The Economist Magazine askes.. Panama, Property boom or frenzy?

Here is an article just published this morning on the Economist.com website from the Economist intelligence unit about the property development boom in Panama. They site our Prima Tower study along with comments by developers and promoters. Looks like they share our concerns about the market. The site was down earlier today but you can read it here.

Panama industry: Property boom or frenzy?
October 25th 2006   

COUNTRY BRIEFING
FROM THE ECONOMIST INTELLIGENCE UNIT

Panama's real-estate market is in the midst of an unprecedented explosion. A
combination of easy credit, foreign demographic trends and, most
importantly, quite a bit of speculative momentum appears to be behind the
surge in investments in the luxury residential market. The intense level of
enthusiasm is raising questions about the sustainability of demand, the
likely strain on infrastructure, and the potential risks to some investors
and end users should the market suddenly burst.

Just when concerns are increasing in the US about the stalled housing
market, Panama's boom appears nowhere near to ending. The country boasts a
host of expensive new high-rise apartment and resort complexes that are in
the planning stage or already under construction. These are being
spearheaded by local and foreign capital, including US and European
companies and investors such as Donald Trump, one of the US's biggest names
in property development. While luxury tourist resorts are being built in
some coastal areas, much of the activity is concentrated in the capital,
Panama City.

Central America's boom town

Panama is not the only Central American country drawing the attention of
foreigner property buyers. Mexico and Costa Rica, even Honduras and
Nicaragua, are seeing influxes of capital, especially that of US "baby
boomers" looking for affordable retirement homes. But the activity in Panama
dwarfs, both in quantity and physical size, that in neighbouring countries.

A study by Prima Panama, a local real estate marketing and promotion
company, identified some 107 building projects under construction in 15
neighbourhoods in Panama City as of July, with a total of 10,980 apartments.
The total value of these projects is estimated at US$3.17bn*equivalent to
20% of Panama's overall annual GDP in 2005. These projects will be completed
and come to market within the next four-to-five years, starting the fourth
quarter of 2006 through to 2010.

Even if all of them do not come to fruition, this would constitute an
enormous spending and construction splurge. Furthermore, since the Prima
study was completed in July some 15 more projects have been announced, with
an additional 7,000-10,000 units.

Among the largest projects in progress are the following.

* Grupo Olloqui, a Spanish group, is building Palacio de la Bahia on the Bay
of Panama. With a planned 97 floors to be completed in 2009, it aims to be
tallest skyscraper in Latin America. The construction budget is said to be
around US$220m.

* A rival project to that of Grupo Olloqui for the title of highest building
is a planned 104-story residential and hotel building, Ice Tower, being
built in the Costa del Este area and slated to be completed in 2010. The
building is being developed by F&F Properties, a Panamanian firm.

* Donald Trump is spearheading Trump Ocean Club International Tower and
Hotel. It will have 62 floors containing 800 luxury apartments and hotel
rooms, estimated to cost US$220m to build. It will also host a casino, yacht
club and private beach. Completion is slated for 2009.

* Grupo Mall, another Spanish group, in early October laid the first brick
of Los Faros de Panamá, a complex of three towers to include a hotel,
commercial mall, 1,716 apartments and 4,000 garage spaces. The investment
will reach US$600m. The project is set for completion in 2009.

Beachfront developments outside of Panama City are also under way or in the
initial stages. The K Group, Mr Trump's local partner, is building the
Coronado Country Club Resort (Pacific coast), an important resort consisting
of 300 apartments and houses. US and European hotel developers are looking
at places like Azuero Peninsula, Isla Viveros and Isla del Rey in the Pearl
Islands, and Montañas de Caldera near Boquete, as well as the Caribbean
coast site of Bocas del Torro. A particularly high-end project, Vistamar
Resort, is being built near Coronado, and will be the largest project in the
beach areas.

