Panama City’s Ever-Growing Skyline

An opinon piece appeared in this week’s edition of Panama’s premier financial newspaper, Capital Financiero by Alfredo Rivera Pizarro, Sales Manager for real estate franchise CB Richard Ellis. In this article, Mr. Rivera offered his views as to why the U.S. bubble market cannot be compared to the current Panama City real estate boom.

I do believe the  overwhelming long-term trend will be that Panama’s land prices will continue to increase. I am particularly bullish on remote beaches and ocean view areas that are favored by retirees, recreational home owners and tourism projects. However, I do NOT agree that Panama City’s condo market conditions cannot be compared to the U.S. bubble.

Among the reasons offered by Mr. Pizarro as to the incompatability:

“1. Conservative Systems for Financing Projects”– Perhaps to the average foreigner seeking capital from the typical financial resources (banks) in Panama, the system would seem stodgy, slow and frustrating. I have certainly had this experience with my own tiny projects. However, what Mr. Rivera’s article did not address is the all-too-cozy relationships that many Panama banks have with real estate developers, many of whom hold seats on the board of directors or have close friends and family who do. In some cases, developers are shareholders, or, in the case of Banistmo founder (and presidential candidate) Alberto Vallarino, the OWNER of the bank. Does Mr. Rivera really expect me to believe that these loan applications are treated with the same scrutiny? Does the Panama banking regulatory system police these conflicts of interest to the same degree as U.S. banking regulators?

Also, the lending environment two years ago, when the U.S. economy was go-go and investing in Panama was a new idea, compared to today, when the global financial sector is nursing wounds, is as different as night and day. It was then, not now, that most of these pre-construction projects received their funding and began selling units.

2. Conservative Lending System For Buyers– Indeed this is also true, particularly so for foreigners unable to demonstrate local income. But many foreign investors who were caught up in the “irrational exuberance” of the Panama City condo craze went so far as to purchase units in cash, avoiding the system altogether. What will be the first asset they liquidate if times get tough back home?

3. The Panamanian Economy Is Growing At Record Pace — Certainly true. Investment is entering the country across all sectors; Panama’s economy is not a chair with 3 legs, but nor is/was the States’. But how does this economic boom make Panama’s housing sector immune from bubbles? If the pace of construction outstrips the demand for real home buyers (not just speculators) then the laws of economics prevail.

I cannot count how many times, during the height of the U.S. housing frenzy, that builders, realtors and mortgage brokers went on record, swearing off worries of an economic head cold with the cure-all statement, “Don’t worry, this market is different.” To me, that often parroted panacea sounded eerily reminiscent the dot-com era before the dot-bomb. The end result was naturally, not much different.

But DO these markets compare?

Some things that Mr. Pizarro didn’t mention that DO bear resemblance between Panama’s current market and the formerly hot U.S. real estate market:

1. Developers Kindly Accepting “Reservations”– Demand has become so frenetic over some smartly marketed projects that reservation lists have been taken. In short, this means that the developer is selling a project before plans are totally approved. Remember when projects in bubble markets like Phoenix were running lotteries to see which lucky winners got the opportunity do drop $800k on a McMansion?

2. Developers Canceling Contracts– Sometimes developers just aren’t happy ENOUGH with the profits on contracts they signed for pre-construction condos and therefore, deftly destroy the contract in order to resell it to a higher bidder. This is just one example of developer greed which, over time, will affect sales.

3. Investors Biting Off Too Much — I know plenty of locals and foreigners who SOMEhow worked the “conservative lending system” to receive mortgages for multiple properties. I have local friends earning modest management wages who are moving into $600k condos while paying pre-construction loans on 2nd and 3rd properties, expecting to ‘flip’ them. What could possibly go wrong?!

4. Everybody’s Playing– An incredible number of foreigners and locals have entered the business of real estate as realtors, investors, property managers and so forth. On the buyer’s side, I have witnessed far more individuals in Panama participating as investors than actual home buyers who intend to actually LIVE in the dwellings they’ve purchased.

To be sure, the current boom in Panama is a unique one and perhaps a case study for globalization’s New World Order. Investment is entering from all 4 corners of the globe and in sectors as diverse as tourism, agriculture, oil exploration and motion picture production. Immigrants from Colombia, Venezuela, North America, Asia and Europe are choosing Panama as their new place of residence. But so long as Panama’s zoning laws remain impotent, investment protection laws “flexible” and personal relationships trump fiscal prudence…Panama’s real estate market is devoid of an economic Kevlar™ vest.

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Filed under: News, Real Estate on April 1st, 2008