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Pre-construction Panama making comeback by Kent Davis, Panama Equity

Why Pre-Construction in Panama Is Making A Comeback

By in Blog with 4 Comments

Buying a property pre-construction is once again looking like one of the best ways to participate in Panama’s real estate market.  Buyers are finding it to be one of the most flexible ways to purchase a property before completion because it allows them to lock in today’s price and come up with the balance in 2-3 years. But first some context…

For the 3 years following Panama’s first real estate boom in 2005, early investors made profits buying pre-construction and selling to end-users once the property was complete.  Take an example of purchasing a pre-construction apartment at $200,000 and then reselling three years later for $250,000.  So a $60,000 investment is now $110,000.  The concept of buying pre-construction allowed early buyers to benefit from the entire value of the appreciation with only 30% of the capital outlay.

The pre-construction market then cooled around 2012 due to a tight lending environment for construction finance, global economic pressures, and a local shift from residential construction to office buildings and hotels.  Over the next four years, very few new condos hit the market, creating what is now very interesting timing to consider purchasing “off-plan” again.

The Skyline is starting to see another wave of new developments in Panama, particularly in quickly evolving neighborhoods like El Cangrejo and established waterfront districts such as Balboa Avenue.  Up and coming beaches areas like Gorgona and Chame have also seen several new project announcements in 2015, with construction on those projects starting NOW.

The market in Panama is starting to heat up again, paradoxically just as the rest of the world seems to be slowing down  because of issues like currency volatility, increasing regulation and regional instability pushing more people and more capital our way.

Panama’s economy for the second third consecutive year is predicted to be the best performing economy in all of the Americas in 2016, topping countries like the US, Canada, Mexico, and Brazil.  The real estate market is growing along with it, and all indications point to property prices being HIGHER in 2 years than they are today.

Here are a few reasons buyers are looking at Pre-Construction Condo Projects in Development now more than ever:

For starters, you’ve got built-in appreciation assuming the overall market moves at the very least at the pace of inflation. Most times, the developer (the seller in this case) will “price-in” the upside, meaning since they cannot sell their pre-construction properties at the same price as an existing property, they will offer them at a discount compared to today’s market.

Developers have a specific formula for escalating their sales prices, usually tied to the number of units sold, meaning that as more properties get sold, the next buyers in line will pay a higher price.

Generally, maintenance for the first 5-10 years will be less than a comparable property because things like a/c units, plumbing fixtures and water heaters are all brand new so the expense on repairs is greatly reduced.  Along the same lines, all builders offer guarantees which in some cases run up to 10 years.  This means that structural or interior building faults must be repaired by the builder.

Another major factor to keep in mind is that Panama is still offering tax exoneration on new properties.  While owners will always have to pay land taxes (in most cases less than $500/year), all new construction has a tax exoneration on the actual property of from between 5 and 20 years, depending on the purchase price.

With tax rates running right around 2%, the savings on a $250,000 condo which has a 10-year exoneration is the equivalent of a $50,000 tax savings.

An added benefit on the sale of a property in pre-construction is that conveyance to a new buyer, assuming the construction has not been completed, is simply a sale of the rights to take over the contract, keeping the transaction cost lower by reducing the taxable event to zero.

Given a compelling case for future pricing gains and the overall health of the Panamanian economy, we believe pre-construction could be the best angle to get in to Panama’s real estate market in 2016.

If you are interested, contact us for a complete list of the best developments, neighborhood by neighborhood

About The Author

Kent Davis, founder and Managing Director at Panama Equity real estate, has been widely quoted in publications such as Wall Street Journal, Time Magazine, The Miami Herald and the Financial Times for his unabashed views on the Panama real estate market. Panama Equity is regarded as one of the most active real estate agencies in Panama and Kent’s articles, reports, and market research projects have been syndicated by press agencies including Bloomberg and the Associated Press.   Connect with the Author via: Email | LinkedIn | Facebook | Google+

4 Comments

  1. Rafael Parrella says:

    Thanks Kent. Very interesting POV on Santa María and the historic prices of Av. Balboa!

