, Jaime Jované agreed with Diez’s statement that

the luxury projects are the ones that are going to be most affected by the global financial crisis. Jovane is

proposing that property developers re-orient their sights and start building low cost homes directed to

local buyers. The government should, at the same time, strengthen the infrastructure to be able to face

the urbanization of the country. Minister Diez said that the current government still has six months in

power and during that time it is determined to finish the construction of roads, aqueducts and sewers,

to help the economy and avoid unemployment in the construction sector.

Housing Minister Gabriel Diez believes that there is no danger of the apartment buildings in the most

exclusive areas of the city remaining empty for too long. Eventually he thinks they are going to be

occupied, as prices will likely have to drop to more realistic levels to make them more affordable for

nationals, unless developers sit on the sidelines until the economic global crisis eases. Apartments that a

few months ago had increased in price by more than 150 per cent, to around $250,000, were on offer

this week at $150,000.48 Elsewhere major developers have been converting “for sale” signs to “for rent”,

targeting incoming companies needing space for executives, and local Panamanians who have been

frozen out of some of the more “desirable” locations. With projects being cancelled and the costs of

materials going up, it seems the only way the real estate boom will continue is for the industry to re-

invent itself.

48

“Economía se mantiene fuerte” La Estralla, December 17, 2008

Construction Slowdown

Investments in the construction sector were down by 35 percent in September 2008 and 78 percent in

October 2008 compared to 2007.49 The global financial crisis has started to put a premature end to the

construction industry boom in Panama, and in the rest of 2009 the fall of this important industry is

expected to be more pronounced. The local market has reached saturation point, and demand for new

projects is falling.

A study by the economist Osvaldo Lao for the Panamanian Association of Real Estate Agents and

Promoters revealed that housing sales reached 1,766 in October 2007, while the number fell to just 438

this past October 2008, the lowest monthly figure in the last two years.50 The study broke housing into

three categories, those less than $80,000, and those priced over $80,000. In housing complexes that

cost less than $80,000, the fall in price averaged 75 percent. For those units costing more than $80,000

the fall in sales was 80 percent. The housing sector of less than $80,000 proves to be the most

marketable, with a turnover rate of less than 10 months. Meanwhile, on the luxury end of the market,

the turnover rate of housing valued at more than $150,000 can be as high as 26 months. A total of 435

active projects with 14,342 available housing units existed in Panama during October 2008, an increase

of 3 percent over September. The report also revealed that the average cost of the housing units in the

capital city last October dropped to $257,285, from $260,500 in September 2008.51

Another economist, Juan Jovane, believes that the main problem is that in 2009 “there will be no

buyers, because the local market is saturated” and international buyers will stop coming. Added to the

fall in demand, Star sources say that banks have become stricter with their mortgages, offering them for

49

ibid 50

“Panama condo sales down 80%” La Estralla, December 17, 2008 51

ibid

only $1,200 a square meter and requesting buyers to pay the difference up front, a scenario that

certainly does not help the real estate sector.52

As investment in construction decreased for the past two months, prices for housing remained high.

According to the study by economist Osvaldo Lao, in the Balboa Ave sector the square meter of

construction reaches $2,932 (compared to $2,612 in Oct 2007), while Punta Pacifica is quoted at $2,524.

Boquete is the only sector with a decreasing value, decreasing 3 percent to $1,390 a square meter.

According to the study, Chorrera and Las Cumbres are among the most economic zones, in the mid-

$500s a square meter. The value of Tocumen, Pacora, the mountain areas and Arraijan have rose the

most, with 56, 53, 52, and 41 percent increases between October of last year and October 2008.53

52

“The View from the Coast” La Estralla, December 20, 2008 53

ibid

Chapter 5: Risks, Hesitations, and Considerations When Investing in Panama Real Estate

Risks in the Residential Market

Boom or bubble?

While there are risks associated with developing in any emerging market, Panama is in a unique position

at the height of a speculative development boom. The Panama City boom started with retirees looking

for a place to cheaply relocate, it quickly became an investor’s speculative market. Promoters recall

investment groups that would come to Panama to buy entire building towers; after placing their cash

deposit, they would sell their interests to other speculators before the project even broke ground. This

type of activity has likened Panama City to other explosive markets like Singapore and Dubai, markets

where speculative capital migrated and underwent subsequent volatility. Many investors believe that

the market is due for further correction, and fear that if it continues to overheat the Panama City

market has potential to collapse even worse.

