05 December 2018

Panamanian Real Estate, the Central American Lobster Pot?

When looking around you in Panama City, it is impossible to miss the incredible number of skyscrapers and to miss the cranes and new skyscrapers that are under construction. Panama City ranks as number 21 in world cities with the most skyscrapers over 150 meters in height, with 50 such building, so far.

This is pretty incredible for a country with a population of just over 4 million, and a city with a population, if you include the entire surrounding area, of 1.5 million people, and a national GDP per capita of $22,000. This ranks Panama at number 80 in GDP per capita. Yet this clearly is not the case in the city and country. Average GDP is not $22,000 when wages for most workers range between $400 and $800 per month (with a "13th month" built-in bonus). 41% of the Panamanian workforce has not achieved even a high-school level education, a prerequisite for a growing knowledge working economy that can also sustain a consumer-driven economy.

Multi-year empty CBD office space
Yet there clearly is money sloshing about, or at least there was. Many of those very tall buildings are residential towers, with at least one being 62 floors with a swimming pool on the roof. Yet looking at those towers at night and counting the lighted floors, and it appears that the buildings are 30% - 40% occupied at best. 

The same situation holds true for office and commercial real estate (right), at least at the middle to higher end. A nearby building, with 24 floors of office space, has had at least 9 of those floors empty for the past 18 months or longer. In all probability, those 9 floors have never been occupied. Yet the building continues. The photo at right was taken early in the morning to clearly show the empty floors, with the sun shining through unimpeded by furnishings, partitions or internal walls.

Construction represents just under 20% of the Panama economy, a level that cannot be sustainable over the longer term. Yet that construction boom has continued year after year.

All the way back in 2007, Reuters reported that, even before the full impact of the Global Financial Crisis (GFC), Panama City was on track to bring more apartments onto the market than Miami in the 1995 - 2005 decade; over 11,000 units by the end of 2010. Not all of those units were built, but many were. And while the GFC certainly slowed everything down, building picked up again. Between 2017 and 2019, over 8,500 new apartments are expected to come to market.

Who is buying these units? In a city in which huge numbers of people live on the minimum wage of $2.50 (average) per hour, feeding the family is more important than aspiring to live in a high rise. Even professionals earn is the range of $1200 per month. 

So "average" people are not investing in these apartments and commercial buildings. But someone is.

Google Maps, 2018
Look at Panama's location on the map, sitting between Costa Rica to the west/north and Colombia to the south. Noriega was overthrown, officially, because he decided to participate a little too actively in the drug trade, instead of helping the Americans to stop that trade. Admittedly there is more than a little evidence that he worked with the CIA and others to ensure that drugs reached America. Yet when the Americans decided to remove him, it was not for his rejection of the "School of the Americas" (for training right-wing governments and their security forces in counter-insurgency and "public order"), it was because he refused to stop the drug traffic. The cultural and emotional scars of that invasion remain.

Noriega was a small-fry, and the drugs were going to come from Colombia and Peru no matter who was in power in Panama, and those drugs were going to, and continue to travel north via Panama and Costa Rica and other countries in Central America. And the resulting drug money needs to go somewhere.

We were recently informed of a finca (farm or undeveloped country land) for sale - hundreds of hectares. Literally a few kilometres along each boundary. Who was selling it? "Oh, he's a narco from Colombia" we were told, completely matter of factly. (we were looking for 4 - 5 hectares, not 500+ hectares).

For a narco, like any investor, the choice is pretty simple; do I concentrate my investments in one sector or one country, or do I diversify? Panama, and Panamanian property and construction provides a good diversification opportunity that is not under the control of the Colombian or American governments.

But not all the money parked in Panama is dirty. If you lived in Venezuela in the 1990 and early 2000s, it was a rich country. And there were many rich Venezuelans. There still are, though far fewer. But those that are still rich saw what was coming and moved some of their assets out of the country. Where did that money go? Certainly, much of it arrived in Panama as investments in residential property, and specifically in the new towers that were going up all along the Ave Balboa and overlooking the Pacific Ocean. 

"Clean" money, for the same reason, has flowed in from Colombia, Brazil and Argentina. Panama is a "safe" place to put that money, where it cannot be seen by your home country government (this might change) or by the Americans, who are trusted by no one in Latin America.

The downside for these investors, clean and dirty, is that there needs to be a market into which they can sell the asset, otherwise there is the risk of a "lobster pot" economy. It is easy to get in, but almost impossible to get out. Yet as most investors are looking for somewhere "safe" to park their money, Panama continues to appear to be a good place to park it. The economy continues to grow, albeit at a slower pace at the moment, and investment opportunities in commercial and high-end residential real estate abound.

Yet one day the government of Venezuela will fall and be replaced by a government that actually seeks to grow the economy by encouraging a functioning market economy. When that happens, Venezuelan money parked offshore will attempt to come home. That will mean selling assets outside of Venezuela, which will include property assets in Panama. We are already seeing examples of individuals seeking to sell, and it looks ugly.

Overheard was a conversation in which a gringo was lamenting the difficulty in selling an apartment bought seven or eight years ago. While background prices of property investment have increased for new-builds, existing high-quality properties cannot sell. This gringo was looking at selling for almost 20% less than the seven or eight-year-old purchase price.

This story is hardly unique, and while the likes of "International Living" and many gringos in Panama continue to laud the country and residential property market, the "lobster pot" continues to trap lobster after lobster.

For some people that will be acceptable - better a 20% loss on an investment in Panama that a confiscation of 100% of the asset in Venezuela. Likewise, such a loss by a narco is still an 80% retention of gains from the production and sale of an illegal product - drugs. Money laundering always costs a higher premium that moving clean money.

Still, the money flowed in, an almost constant river of money through the 2000s and 2010s. But last year (2017) the flow began to slow. What happened?

It seems, though I have no evidence to support this, that Venezuelans have simply run out of assets to get out of the country, while at the same time, Colombians, with the peace deal with FARC, have found home a safer place to invest. Argentina is back in crisis, and has spent so long in various crises that any easily movable financial assets have probably already found homes outside the country. If the crisis continues, there may come a time when Argentina actually becomes a magnet for investment.

Anecdotal evidence (that means someone close to the industry told me) suggests that in 2018, construction permits for new construction in Panama City are down by 50% on permits issued in 2017.

Does this foreshadow a squeeze in available properties, or saturation that will require a correction to soak up excess capacity? I do not know the answer, and there are probably three answers for every two people in Panama that you ask.

So to come back to the original point, the money in Panama is not coming from organic growth, but from external investment. Unfortunately for Panama, that external investment is in large part going into construction, and therefore is building wondrous high-rises and commercial property. It is not building the foundations for a self-sustaining economy. Cut off the foreign construction investment, and there is inadequate local demand or debt servicing capacity to replace the construction industry job that will be lost.

A country in which 41% of the working population does not have a high-school level education cannot sustain a "knowledge worker" economy or an economic pyramid. An upturned drawing pin (thumb tack) economic "pyramid" cannot sustain a construction based economy without a consistent and continuous flow of inbound investment.


  1. Very good analysis. It seems as though the construction mania is widespread across the country. Secondary and tertiary cities and towns now all boast malls and plazas. Here in David, there is a plethora of empty commercial units...everywhere. I think the bubble will burst very soon. Less construction jobs, and an explosion in easy consumer credit. I see a lot of storm clouds in the near future. There will be a correction.

  2. Analysis is on point and street-level, thank you.