What’s The Holdup With Panama’s Condos?
Panama City’s Skyline Growth Is Slowing
As Panama’s real estate boom teeters ever closer towards a little town I call “Bustville”, I am amazed by those in denial, who still shout to the rafters such brilliant defense as, “the fundamentals are still strong!” or “this is a different market”. These and other lines are too reminiscent of those I heard parroted by other fellow deniers during the dot-bomb disaster of the 90s.
Still, since nothing’s shocking to me anymore in Panama, I have to wonder if I’m the crazy one. What are those folks seeing that I’m not? I have lived in Latin America for the last 11 years, the majority of my adult and professional life. I reside full-time in Costa Rica and Panama (How can one person have 2 primary residences? — another article). Since I first arrived in Panama around 6 years ago, I’ve never understood how prices here went from very reasonable, to very….well, NOT reasonable.
From the vantage of my modest 12th story apartment in El Cangrejo, where I regrettably pay a king’s ransom to rent, I can see a good 2 dozen cranes and projects in various stages of “almost complete”. I confess, I too was lured by the pre-construction pied piper, but that was 4 years ago. Back then, prices seemed too good to be true ($80k for a condo with views!?), loans were easy, taxes were cheap, and few expats had much interest in Panama. Even so, I warned against the perils of buying pre-construction over two and half years ago. Typical to form, my condo was over a year late on delivery. I moved in and resided there for about a year, then sold when I thought asking prices were getting nuts. So I counted my chips and have since been waiting on the sidelines, suffering through outrageous rent, waiting for sellers to lower prices. Hopefully a few wake up soon and realize there are no more easy loans nor foolish buyers.
When I get really curious, I climb up to my building’s rooftop and use a set of cheap binoculars to survey the entire city and the progress of the many buildings in construction. For fun, I make notes about the progress from the previous time I check. Lately, a whole lot of ‘em are not going anywhere. Unfortunately, a good friend of mine bought one directly in front of my apartment. For the past 3 months, it’s been nearing the end of “grey phase” and yet, there hasn’t been a worker in site. The scary thing is, this is a mid-priced building that was started WAY back before all the mayhem ensued. Now, correct me if I’m wrong, but if all these units were pre-sold as we’ve been told, why wouldn’t the developer want to hurry up and finish, hand over keys to the buyers and get paid his hefty ransom by the banks who underwrote the building? Call me naive, but I would think this is how things would work. Ok, so maybe not…
So, could somebody please explain to me why condo towers in Panama aren’t getting finished?
Among my own theories:
1. Bank never made the loan
So the story we were told was that the developers had to meet a certain % of pre-sales, then the bank gave them the money to build. So did the developers not hit the required figure? When they did hit the number, was it at a difficult time and maybe the bank didn’t have it?
2. They spent the money on another project!
I’m not saying developers in Panama would ever co-mingle funds, but a lot of these guys had 5-10 buildings going up at the same time. Could it be that some of them spent the funds on a different project?
3. They are way over budget on the project
Having personally gone way over budget on my only 2 construction jobs, I can imagine that with rising steel and concrete prices during the construction boom (now seems like a distant memory) that prices for everything from supplies to wages
4. Banks are withholding money for some reason
The banks were supposed to fork over the balance of the loan to finance construction once the buildings had met pre-sale requirements. But maybe the banks are re-thinking these loans to developers in the current market conditions?
5. They can’t multi-task
Some of these developers simply took on more simultaneous construction than they could possibly manage. That makes it tough to manage costs and quality. Could be that some got smart and decided to finish one at a time?
6. Developers are stalling until they know buyers will be able to get loans?
Maybe the developers are crazy like foxes and know that if they were to hand over keys to buyers today, a good portion of them would not be able to either obtain the bank loans or make the payments on said loans. That could cause rapid devaluation of the units inside the building, many of which developers held on to themselves, thinking they’d make a killing in the long run when they flipped their own units. Perhaps the developers’ strategy is to just slow everything to a crawl to avoid flooding the market with condos nobody wants or can afford today?
So what’s your theory…when are all these new homeowners going to moving in?
| Written by Casey Halloran |  |
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Filed under: Business, Real Estate on August 10th, 2009
Casey,
I couldn’t agree more. I’ve commented on your site here before and my opinions have not changed. Regardless of the fact that there are many moving here to work on the Canal expansion who can afford condos in the $150,000-$200,000 range there can’t be that many. Who is going to buy all of these units in the $200,000 and up range? The developers got too greedy and the simple economics of too much supply and not enough demand will force them to reduce prices on the ones that they haven’t turned into rentals. I live here in Panama and work for a luxury auction firm based in the US. I am trying to put together a year-end luxury condo auction event here. My response from the big developers a few months ago was that they did not need our services but I think that as time goes by, some may realize that even Panama is not immune to the global crisis and that the idea of a fresh, new marketing concept like an international real estate auction may not be such a bad idea after all.
How about those projects that are being finished and are moving ahead? There are many! Or how about those Contracts that are trading once again, supposedly by naive, dumb buyers/investors, albeit at discounts but still 30% to 40% higher then original purchase prices of 2003-2005 (in those buildings that are being worked on), I know because we are selling them. Well, may be it is a very different market, may be real estate corrections are localized occurrences. May be target buyer is different then in most places and he or she does see multiple advantages in buying here. Yes, it is almost impossible to finance a foreigner but that too will change, it has to – no bank in its right mind can tolerate not making money for too long. All things need to be thought through on case by case bases. Once experienced developers will understand that making 100% returns on their cash investments is not what real estate development is all about all will go back to normal, I hope. But a little optimism never hurts.
