Chill out, sit back and light a cigar in Panama

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Is Panama worth looking at again?Panama is a country which has attracted major attention from international property investors over the last few years. There has been a sea change in the economy, international investors are more positive than ever before and domestic business and property markets have shown significant growth. However, there is some debate as to whether the market is ripe for a fall in light of the ongoing economic downturn around the world and the repatriation of substantial investment funds by property investors.

A general consensus in the market is very difficult with many believing that the property market would benefit from an “adjustment” in light of the downturn in the worldwide property market. However, there is also a feeling that substantial rental yields will offer a large degree of support to various areas of the market – a market which in many cases is polarised. So what are the arguments for and against a fallback in the sector?

Is a reduction in property prices healthy?

Even though in general terms we have seen a 30% reduction in Panamanian property prices over the last 12 months many people believe there is still significant downside in the short to medium term. The vast majority of predevelopment contracts which were signed in the run-up to the worldwide economic downturn are only now coming into play and there are concerns that agreed prices were inflated against today’s market.

There is also a feeling that these prearranged contracts will only store up further problems for the Panamanian market further down the line and could exacerbate a potential property market correction. In many ways the market can be compared to Dubai where international investors swamped the domestic market forcing prices higher and higher which brought more and more property developers into the market.

Do we have a two tier property market in Panama?

Even though there has been a significant fall in general property market prices in Panama it is not widely known that the vast majority of properties in the higher echelons of the market are owned and controlled by a relatively small number of people who are both wealthy and have significant contacts with the political regime in the country. Many people believe that the $1 million and above properties will show very little change in price as the ultra-rich investors behind this area of the market have not been affected significantly by the worldwide economic downturn.

While the same cannot be said in the smaller property end of the market there is a feeling that rental yields approaching 11% in some instances should offer more than enough support to see investors through these difficult times.

Can rental yields really support your property investment?

In general terms any investment is valued on the income stream which it can or could create for the owner. If you were offered an investment with a yield of up to 11% (with 9% fairly easily achievable at the moment) in simple terms you should be able to pay off the cost of your investment in under 10 years (although this is a fairly simple calculation which does not take into account running costs etc). So in theory if you acquire a property yielding 11% and were a long-term investor you could have your money returned by rent alone within 10 years and effectively have a property at “zero cost”.

Whether yields will increase in the short to medium term remains to be seen but a steady yield of between 9% and 11% is something fairly uncommon in any investment market. There will of course be investment risk, currency risk and various costs which need to be taken into account, but in theory there is potential to build up a solid portfolio which should offer interesting long-term returns.

Panamanian economy

Up until the last few years the Panama Canal has been at the forefront of the Panamanian economy (and still is today) although the government has made great strides in areas of finance and tourism in particular, not mention the property market. Even though these areas of the economy have suffered from international volatility over the last 12 months many believe there is a firm base for significant growth in the future, which should see interest return to the domestic property market.

Changing the basis and future direction of an economy also involves significant infrastructure investment which has begun to flow in Panama. While the authorities acknowledge there is still much work to be done it is worth remembering that they have made significant progress in a very short space of time. The Panamanian property market is also fairly immature after becoming something of a hotspot due to the increased international presence of Panama and the offshore haven element which has always been associated with the country.

Local finance

As with any financial market around the world, mortgage liquidity and loan liquidity in places such as Panama has suffered due to the general worldwide downturn. We could see a number of top developers feel the squeeze in the short term and attempt to sell off assets at “distressed” prices, although in some ways this could attract the attention of “bottom fishers” looking to acquire properties at “rock bottom” prices. There is money in the Panamanian economy and there is money for investment from both local and domestic property investors as and when the time and place is right.

Even though there may be concerns in the background that the country could fall into old ways, such as sky-high inflation and a runaway economy, the ongoing economic downturn should in many ways dampen this possible trend.

Conclusion

Panama has a polarised property market where the mega-rich have remained relatively untouched and seen little fall in the value of their property assets or their personal wealth. At the lower end of the spectrum we have seen yields pushed-up towards 11% which should offer a large degree of stability and a backbone to those looking for long-term property investments.

Even though there is still the risk that the Panamanian economy could be turning to old ways this would seem highly unlikely given backing from the US and other major countries around the world, the deluge of property market investors, new international business partners and an economy which is expanding away from just the Panamanian Canal. All in all it may not be easy, prices will move up and down but in the long-term those looking beyond the next five years could well be able to sit back and enjoy a famous Panama cigar!

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