    Let’s also follow closely the proposed tax hikes  on construction permits, and  also the future on real estate taxation.  

    Premium Units with only 5 years of tax exoneration are starting to go out to the market, and current  tax rates are very high. If those rates don’t change, +600K apartments will face crazy high cost versus their neighbords on 20y tax exempt units. 

  2. RafaelP says:

    Thanks for the article. I just don’t agree with the assumption that prices are going to continue rising in Panamá City (on the type of premium units you recall). 
    My argument is based on the number of buildings being developed (+16 in Costa del Este, +10 in Santa María…). Is there a market to absorb that many units? 
    Rent prices have been declining during the past months; I find hard to project capital gains in 2018-2019 once those building are completed. 
    Another thing to have in mind is that selling the purchase option of an apartment is not easy, many variables to consider: number of units still on the hands of the developer, contract clauses setting reselling restriction, and more. 
    I do believe real estate is still a good business in Panamá, though in a longer horizon than the reflected in the article. 

    • Kent Davis says:

      Rafael, as a longtime subscriber, thank you for taking the time to share your thoughts on the real estate market in Panama. You bring up some excellent points!

      Regarding Costa del Este, as you may recall I mentioned in several posts in 2015 that the market was beginning to soften as more families were putting up their homes for sale and rent in Costa del Este to move in to their newly purchased properties in Santa Maria. That is now a reality and prices have come down significantly in the second half of 2016.

      In addition, you’ve got the same phenomenon in Costa del Este which happened in Balboa Avenue from 2009 – 2010, and that was a bunch of new buildings getting delivered right as the world economy was hitting rock bottom. It’s no secret that the Panamanian economy is off it’s 10% GDP growth kick and business owners and local families who got used to the good times have gotten much more conservative. On Balboa Avenue, we saw a correction of 20% over a 12 month period, with prices rising slightly (but only slightly) over that time.

      Regarding your point on rentals: Agreed, 100%. We’ve been advising our investor clients to watch out for rental rates softening this year due to a number of factors. With the Canal expansion over with, engineers and managers who were on that job have gone home, and we’ve got no big projects starting for the next 6 months. We’re feeling that now.

      Additionally, as we reported to subscribers in our 2016-2017 Luxury Property Report, we’re seeing the top end of the luxury rental market softening for a few reasons. With less multinationals opening up in Panama this year (less than 30 as of Dec 1, 2016), we’re seeing less C-level execs coming in who can afford $3,500+ rentals and more mid-level guys at between $1,000 – $1,500/month rentals.

      And you are absolutely right: depreciating yields can and have had an effect on the resale market.

      Jury is out on Santa Maria, amigo. I personally see it as a matter of local families (mostly Panamanian and Venezuelan) keeping up with the Jonses as they say. But what many (young families) didn’t consider is that they would have a hard time selling their existing homes in places like Costa del Este, where we are seeing some price wars as families risk losing their deposits on their new residences in Valery Point and The Reserve. I don’t think there’s much of a market from European or North American buyers in Santa Maria, with the exception of a few die hard golfers 
      I guess my point of the article was despite the above, Panama has a very bright future and pre-construction sales are still reflecting that perception. I very much believe that areas like El Cangrejo, Balboa Avenue, Parque Lefevre, and perhaps even Costa del Este (which still has a long way to grow), will be more expensive in 3 years than they are today.

      They key when buying pre-construction is to do your homework! Ask the right questions, work with the right developers, buy in the right areas for the right price and never assume that real estate prices will always go up.

      But it’s only one guys opinion, and this guy obviously has a horse in the race. Again, thank you for bringing up these points, they are all valid and you can expect us to be watching these types of trends carefully.

  3. Jeff says:

    I am interested in beach front pre construction.  I like the Coronodo area, particularly being able to walk and or ride a bike to stores, restaurants, etc….   I want to have a beach view and access.   
    I dont mind looking at the pre construction condos in Gorgona, and I would like to know what the plan is to build infrastructure near the condos so things like restaurants and groceries are availalbe locally, instead of driving into Coronodo.

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