Panama Investor Blog

Occupancy permits issued? Time to Pony up.

This article in La Prensa brings up an issue that buyers are now experiencing with new condo buildings  in Panama. When contracts are signed they usually have a clause that calls for the final payment within a certain time of issuance of the occupancy permit. As the article points out, city engineers will give occupancy permits when the building has met criteria that don't necessarily allow you to live in the building. In most countries, occupancy means just that, electric, elevators, water, and for the most part construction over.

Like most matters of this kind in Panama, buyers learn the hard way that the short sighted developers want to get paid ASAP to pay off their loans and will enforce a contract on a partially complete building.  in order to do it. Unfortunately, many of the developers have not been developers before the boom began so their reputations don't matter to them now that the boom is over. But it leaves another black mark on Panama and the fault must be laid on the government and various  engineering organizations that allow this practice.

ANA TERESA BENJAMÍN ANA TERESA BENJAMÍN
abenjamin@prensa.com abenjamin@prensa.com

  The engineer of the municipal district of Panama, Jaime Salas, was surprised, surprised that, almost at the end of his administration, proliferation of complaints from buyers who claim to feel deceived because they received apartments in buildings that are not completed.

  "If we do affects someone by law, we must resort to the appropriate bodies," defends Chambers, who says that in Municipal Engineering occupancy permits are granted with a minimum of 90% of the work is built because the only way to verify the operation of security systems.

"There is no way to verify if the security there is no electricity, power companies and energy connected only if there is an occupancy permit," Salas details.

  That is what the resolution of the AN-411 Authority of Public Services, on "delivery system".

  Chambers said that the 10% end up in the works are usually completed in social areas: repellos or ceilings, for example.

  But what it does not say is that works without electricity since the beginning of construction, a temporary facility with which you can verify security systems, says the architect Mario Montenegro.

  The architect also acknowledged that the granting of the permit with 90% of the finished work is more a practical than a law.

  "What we're doing is an arbitrary Engineering," says a buyer who moved into his apartment in September 2008 in a building permit obtained in July of that year, and who complains that he still lives "in a building with dust and construction trucks. The buyer asked the subject to its name because the developer is now going to finish the social areas.

  Why does this happen? As explained in Montenegro, "the developer needs to occupy the apartment to begin repaying the loan to the bank construction [and pay less interest], and the consumer has trouble moving. . In the end the consumer is harmed because it affects you then go to have accepted the apartment in an unfinished building. "

  For the director of Consumer Protection, Elias Elias, the solution to this dilemma is simple: "There is a provision requiring the consumer to accept a property under conditions other than those agreed, if this happens, you should not accept and should exercise legal action. "

Tower construction stops on Ave Balboa

Nothing really new here other than the fact that the local press is discovering what most of us already knew. Buildings that have not started probably won't.

La Prensa

While prices have not dropped, the pace of construction on lots on Avenida Balboa has slowed considerably.

At the height of the country's construction boom, the street was supposed to be home to six of the region's tallest buildings. But those plans appear to be on hold for the time being.

The site of the proposed “El Palacio de la Bahía” project, which was supposed to be the tallest building in the region when completed, is currently being used to store equipment being used in the Coastal Belt project.

No date for the start of the project has been announced.

Valle Escondido breaks new ground again

Posted by Paul McBride - paul@primapanama.com

One thing that Sam has consistently done during the years that he's written this blog is to keep the promotion of his own personal business and investments to a minimum.

However, there are some developments that have occurred in his project here in Boquete, Valle Escondido,that reinforce the message that he's been trying to send to his readers over the past year.  I think these new developments deserve some attention.

There's no secret that Sam feels that the global financial system is undergoing some fundamental and systemic changes.  Many of these changes will affect the way we live in the future.  Sam has been very clear that each of us has a responsibility to provide for ourselves and our families and it is will be increasingly foolish to believe that the government (any government) has our best interests in mind.

When Sam first created Valle Escondido, it was his goal to create a community built to first world standards, set in a beautiful environment and blessed with one of the world's finest climates.  But more than that, he set out to create a community that was self sufficient, one that wouldn't need to depend on anyone or anything outside of the project to provide the basic necessities of life.

