Earlier this week I received the following detailed analysis of Panama's real estate situation as a comment to a post. It was so well written that I asked the writer if I could re-post it this week. I believe with her extensive background in real estate and her time spent here in Panama as a first hand observer, her analysis is well worth the time to read.
PANAMA ODIO ET AMO
It's interesting to read all the well written comments on the "great
real estate rip off" occuring now in Panama. We moved to Panamá,
enticed by the promise of a quieter, less expensive life in a tropical
paradise. During the few years we’ve been here, many prices have
tripled and the city has sprouted with literally hundreds of real
estate projects that have poisoned the air and created unsolvable
traffic problems. Now, we find ourselves surrounded by the dense urban
chaos from which we were escaping. Additionally, throughout the
country, the building fever has corrupted and ruined miles of the most
beautiful beaches in the world and raped the mountain sides. The land
is now littered with ill conceived, half completed projects that offer
thousands of units to a handful of buyers.
Soon after our arrival, we purchased a small farm. We resisted
buying in the City. There were too many condo projects already under
construction. The situation reminded us far too closely of the
1980’s-Wilshire Blvd. debacle in Los Angeles where a “down zoning”
ordinance literally coerced the developers to build simultaneously and
immediately. There was no choice. You either build immediately or face
an enormous financial loss. Everyone who owned a lot on Wilshire,
built. The city fathers received millions of dollars in permit fees and
soon thereafter, thirteen gorgeous towers sat for years, unsold and
empty, as a constant reminder of greed and bad planning.
In
Panama, two hundred towers are being built practically at once for a
very similar motive. If you did not build by 2009, the tax exemption
allocated to new luxury construction would drop from 20 years to a mere
5 years. Even taking into account the rise in competition, it still
made sense to come under the 20 year exemption and build, rather than
risk the potential gain. (A sad aside: the present government waited
until April 2008 to extend the 20 year fiscal-grace period. By that
time, everyone had alas started to plan and /or build.)
I
still find it hard to believe that the government has permitted such an
incredible scale of overbuilding. Like in the US, Laissez-faire
policies have resulted in an absence of rules which has caused a series
of economic disasters. In my opinion, lack of regulations should never
be confused with “freedom” for it results in situations that only
benefit the powerful; often a very “short term” benefit. The money in Panama is in the hands of a poorly informed, greedy
minority that has bled the country dry with kickbacks, false promises
and thievery. The economic chaos in the U.S., will furnish the perfect
alibi once the economic storm looming over Panama hits. When the bubble
bursts, they will blame the new government for the mayhem their own
foolish greed has caused. 1. The absence of a Multiple Listing Service and lack of title-information. In the U.S. and many other countries, once a sale is completed and
recorded, the sale amount becomes a matter of record. In Panamá,
instead, sale searches are laborious and difficult. Information can
only be found by spending hours in the “catastro office” where there
are no laws governing disclosure of historically accepted prices. To a
buyer, this type of information is vital. What is one’s unit worth if
the identical unit on the floor above was sold for 60% less? 4. Promises of profits tied to manufactured lease values. The sky is the limit! When times are easy and the lending easier, the public accepts the
word “SOLD” far too easily. The banks do too, until the truth becomes
convenient. A greedy public rushed to buy clusters of units as
investments although it is widely known that the purchase of single
units is rarely profitable. Like in a Ponzi scheme, only the early
buyers make profits. The rest lose, burdened by taxes, condo fees and
VACANCIES. And….what about holding costs? Here in Panama, real estate agents promise you ¨holding gains”. When times are easy and the lending easier, the public accepts the
word “SOLD” far too easily. And the banks do too; until it is
convenient for them to accept unfounded data. Some time ago, when there were only a few competing projects in the
city, we were asked to pay a 30% deposit to the developer in three
payments over a six month period. The project was to be finished two
years later. The price was in the $700,000´s. There was no financing
offered at that time, but we were told not to worry. We could arrange
financing when further payments became due. If however, at the close of
escrow, credit had dried up, we would have had to come up with all cash
and / or accept a loan at whatever the then current interest rate might
be. Moreover, if by close of escrow, the condo value had declined by
say 40%, we would be faced with the grim decision of letting the
Developer keep the 30% deposit OR complete the purchase with cash. When
the housing bubble burst in the US, many buyers happily walked away
from deposits, a small price to pay compared to the loss entailed by
completing the contract. Whatever the future brings, these years will never be forgotten.