In Panama, in order to start pre-sales, the developer only needs to have an option on a piece of land;

often a deal is struck with the land owner to give them a piece of the project if the deal goes through to

completion. Sophisticated artists renderings and web sites market the project; if the marketing goes

well; a deposit of about 10% is collected to “purchase” a unit. If the project does not seem to be feasible

or profitable before groundbreaking, the developer refunds the deposits. Therefore, many of the

projects being sold – and consequently canceled – are very early in the development process. However,

even with the cancellation of these projects, the market is still steaming ahead: recent estimates from

Prima Panama forecast that 380 towers in Panama City are either approved or under review,

representing a staggering 35,000 new units to come online in the next ten years. The instability of this

market presents a considerable risk for investors looking at Panama City. Although it is unlikely that all

of the units planned will come online, the current level of construction dictates an exponential increase

in the market’s short term supply. Additionally, even if the projected influx of baby boomers comes to

Panama, it is important to understand what percentage of these buyers want to be in city condos

(versus communities in the beaches or mountains). Lastly, if speculators are currently driving up prices

for condominiums in Panama, there is considerable risk regarding price level fluctuation when the

majority of the inventory comes on to the market in late 2008 and 2009. Uncertainties related to the

level of supply, rising construction costs, and potential demand for units combine to make the Panama

City market relatively risky at this time.

Volatility of second homes

It is necessary to consider the inherent risk associated with residential tourism markets, since second,

holiday, and retirement homes are likely to be more volatile than primary home markets, for the

following reasons:

-Demand is more discretionary than in primary home markets: second homes are not as essential to

consumers as main residences thus they are more likely to feel interest rate or economic shocks

-Lenders more likely to be concerned about defaults on second homes

-There is little to no fallback demand for these residential tourism units, as many local households are

priced out during booms. The supply side of the market is more likely to transmit volatility i.e. “feast or

famine” This risk is especially inflated in a market like Panama where there is a great income disparity

and the majority of residents can not afford the new product entering the market.

Property Market Transparency

Perhaps one of the greatest contrasts in developed versus emerging markets is the difference in

“transparency”. This refers to the quality and quantity of the information made available to participants,

and the consistency of the rules and regulations with respect to property rights in a marketplace. From

an investor’s perspective, high transparency in markets like the US and UK eases the flow and reliability

of information, but also makes it harder to find market inefficiencies that would typically earn a “risk

premium.” Conversely, while low transparency imposes additional risks and transaction costs, it can also

translate into emerging opportunities and lower cost of labor.

Hesitations

When writing on hesitations and obstructions pertaining to real estate investment in Panama, one must

make the distinction between an investment for purely financial reasons and an investment in a

property for personal use. The majority of the data collected was from the second scenario, as the

people questioned were mostly recent home buyers referred from a reputable international brokerage

firm based in Panama City, Panama. 54

Of the population surveyed, the most common concerns prior to purchasing their property were 1) the

level of crime in the country 2) the availability of title history and 3) availability and quality of

healthcare. I will first address each of these issues, and then cover the overall risks inherent in Panama.

The level of crime:

The crime in Panama City is low among the Latin American nations, and moderate overall. The highest

portion of crime is located on the Caribbean side in the city of Colon. Here, police checkpoints have

become a common sight on most roadways. Most typical of the crimes are those common in major

United States metropolitan areas ranging from robbery, muggings, to recently “express kidnappings”

where the victim is taken to an ATM and forced to withdraw, and handover cash. Many of these crimes

are committed by youth gangs so in recent years Panama City has enacted a curfew for people under 18

years of age. The law requires any youth out past the curfew to either carry a permit validating their

54

Sample of 20 recent prospects to New World Real Estate, provided the following responses

school attendance, or a Certificate of Employment for reasons to be out at that time. Minors caught

violating this law are brought to the police station for pick up and release to their parents or legal

guardians. The parents or guardians may be fined up to $50 for such violations. Overall, the crime is no

more severe than what one expects in major cities around the world. Crime outside the city is rare, and

primarily related to drug trafficking, the victims directly involved. Panamanians know the value tourism

and visitors provide to the country, so direct attacks on foreigners seldom occur. Here, awareness and

caution can eliminate the majority of the risk associated to crime.

The availability of a clean title:

As opposed to the United States, when purchasing land in Panama a person does not need to create title

claim. This work is housed in the Public Registry system.

The Public Registry Office holds the records of all titled properties within all nine of Panama’s provinces.

Since this is a public office and information is readily available, this assists greatly in undertaking due

diligence on the parcel of land.

The Public Registry provides a document with a full history of the piece of land (finca) including the

property’s full legal description. This document is the most important piece of information when

attempting to secure title insurance in Panama. Once the title insurance company receives this form, it

normally issues two documents, “Schedule A”, which describes the property that is to be insured, and

“Schedule B” that describes the contingencies or exceptions.

"Possession Rights” Properties

Not all properties in Panama are of private domain and therefore subject to registration at the Public

Registry Office. Often, land located on the beach front, islands, or special tourism zones is Government

property, and only “Possession Rights” can be granted for a specified period of time. These lands are

recognized for a specific occupation or use for the set time, whereby the owner remains the

Government.

From the lack of uniformity regarding the granting entity for “possession rights” it is vitally important to

review each purchase individually and keep in mind the aspects above. The transaction time on these

properties will vary and often takes up to two years due to the process involved.