Today, he has accomplished many of his goals.  From the start, Valle Escondido has been an innovator in residential developments in Panama incorporating such things as the country's first underground electrical utilities, state of the art security system, Internet based residential billing system, an extensive water treatment system and many more amenities.  Residents in Valle Escondido enjoy the benefits that most people living elsewhere take for granted but are not usual or customary in this country.

But Sam was not content with that.  Sam wanted to create not just the best development in Panama but the best and most attractive community in Latin America.

To that end, a state of the art hydro-electric system is now being installed here in Valle Escondido.  When complete, this system will provide enough electricity to power the entire project, including the resort, and have enough spare capacity to sell power back to the local utility.  Not only will this be a "green" alternative to standard electricity generation but it will give residents of Valle Escondido the assurance of uninterrupted power well into the future.

Soon, residents will be "off the grid" and will enjoy an uninterrupted and pollution free source of renewable energy.

We are also experimenting with organic gardening.  Boquete is known throughout Panama as having some of the richest soils in the country, so we thought we'd try our hand at producing vegetables for the restaurant.

Although not designed to feed the whole community, this garden will be the first of several planned cultivated areas in the community that will eventually offer fresh produce for our residents.

This year also marks an expansion of our current water system and we ultimately plan to produce as much as 200,000 gallons of potable water for our residents each day.

So, as you can see, Sam doesn't just preach preparedness, he practices it every day here in Valle Escondido.

Construction companies liable for collateral damage

Based on an article in today's La Prensa, the public may be protected from damages inflicted by construction companies. A number of private residences have been damaged by falling debris in the last few years.  With no laws to protect them they had little or no recourse except to file a law suite. In Panama, that is expensive and takes years. With the high probability of corruption you would probably lose the case in the end. Here is a move in the right direction.

Excerpt: Construction companies that disrupt residences or businesses may face fines of between $10,000 and $500,000, and will have to compensate those entities for any damage that they cause.

Lisandro Arias, the director of the Metropolitan Environmental Authority, said the new regulations will be one of the most important sections of the rules of environmental quality that will be submitted to the Executive Cabinet for approval this week.

According to Arias, the current laws do not provide any protection for third parties that experience damage caused by companies working on projects.

“These rules are expected to make the companies implement safety measures to protect the environment and the people around their projects,” Arias said.

The document was drafted by Integrated Technical Services, an engineering firm specializing in occupational health and safety issues. It was developed with input from various groups, including the National Council of Private Enterprises and the Panamanian Chamber of Construction.

The government has received numerous complaints from people living near construction sites, especially in Panama City. In San Francisco, for example, several residents have complained about damage from falling debris from high rises being constructed in the area.

Trouble for Trump Ocean Club

As the article points out, the project will get built and those at the most risk are the bond holders. But that having been said, it is obvious that pricing pressure are mounting especially with the problems in the overall condo market in the city. As prices go down there will be a lot of incentive for early buyers to walk away from paying the balance in two years, unless of course you believe that everything will be back to normal by then. Not long ago the name Trump meant a pretty sure thing but how things have changed. This is a very telling tale of woe for Panama.

CHICAGO, Dec 17, 2008 (BUSINESS WIRE) -- Fitch Ratings has downgraded the rating on Newland International Properties, Corp.'s $220 million senior secured notes to 'B+' from 'BB'. The action is a result of the significant deterioration in global real estate markets and an increase in liquidity risks associated with the timely payment of principal and interest on the notes. Newland International Properties, Corp. (Newland) is developing the Trump Ocean Club International Hotel & Tower, a multi-use tower located on the Punta Pacifica Peninsula in Panama City, Panama.

In conjunction with the repricing seen generally in all asset classes, real estate prices have fallen considerably in most global markets. Although to date, Trump Ocean Club (TOC) pricing has remained stable and some sales have continued, price declines within the Panama City submarket or at the project could lead to higher than expected default rates for existing buyers. Units are purchased at TOC utilizing a 30% down-payment scheme with the remaining 70% of the purchase-price due upon the delivery of the unit. To the extent units were purchased as investment properties or as second homes, the incentive to pay the outstanding balance of a purchase agreement could decline if global real estate values continue to be pressured. Noteworthy in this scenario, purchasers would forfeit all down payments to Newland. Price volatility could also curtail expectations of future sales.