Moving south

Expected buyers include local purchasers, encouraged by low interest rates
and excess liquidity in the banking system. However, it is the foreign
market that is driving the bonanza: expatriates living and working in
Panama; second-home buyers from abroad; and US citizens of the "baby boom"
generation looking to retire in Central America. In addition, foreign
real-estate investors are adding Panamanian assets to their long-term
investment portfolios. Some buyers, especially wealthy citizens or
businessmen from other Latin American countries, now see Panama as an
alternative to Miami as an offshore base of operations or site for vacation
homes.

Whether the pace of growth is being fuelled more by speculation than by
authentic demand is a key question. The Prima study looked at immigration
trends from the US and residency visas issued to foreigners by Panama's
government as a proxy for end-user demand. Its findings suggest that the
level of immigration might be insufficient to justify the building of so
many luxury apartment complexes targeting foreign purchasers, and that the
perception of foreign demand could be overly optimistic.

However, others say that this underestimates local Panamanian demand for
property and the importance of foreign, but non-resident buyers. Indeed,
apartments in one large development in the Costa del Este area have been
purchased mostly by locals.

Demand for property could get an added boost from the results of the October
22nd nationwide referendum, in which Panamanians voted overwhelmingly to
approve the government's US$5.25bn plan to expand and modernise the
92-year-old Panama Canal. The construction period for the canal project is
estimated to last through 2014, and could entail creation of tens of
thousands of jobs. This will boost the economy and housing demand, and also
raise the country's international profile, further fuelling the property
bonanza.

Too much, too quickly?

Still, there are concerns that the building activity is too much for
Panama's market to absorb, particularly as property values are rapidly
rising. The activity is even larger than recent property development in
Miami metro area, which is a wealthier and internationally oriented city and
business centre for Latin America. The nearly 11,000 apartments that will
come to market in Panama City over the next five years (and that figure
could be much higher given the latest project announcements) is nearly the
same number that was built in the city of Miami during the past 10 years.
With so much inventory becoming available, price levels, currently being
driven up by speculation, could be vulnerable to a plunge if the perceived
demand does not materialise.

The pace of growth in the residential market also generates challenges for
Panama's government. The first is to improve infrastructure to meet the
needs of a major increase in high-rise buildings. The roads and public
transport system are lacking, and traffic in Panama City is already a major
problem. Water, sewage and other services will also be put under strain once
the many planned residences are up and fully occupied.

Further, critics say that the quality of construction, and the impact on the
surrounding areas, will be compromised by poor enforcement of environmental
and public-safety regulations. Finally, a slow bureaucracy and legal
insecurity could plague any future legal disputes that could emerge from the
building and buying frenzy.

Many of these problems will be even worse in smaller coastal and island
communities, where local regulatory enforcement is more lacking, and where
the nature of many of the communities is being changed by the inflows of
money and foreigners.

We're worth it

Promoters of the new real estate developments argue otherwise. They say that
Panama's robust economy, stable government, relative lack of crime,
affordable cost of living and an attractive lifestyle justify the investment
boom. They also say the government has plans to work together with private
investors to provide upgraded infrastructure. They cite the new Centenario
Bridge, expansion of Corredor Sur (Panama City's freeway) and the purchase
of more buses to augment the public transport system. They also mention
plans to upgrade waste disposal and pollution control.

However, there is no real evidence that the government is working
comprehensively and in concert with builders. And whether the government
will be able to pay attention to, or have the funds available to improve,
public infrastructure while it focuses its energies on the huge Panama Canal
project is subject to doubt.

In the end, Panama's hot property sector could one day go the way of other
similarly frothy markets*such as Singapore, Dubai and Hong Kong*whose real
estate markets were magnets for speculative capital and underwent subsequent
volatility, even crisis. Risks for builders and creditors in Panama could be
minimal, as a large number of the new units are being successfully pre-sold
in the pre-construction phase. Those investors and end-users who get into
the game fairly early will also gain. There is a risk, however, that those
who come in later could find themselves in an overrated and expensive
market, and eventually, with collapsed asset values.

Source: Viewswire
The Economist Intelligence Unit

Anna Szterenfeld
Latin America Editor
The Economist Intelligence Unit
111 W 57th Street
N.Y., N.Y.  10019

Phone: (212) 554-0608
Fax: (212) 586-2645
email: annaszterenfeld@eiu.com