In July, Panama will have a new government, and it will no longer be
necessary to keep the truth under wraps. I’ve heard of investment
groups forming to “steal” units when prices crash. Even at slashed
prices, before investing in this country, buyers need to consider a
plethora of caveats such as:
1. The absence of a MLS and the difficulty obtaining accurate title-information.
2. Questionable methods and lack of quality of construction.
3. Absence of professional management
4. False promises of investment profits tied to manufactured lease values.
5. Vanishing financing
The market is not moving, but developers are sporting signs bearing
“xyz % sold”. The term “sold” should legally only be used when an asset
is paid for and title has passed. In Panama “SOLD” means that the
developers have received a deposit on a unit from a Buyer. The Buyer by
the way may or may not execute the purchase. He will lose the deposit
and the unit will be back on the market.
The absence of sale and lease data furnished by a Multiple Listing
Service deprives the public of information and empowers local agents
with the latitude to misrepresent and confuse. That is, in my judgment,
one of the gravest problems in Panamá. In the “value-declining market”
developers do not reduce asking prices but do accept lower offers. An
advertised price reduction would disclose the pressure they are under
and generate even lower offers. It would also generate panic among
those buyers who have 30% in escrow and are due to close at three year
old prices. Should the developers be forced to accept much lower
prices, the new price would effectively reduce the value and the equity
position of those units that were purchased at a much higher price.
Example:
An initial sale in year 2006 -
> Unit 106 Sales price $300,000 with a
50% Loan: Loan - $150,000
Equity: $150,000
> Compare with an equal unit sold at a 32%
price reduction in 2009
Unit 206 Sale Price $200,000 with a
50% loan: Loan - $100,000
Equity - $ 100,000
The recent sale of unit 206 (identical with 201, but one floor higher)
establishes a value for unit 106 of less than $200,000 with the equity
reduced to about $50,000.The buyer therefore, has lost $100,000 equity.
If the loan to value were 80/20, all equity would be lost and the bank
loan would be worth way more than the value of the unit.
2. Methods and quality of construction.
Panama is delightfully exempt of rules. Buildings are still inspected
at the construction stage by inspectors who work for the builder,
totally ignoring the inherent conflict of interest that would develop
if there was ever a problem. In Panama, there are no established
schemata to ensure the solidity and quality of a construction project.
Rules simply do not exist, or if they do they are ignored. The
reputation of the builder is expected to assure the occupant that
foundation, elevation, setbacks, seismic reinforcements, EPR, etc. are
OK. Recently, the government started ¨post facto¨ to discuss a body of
laws that should create construction standards. Let the next government
suffer from the slow-down in construction that the new building code
will create! And, who will verify that the new building standards are
applied?
In the proximity of the sea, it seems that bedrock cannot be found in
most areas without digging as deep as 100mts. This need not pose a
problem for today’s high-rises which can be built on caissons, pylons,
floating foundations etc., but it is this very absence of rules and
regulations that make one shiver. Which of these systems was chosen and
what geological studies were conducted to adopt one foundation system
over another? A small jolt, like the one the City suffered forty years
ago and.......! Also let’s not forget the dangers of a scanty
infrastructure, inadequate sewer systems, dubious electricity sources,
contaminated water, etc. According to a recent article in la Prensa, in
S. Francisco some new high-rise projects are using existing single
family residence 5-inch sewer hookups.