The constraints in capital markets are expected to increase the difficulty of securing financing for real estate assets. Generally, real estate demand is affected by a lack of access to mortgage financing for prospective buyers. This risk is exacerbated by the target market of the project, which focuses on foreign buyers that do not intend to make the TOC their primary residence.

Given the downward trend in the real estate industry, a slowdown in sales at the TOC is not unexpected. Between August 2008 and October 2008 TOC experienced a significant decrease in project absorption rates. This sales pace has affected the cash position of Newland and heightened liquidity risks associated with timely payment on the notes. Liquidity on the notes is dependent on collections from future sales and on down-payment collections from previous sales to meet ongoing debt-service requirements.

Although the long-term solvency of the project appears strong (as evidenced by sales equaling approximately 80% of total available units and a construction escrow reserve sized to cover remaining build out costs), short-term liquidity stress could arise when cash on hand is not sufficient to cover timely payment of interest on the notes. Although permitted by the transaction structure, the two most recent interest payments were partially covered with draws from the Debt-Service Reserve Account. To quantify the potential liquidity risks Newland could face throughout the construction phase of this development, Fitch has analyzed the expected cash inflows and outflows of the project for the next six to twelve months.
It is important to note that all cash expected to be needed to complete construction on the TOC is held in a trustee-controlled reserve account and subject to certain transactional covenants. This construction escrow account had $157.8 million in proceeds at Oct. 31, 2008.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Panama condo sales down 80%

Wow! Right after the president brags about the economy in Forbes and local economists have stated that construction is the leader of Panama economic growth, this comes out.  Although this has barley gotten a nod in the local press, it is one of the most important stories of the year. Yes, those who read this blog knew it was going to happen almost two years ago, but what we didn't know is how severe the down turn would be and that the market has already has imploded. By early next year my guess is that most projects that are not fully sold and funded will not get completed.

From La Estralla

Investments in the construction sector were down by 35 percent in September and 78 percent in October compared to last year

The global financial crisis has started to put a premature end to the construction industry boom in Panama, and in 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.

As proof, in the month of September, investments in construction projects were down by 35 percent, compared to September 2007. The sale of projects in the month of October fell 78 percent compared to statistics for October 2007.

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, the lowest monthly figure in the last two years. In housing complexes that cost less than $80,000 the fall was 75 percent.

For 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, 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 $257,286, from $260,500 in September.

Tocumen and Arraijan are currently the most active zones. Beach and mountain projects are the hardest to sell.

Lao’s study suggests the need to clean up the market, as the presale percentage is too high, which could lead to the suspension of some projects.

The 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 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.

PRICES BY THE SQUARE METER

in 2008, average prices for construction square meters in the country increased by 11 percent. As investment in construction decreased for the past two months, prices for housing remained high. According to a study by the 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, 24 de Diciembre 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.

 

Occupancy permits have a deceptive name

This article from La Presna talks about the fact that occupancy permits are sometimes issued before the buildings are actually ready for occupancy and goes on to say it is so buyers can start moving in furniture. There is actually another more important reason for this rushing to get the permit issued. The occupancy permit is the trigger point under most contracts to GET THE FINAL PAYMENT from the buyer. Like many things in Panama, this is another area where things are not so transparent. When there are millions of dollars at stake, finding sympathetic authorities is not a difficulty that can't be overcome.

La Prensa

Having an occupancy permit issued by the Directorate of Municipal Works does not mean that the property is actually ready to be occupied.

In the Destiny building on Avenida Balboa, laborers are working in the lobby and the garage. Neither the floors nor the ceilings are finished. Everywhere there is scaffolding, electrical cables and freshly-poured cement.

Still, the building was issued its occupancy permit last week.

The project's owner, Bay One Development, was able to obtain the permit after receiving favorable inspections from entities such as the fire department, who checked to see if sprinklers, fire extinguishers and alarms were in working order.

Isaac Mizrachi, who chairs Bay One, acknowledged that, despite having an occupancy permit, the property is not currently habitable.

He noted that the permit was sought so that condo owners could begin furnishing their units, including having furniture delivered.

For Mizrachi, applying for an occupancy permit before the building can be occupied is one of the “idiosyncrasies” of the country's construction industry. Jaime Salas, director of Municipal Works and Construction, explained that buildings can be issued permits when they are 85 percent complete.

