Panama’s middle and lower class housing market continues to show strong signs of growth, while the 250k and up segments are flat and in some cases trending negatively. Luxury property sales (surprisingly) have picked up during the first 4 months of 2017.
Here’s what we know:
The World Bank reports 5% GDP growth in the first quarter of 2017 driven by government-led infrastructure projects and recovery in the logistics industry. Ask most business owners however, and they’ll tell you business is DOWN, mostly because of a slumping tourism market.
New job creation and the unemployment rate are trending positively, as are Panama Canal Traffic tolls and the Free Trade Zone movement, meaning the market may have hit bottom sometime last year. New tourism campaigns to bring US and European tourists should start to bear fruit in the next few months, so keep an eye on hotel vacancy rates, which are currently hovering around 50%, their lowest figure EVER.
For the first quarter of 2017, the pre-construction market (residential projects that are either about to start or currently in construction) averaged 1,300 unit sales per month, with roughly 65% of those sales occurring in the sub 120k market.
The luxury sector ($600,000 and up) has shown a slight uptick compared to the same period last year. In terms of units sold, the luxury sector boasted 50 units per month for the first quarter of 2017 vs 29 during the same period last year; a 29% increase. Will that trend hold? Hard to say at this point. Keep an eye on Venezuela, European politics, and tax and trade policies in the US.
Luxury property sales were concentrated in two main areas of Panama City: Santa Maria and Costa del Este, two districts which have seen nearly a dozen projects starting in the last 12 months. According to developers, most of the purchases were from young, wealthy Panamanian families, many of whom are first time home buyers. Buyers from Venezuela, Mexico and Colombia have also started to get back in the market.
In the $180,000 – $400,000 price point, developers have been attempting to pass on higher construction costs to buyers and have been only mildly successful, as noted by research firm Galeria Inmobiliaria which reported sales down by nearly 50% year over year.
Supply in the 180k – 400k segment is up by nearly 31% with a total of 8,259 units either planned or in construction, putting pressure on prices on future delivery, assuming demand remains stable.
Conservative lending policies coupled with rising interest rates have slowed down purchases in the upper-middle and upper price points, as evidenced by the above. And while the average interest rate for a Panamanian looking to purchase a property is still below 5%, banks are decreasing their loan to value rates and increasing the rates they charge to foreign investors by as much as 50%
The tourism sector is directly to blame for the slowdown in the 180k – 400k price points, considering foreigners usually comprise most of the demand for properties priced in this range. Everyone is hoping the $40 million injection for advertising campaigns directed at travelers from the US and Europe will have a direct impact on pre-construction sales and property valuations and time will tell.
Panama’s Resale Market: Property Sales and Rentals
Rental properties under $1,200/month continue to be the most sought after price point in the city and usually rent within 1 week of going on the market. We expect this segment to grow over time as immigration trends continue and assuming the Panamanian economy stays on track. As vacancy numbers approach zero, rents should see an increase, which will push property valuations higher.
Properties between $1,200/month – $1,800 per month have seen some pressure from inexpensive hotel rooms, which have driven one-time corporate renters of apartments to opt for the more flexible and competitive rates of hotels for incoming executives and staff.
On the luxury side, well-furnished and maintained properties between $2,500 – $5,000 have seen increased rental activity, mostly from mid- and upper-level corporate clients on assignment on 1-3 year terms.
New corporate registration is up by 12%, according to a recent report in La Prensa, which may mean that new companies with expansion plans for Panama could end up absorbing some of the excess inventory in the rental market. Major projects like Metro Line 3, the Amador Cruise Ship terminal, and the new Bridge over the Panama Canal also bring in engineers with healthy rental budgets.
The Trump Ocean Club has seen a 30-40% rental rate reduction in the last 24 months, due mainly to oversupply and competition amongst owners particularly on two and three bedroom units. Slow rentals and increasing fees have driven down resale values so keep an eye on that building for motivated sellers.
Overall, existing property sales in the city center have seen a slight uptick in transaction volume but not enough to affect asking prices, which are similar to last year.
Trends to Follow
In addition to rising interest rates and increasingly conservative bank lending policies, keep an eye on inflation in Panama. As prices level off (after their historic run up over the last 5 years) and construction wages hold steady (after a nearly 50% increase in the last 36 months), developers may be able to start slowly increasing their prices again.
External factors such as European uncertainty, changes in the US housing and securities markets, and political instability in Asia may bring more immigration to a safe, stable, and fiscally sound country such as Panama. Asia in particular is a very interesting market to watch because Panama is still mostly off their radar. Perhaps not for long…
With the election of a new, left-leaning president in Korea, look for taxes to rise and some market-cooling policies to be enacted, which may drive Korean investors to look overseas at dollar-based countries such as Panama. In addition, mainland Chinese companies have started to establish a presence in Panama on the heels of multinationals such as Huawei and China Construction America doing well.
The natural cycle of currency revaluations may bring back Brazilian, Colombian, and Canadian buyers, many of whom have been sitting on the sidelines because of a historically strong dollar. In addition, ongoing city improvements like new sidewalks, improved trash collection, buried cables, and expanded green areas will add to the overall attractiveness of the downtown core.
Panama’s fiscal health in terms of debt-to-GDP will allow it to continue investing in infrastructure projects such as the expansion of the Metro, new ports, energy projects, and social and educational initiatives, keeping unemployment low and supporting new home ownership.
Here’s a final gamechanger: The Mayor of Panama has just proposed a reduction of the property tax by 50%, due to be voted on later this year. That, combined with a potential lifting of the preferential interest rate price point (currently at $120,000) to $150,000 could open up Panama’s real estate market for another run.
Overall, Panama is in pretty good shape considering the last 2 years of scandals and damaging headlines. Banks have healthy balance sheets and continue to support the construction and retail lending side of housing. Local and foreign builders continue to show confidence in the form of new construction project starts, and a dollar-based economy generally lends confidence to institutional and private investment.
In the grand scheme of things, Panama has shown to be a pretty resilient economy, but at this point, no news is good news. 😊