3. Lack of professional management
The scarcity of regulations governing condo Management is also
worrisome. In the past, most owners / occupants knew each other. They
were the elite of the country. Decisions were made “en- famille” and
peer control did not allow for larceny. Now, the mega projects are sold
to hundreds of people who may never meet. If only a fraction of the
units are sold and /or occupied, there is no mechanism in place to
protect the condo occupants from a management controlled by the
Developer. And even worse, if and when the Developer is replaced by a
bank, most of the promises made at the time of sale (staff to be
provided, working elevators, maintenance, reserves, services, etc.)
won’t be fulfilled. The Condo fees of unsold units will not be paid.
As the financial crisis deepens, white collar crime occurs more and more frequently.
A resident of one of the beach high-rises reported that at a large July
get-together an announcement was made that Management had absconded
with two years of condo-reserves. In Panamá there is no white-collar
theft insurance to protect owners from such events.
Do not buy without verifying the reserves. (How much is in hand? In
what bank is it deposited? When necessary, how is the money allocated?
Are the funds insured?) . And when you are given the Condominium
Covenant Conditions and Restrictions to approve, learn at what
percentage level of ownership Residents can govern their own building.
Why should we not believe the promises of a quick Buck? Put a deposit
down; sell the reservation when prices go up; and make a gain 10 times
the original deposit. With a 10% deposit, if the price of the unit
doubles, the buyer is promised a gain 10 times his original investment.
With a 20% deposit, the buyer is promised a gain 5 times the original
investment. Still pretty good. If you cannot find a substitute buyer,
you can go ahead and close cash to a 90% loan.
Rental prices are established at 1% of asking price. ($2,500 a month
for a $250,000 unit). Hence, $30,000 per annum of income will service a
90% loan ($15,000 at current rates, and leave a hefty margin for condo
fees ($250 x 12 months), management fees ($1,800 + or -), etc. There
may even be enough money left to deliver the 30% yearly return the
agent promised. That may also be the reason why there are so many ads
that sport high rents combined with a ¨for sale” offer; anything to
entice people to buy.
To help things along, the Ministerio has edited the body of law that
regulated lessor and tenant relations. It made them “easier to comply
with”. Now, one can rent one´s unit for a day, for a week, for a month.
Hundreds of furnished units are now offered in direct competition with
local hotels, creating a vaster mayhem in a pathetic effort to show the
potential for high rents to the investor and the ease of money making,
Panamanian style. And again, without MLS lease-info, who tells the
buyer that the lease amounts are unobtainable?
4. Vanishing financing
Financing is drying up faster than I can type.
Banks are now requiring that a project be 50% out of escrow before
offering financing. And those banks, who still lend, apply their own
formula to establish value, and do not care what the Buyer has agreed
to pay.
The Future
Some years ago in the U.S. my office successfully specialized in all
aspect of high-rises: sales, financing, design, management and
construction. In the past, I have resisted writing about the overbuilt
situation in Panama for fear of making things worse. Now that the die
is cast, I feel obliged to share my knowledge and my experience with
others. I would like to warn future buyers and help those who have
already invested in new construction, enticed by lies and
exaggerations, to minimize their losses. I also hope that if native
Panamanians read this article they will better understand what has been
done to their country, when, why and by whom.
I find myself intellectually unable to fathom when and how the
absorption of 20 thousand + units will take place. My experience as a
“Real Estate analyst” only covers the years of mayhem caused by less
than a 1000 unsold units. I shudder at the thought of the plethora of
problems that such a condition will unequivocally impart to the city
and to the Panamanian society itself.
The mega high-rise building projects combined with other current
projects such as the widening of the canal, the increase in the road
grid, the re-discussion of the Panama Bay, etc, have given new hope for
continued wealth and employment to hundreds of people and created a new
lower-middle class. This class is made up of workers who were enticed
to leave their meager agricultural situations and come to the capital
to work. Now they have entered the rungs of this lower-middle class,
bought large cars and small houses, bought furniture, entered into
credit situations, and sent their children to better schools. I ask
myself what will happen socially when these hundreds of workers realize
that the party is over. They will be forced to return home, to...what?
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