Price index for construction steel increase 200%

The Office of the Comptroller General published for the first time last week an index of retail prices for the most commonly used building materials.

As a builder in Panama I can attest the huge increases in construction costs we have experienced over the last few years. Homes that used to cost about $40 a square foot to build in 2002 are nearly double that today. In the last year alone we have seen a 200% increase in the cost of 1/2" steel rebar according to this brief article about the new construction price index the government is putting out. A bag of concrete has nearly doubled in the last year as well. The good news is that the price of oil and steel are dropping rapidly on the world market and we may actually see significant decreases in construction costs in the near future.

Construction up 52% over last year.... not really!

Panama continues to surprise the skeptics by recording an ever increasing number of building permits leading to record construction planned for the coming years, or so it would appear from the data provided by the comptrollers office. According to this article in LA Prensa this morning, the value of building permits approved between January and August 2008 amounted to $1.1 billion, 52% more than the $726 million recorded in the same period of 2007. Of that, 82% of the value of the building permits, or $906 million, was located in the city. That was an increase of 54% from the same period in 2007. The article goes on to state "The Panamanian construction boom has shown no signs that it has been slowed by the worldwide financial crisis."

So how can Panama continue to grow while the rest of the world is slowing? Well, you have to understand the sales and construction cycle in order to see through the smoke and mirrors. These $1.1 billion in projects that have gotten their permits over the last 9 months are the ones that have been in pre-sale for the last two years. The building permits are the last thing the developer gets before he starts to build because they cost between 1-2% of the build costs.  He has bought (or contracted to buy)  the land, done the environmental impact studies, received pre-approvals, made the required pre-sales and collected the 10% deposits from the buyers/speculators. The buyers second payment (usually 15%) comes when ground is broken.

Certainly there are a number of projects that received permits in the first half of the year that have started construction and are well underway. They need to be concerned if the buyers will be able to guaranty the final payment when the building is 6 months from completion as called for in their contracts. But the real economic problems in the world did not start affecting Panama until about 3-4 months ago. It will be the permits issued in the later part of the year that will be at greatest risk because those buyers/speculators only had 10% skin in the game.

Under these economic uncertain times, it will be interesting to see how many of those speculators walk away from their 10%. Obviously if enough don't follow through with the second payment the building will be cancelled. The developer cannot know how many will walk until he gets the building permit and starts to dig in the dirt. He can then send out his notice for the second payment.

Projects that are coming to completion in the next 6 months are just notifying the buyers to pony up their letter of credit from the banks that guaranty final payment, usually 70% of the purchase price. I just received a notice on Pacific Village this week. These buyers are much less likely to walk as they have 30% down and probably bought well below $2000 a meter.

The construction cycle can fool you into believe all is well when in fact there may be sever cracks starting to show.

Construction on the rise, yet seems to defy

Construction in the city continues at a frantic pace and it is showing little signs of slowing. Even though the rest of the world is in a funk and the demand for resales of the many condo's bought by speculators are not selling, the developers continue to build. They are cheered on by the heads of the various real estate associations who " see no end in sight to the construction boom in Panama". Seems to defy logic doesn't it?

From La Presna

The value of building permits issued by the government for the first six months of the year amounted to $829.8 million dollars, a 54.5 percent increase over the same period last year, according to a report published by the Contraloría General de la República.

The bulk of projects are concentrated in the district of Panama, with $675 million worth of construction, a 58.1 percent increase from the previous year. Arraiján, the area with the second-highest number of works planned, had the largest increase in the country. Work in that area totaled $44 million, a 161 percent increase from the first half of 2007.

This is a consequence of movement toward outer areas by Panamanians looking to escape high prices for real estate in the city, said Walter Medrano, president of the Cámara Panameña de la Construcción.

Regarding the overall results, Medrano said he hoped that the increase is maintained in the second half of the year.

José Boyd, president of the Asociación de Corredores y Promotores de Bienes Raíces, said he sees no end in sight to the construction boom in Panama.

“What may happen now is that sectors such as commercial real estate will gain more prominence now,” he said.

Boyd estimated that the industry will continue to grow over the next five years, driven by public works and coastal tourism developments within the country.