Let me try and asnswer some of the questions raised from what i now on bank lending with condos.
I am no expert but this is from my personal experience
1. The money that the banks would be lending after seeing a the required number of contracts would be the constuction money required to building the condo so with out the loan there would be no Tower all you might see are some footings .
2. Comingling as we probably all know is illegal in the US but i am not sure how the regulation stand in Panama. We would only know this if you had access to the developers financial information.
3. Going over budget could be a strong possability, usually a developer will look for a mezzanie loan to cover these extra cost but good luck in find any bank that would lend money for property in todays current market.
4.When a bank agrees to lend and finance they dont normally give all the money in one lump sum. They agree to lend but only release a drawdown as agreed with the developer. So they would not have spent all the money. Can a bank stop issuing funds? Yes they can but in most cases it is the developer who cannot get to the next agreed level for the next draw down that stops the flow of money to the project.
5. I dont really have an answer for this point. I good builder will traet each project as a seperate project with its own team and its own budget. The bank lending the money will also be looking at how the developer will handle themselves. This type of problem normally occurs as a issue for the first tower to be started not the last. As the developer over reaches themselves and the first tower suffers.
6. Stalling by a developer could be a case for delay but considering the developer will still have to make monthly payments to the bank waiting for better times will not cure the problems they have. It would take a strong developer with deep pockets to use that tactic.
No matter what people tell you, all developers will have borrowed from a bank to build a tower. There will be a cost for borrowing and the amount required will be paid to the developer in drawn downs. If the bank that is lending the money has a issue i.e. Standford bank or Lehman bros. The developer has a huge problem as they will have to find anther bank to lend them money.
I dont care how big a developer they are banks are not lending money. So the project will grind to a halt.
You might also have developers who are behind in the payments to the bank. They have to cut costs so they can make payments so they reduce the work force so they can make payments to the lender.
This will be a telling time for developers in Panama.
I know of a Tower in Orlando called West 55 that has foreclosed 3 time already and its not even completed yet. Each time was due to the new owner not being able to make to payments back to the lender.
We little or no pre construction buyers around who knows what the future will be for the Towers.
Alex, I appreciate your optimism and concur on several of your points. Indeed, a few intrepid friends of mine in the real estate industry are still making a living selling City condos, albeit not nearly at the pace of 2 years ago. I’m still fairly positive on Panama’s tourism and real estate potential, especially given the strong start of the new administration, but the glut of $300k+ condos has me scratching my head and wondering where on earth they’ll ever find the buyers. I think the country and the business/political powers that be need a serious reality check. It’s time to roll up the sleeves and get competitive. The money ain’t flowing like it used to be!
So in other words, don’t invest in Panama? Or are there other places besides Panama City that might be considered?
The season of the fat cows in Panama City real estate is now over and the sooner we all come to terms with it the better. Enters the season of the skinny cows and soon the season of no cows.
Since there is always another way to skin this Panamanian real estate investing cat, there are some places in Panama’s interior (well documented and researched I may add) that still show all the markings of a sound, solid real estate investment. Very few though and probably a couple of years away.
Having said that, let’s not forget that the Panamanian real estate ( at least in the interior )has been very speculative and so far has mostly consisted of mindless land-garbing that also is coming to a stop due to the global financial drought.
To cut a long story short, the only way I would invest in Panamanian property right now would be if I was a Venezuelan trying to get my money out of Dodge before Mr. C. gets his hands on it.
Rob, I am not advising against investing in Panama City, or anywhere else in Panama…BUT I would NOT advise in over paying nor purchasing ANY pre-construction condos in Panama City. There are just too many ways to lose, which I chronicled in a post over 2 years ago.
I think it’s vital to understand the potential resale value of the property by reviewing REAL sale prices (not asking prices) as well as rental potential. If you think long-term, there’s money to be made for sure if you purchase at a good price. The short-term speculators are the ones getting pinched.
I lived in Panama City back in 2001. Wasn’t so bad then, but when my lease was up, my (now ex) wife and I up and split for La Chorrera. Bit of a commute, but I saved nearly $400 on rent!
thanks for the post and thank you to those with the comments and questions. i appreciate a good question as much as a good answer.
it should be emphasized that the present City context is still one in which some 100 buildings have NOT been delivered yet.
the City real estate scene seems to be lagging other comparable cities such as Miami, Orlando, Las Vegas, etc., primarily because these buildings have not been delivered. i say “lagging” because the City market reminds me of how things were in Florida around 2006 or 2007, after Florida’s boom had subsided but before disaster had struck.
when those 100 buildings are finished, i believe that we’ll all be asking ourselves questions other than “is this a good time to invest?” or “did i do well buying that $500,000 condo for only $300,000?”
instead, we might be asking about how a condo association in a building with 200 units is going to maintain a pool, garden, elevators, a generator, a lobby, etc., when only 50 (or less) owners are living there and regularly paying their dues. i’ve seen occupancy ratios like this in florida.
no one is really talking about worst-case scenarios. to me, that means that it’s more than just the developers that are living in denial.
it seems that the banks in Panama probably see the writing on the wall better than anyone else.
gregorio, el gringo