Often land developers in these special areas have procured the right of possession title documents and

have transferred the ownership of the same by means of the sale under a Panamanian corporation and

its assets. It is advised by local real estate firms that special caution be taken with these transactions

since the corporation could have undertaken other businesses besides that related to the property and

there is no official registry of the commercial undertakings of the same.

People interested in “Possession Rights” must be careful since those rights are only issued in two

circumstances:

1. The National Agrarian Reform: With this title a foreign investor must be sure the award was granted

by the Agrarian reform, and specify the intended activity on the parcel is specified.

2. Title granted by the Cadastral Office of the Ministry of the Economy: Since often the “possession

rights” are located within islands and beachfront property, such as Bocas del Toro, Chiriqui, Portobelo,

Veraguas, in 2006 the government enacted Law No.2 , whereby administrative concessions and the

purchase of islands and coastal territories for tourist investment purposes are regulated through the

Ministry of the Economy and the Cadastral Office. Foreigners and national investors find security in this

law because it has extended concession periods from 40, 60 and 90 years, depending on the amount of

the investment and also grants the option purchase an island and coastal territories with some

restrictions.

The availability and quality of healthcare

Panama has 22 hospitals, 12 within the province of Panama. Panama contains modern hospitals in its

metropolitan areas, with quality healthcare rivaling the quality within the United States. There is a

medical center with modern facilities in the city of David in the Chiriqui Province in the western region

of Panama. The standards held within the hospitals are internationally equitable, and some of the staff,

and the majority of the doctors, hold medical education backgrounds from the United States.

Within the country there are two healthcare systems, a public and a private. The Caja de Seguro Social

(Social Security System) is in charge of maintaining the public institutions. For working Panamanians

healthcare and medication from hospitals and clinics within the Social Security System are free, provided

they maintain their employment which pays into the system.

While the public system offers quality care, foreigners and wealthy Panamanians usually opt for

insurance with the private hospitals. Within Panama City, where most “baby boomers” would reside, the

most popular hospitals include:

Hospital Punta Pacifica – This is the only Johns Hopkins associated hospital in Central America. This

hospital is located in the center of the city on Punta Pacifica and is known to be the most expensive in

Panama.

Clinica Hospital San Fernando- The San Fernando Hospital has many connections with the United States.

The hospital is officially affiliated with Tulane University, Miami’s Baptist Health Center and the Miami

Children’s Hospital. San Fernando is planning to open a clinic in Coronado, which is a tourism and

vacation hot spot on Panama’s Pacific Coast. The main hospital is located on Avenida Balboa in Panama

City.

Hospital Nacional- This hospital first opened as primarily a women’s hospital over 35 years ago. Now the

facility is home to over 120 specialists and 85 patient beds. A bonus for many retirees, Hospital Nacional

accepts international health care plans as well as ambulatory and emergency care for US veterans, and

located in the Bella Vista section of Panama City.

Within the interior, most of Panama’s cities have both public and private hospitals, but for the most part

are not as large as the ones in Panama City and the staff is normally not as probably to speak English.

The health care in Panama is much less expensive overall because at the basics: doctors fees and

hospital visits are much cheaper, malpractice insurance is very low, because the laws do not allow for

frivolous lawsuits, and the median income is around $300 a month, so health care cannot be expensive

or no one would use it. 55

55

“Healthcare in Panama” EIU Country Analysis, December 12, 2006

Chapter 6: Conclusion

Investors worldwide are focusing their attention on Panama today. The 86 million ‘baby boomers’ are no

exception as they seek to put their retirement savings to maximum use. Real estate prices in Panama are

attractively lower as compared to most developed nations. Also, the economy is strong with a huge

financial center and the Panama Canal as strong underpinnings. GDP growth in Panama was over 11

percent in 2007 and greater than 8 percent in 2008. The projected growth in GDP is 9 percent for 2009.

Despite strong economic growth and compelling opportunities within the real estate market, investment

in Panama should be approached with caution. Like most emerging markets, there are numerous risks

associated with investment.

The investment scene currently in Panama is better than in most most countries. The banks have

maintained a high level of liquidity. Nevertheless, the Panamanian and foreign banks have assumed a

defensive stance as the local banks have seen their lines of credit cut by foreign correspondent banks.

For this reason, although real estate projects underway have continued, more stringent credit policies

have been implemented. Some projects in the early stages have been canceled. The majority of more

recent projects, since September/October 2008, have been put on hold until further notice. Thus far

there has been no backup of inventory for completed residential units. However there is undoubtedly

pressure on the pricing, especially on larger luxury units, as some clients from abroad are dealing with

decreased wealth and may have difficulty in closing. The decreased prices should re-attract investors

who were driven away due to the price increases of the recent boom.

Overall, the market seems to be experiencing a correction in prices, especially within Panama City, and

may continue on that trend for a time. This correction is not based upon a country specific-problem but

is taking place worldwide. Therefore, the relative status of Panama as an attractive retirement

destination has not changed, and the country should see persistent demand from those comfortable

with the risks inherent in an emerging market.

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