With every crisis, comes opportunity. True to form, new investment property sectors are starting to emerge in Panama. This is as a result of the health and economic woes brought on by COVID-19.
One thing is for sure: Panama’s luxury market is in trouble. Even at pre-COVID levels, the high-end condo market was showing signs of excess supply. Now, the 12-24 month prospects for corporate relocations are still very uncertain. As a result, rental prices on luxury apartments are continuing to slide. This has caused investors to start looking elsewhere.
At the same time, an old and often overlooked sector has started to gain attention from investors. Apartment Buildings. Specifically middle-class, high-density rental properties. In particular, older, city-center, mid-rise buildings with an average rental price of $650 per month.
The supply of single-owner apartment buildings for sale in Panama has always been limited. And demand is also limited in that very few banks will lend against multifamily assets, meaning it’s a niche market.
But being in that niche right now may be one of the best places to be in Panama.
Economic Woes Creating a New Market
Renters in Panama are seeking lower-priced housing solutions. This means changing neighborhoods, sacrificing amenities, and doing whatever it takes to reduce expenses.
Tenant preferences are shifting away from features like views, proximity to schools, and upscale neighborhoods.
The new focus is on access to mass transit, low prices per square meter, and flexible building administrations.
Also, many independent professionals are transitioning to a permanent work-from-home situation.
These trends bode well for older properties which tend to be both larger and less expensive.
For this reason, property sales and rentals in the multi-family sector are up by 25% compared to January 2020.
Building Owners May Need To Get Out
Owners of these types of properties are starting to see their share of issues as a result of the pandemic as once healthy rent-rolls are now taking a battering during Panama’s 6-month quarantine.
Many tenants in the restaurant industry for example and most major hotels have been closed since the COVID-19 pandemic started. As a result, they have decided to either fire or furlough nearly all their workers. Plus, the government enacted moratorium on evictions, hasn’t helped landlord’s situations.
In short, cash flow challenges have created a few distressed sale scenarios. Business owners in the Colon Free Trade Zone, retail, and hospitality industries have been particularly hard hit.
The Multifamily Market: Valuation and Operational Costs
Properties in Panama are appraised based on rental income, replacement cost, and comparative market pricing.
Financing for multifamily properties in Panama is available to buyers who have a 5+ year commercial history in Panama. Interest rates at the time of publication are 6.5% + a 1% surcharge for investment properties, for a total of 7.5%. The typical loan to value ratio for lending against a multifamily asset in Panama is generally 60% of the purchase price.
Fixed and variable costs for managing a multifamily residential property in Panama are between 20-30% of the gross monthly income.
As far as costs, utilities are generally covered by the building owner. Utilities include gas, water, and electricity with the exception of the electricity consumed within the apartment. Electricity costs in Panama are currently $0.18/KwH.
Costs can vary depending on amenities such as swimming pools and meeting areas. Elevators, temperature control systems, and exterior illumination also affect energy costs.
Depending on these factors, a good rule of thumb for estimating electricity costs is $0.15/m2 of construction. In this example, a 3,000m2 building with an average of 24 total apartments would have a monthly power bill of approximately $450. This is assuming the building has no amenities and only one elevator.
Water and trash pickup are a combined expense in Panama. These costs can vary depending on the building location. A general rule of thumb is this cost will run between USD 25-35 per apartment per month. In the case of the example building above, your combined water and trash expense will be between $600 – $840 per month.
Natural gas is an additional cost of ownership and in Panama gas is used for heating water and powering appliances. Some older buildings do not have the internal piping to support natural gas, so this becomes a cost for the tenant. Natural gas costs generally run between $10-$20/unit. Depending on how many tenants have large appliances.
Additional fixed costs include monthly fumigation, elevator repair, and pool and grounds maintenance.
Property Management in Panama
The typical property management fee in Panama is 10% of the gross monthly rent collection.
Property managers are responsible for managing all the works on site. This includes building maintenance, apartment renovations, and tenant change-overs.
Property management responsibilities also cover tenant placement, rent collection, and general accounting services. This includes paying taxes and any other fees related to the structure of ownership.
Most property managers in Panama are located onsite.
Property taxes in Panama are based on the registered value of the property. This registered value includes a “land” component and an “improvement” component. Improvements are generally exonerated for the first 20 years after construction. Property taxes are based on a schedule and are only updated when the property is sold.
The Panama Rental Property Market in 2020
Since the COVID-19 crisis began, interest in mid to low priced apartments for rent in Panama has seen a resurgence.
Tenants are looking to save money and live closer to public transportation. Plus many are starting to work from home. Multifamily properties are well-positioned to meet this new demand.
Despite increasing demand, many owners are trying to strike a balance between vacating tenants and recouping missed rent payments. This has proven difficult as the government mandate prohibiting evictions has been widely misinterpreted by tenants as permission to forego paying the rent.
To relieve some of the pressure, banks in Panama have enacted a moratorium on late-payment penalties. The moratorium is scheduled to continue thru December 31st, 2020.
Agile property managers are accommodating for reduced rental income in many ways. Some have resorted to the barter system, whereby qualified tenants trade service in place of payment. For example, a tenant can clean the property or do routine maintenance in exchange for a reduction in rent.
Property managers have also begun to focus their marketing efforts on tenants in certain industries. These include healthcare, public sector employees, as well as independent professionals. Tenants in banking, wholesale supply, and delivery services are also in a good position to meet rent obligations.
An Emerging Sector for Investors
Historically, apartment complexes targeting middle and lower-income tenants have been popular with local investors. The recent economic downturn is making these types of assets more attractive to foreign investors.
Despite Panama’s recent spike in unemployment, there are still many fully employed renters looking to downsize. With the financial pressures that current apartment-complex owners are facing combined with new demand from cost-cutting tenants, there is now an attractive scenario for investors looking to buy cash-producing assets at historically low prices.
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