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PANAMA REAL ESTATE 3: How 2012 could unfold

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By Kent Davis*

2012 WILL BRING new challenges and opportunities to Panama. As Panama City moves forward on a massive adjustment of its urban transportation system, traffic in an already congested city of  1.5 million people will get worse before it gets better.

The good news is that by mid-2013 we believe that the real estate market will once again begin to appreciate and will do so in a manner never seen before due in part to a completely modernized transportation system and increased revenue from an expanded Panama Canal.

This year, however, we believe that city real estate prices across the board will come down by at least 10% and as much as 20% due in part to the massive amount of residential condominiums in construction and their timeframe of delivery, specifically along Balboa Avenue, San Francisco, and Punta Pacifica.

The district of Bella Vista known as  Avenida Balboa,  will experience the largest increase in supply (in proportion to existing inventory) than any neighborhood over the last five years.

People have been talking about Panama being “overbuilt” for a long time now, and this will finally be the year when the lion’s share of inventory that has been in construction finally hits the market.

One would have to assume that an unprecedented dump of new inventory onto a relatively stable market will have downward pricing pressure on the market as a whole. This pricing correction will inevitably affect the “luxury” market of $2,000-per-meter-and-up condominiums in other areas of the city and will also have an impact across other market categories in Panama City including more moderately priced condos in areas like El Cangrejo, Obarrio, and other parts of Bella Vista.

Avenida Balboa has been for the last 5 years one of the most recognized areas of Panama, which is the main reason why so many developers decided to build along this iconic waterfront strip.

Balboa is one of Panama City’s prime spots for ocean view condos and – with the newly constructed Cinta Costera remains a very attractive area. However, almost half of the buildings that line Balboa Avenue are in construction, and 2012 is the year that the majority of the new inventory will finally be completed and released on to the market. The good news is that after this final wave of new deliveries, there will be only a handful of empty lots for future projects.

Back in 2009, one would be lucky to find a brand new high-rise condo on Balboa Avenue for less than $2,500 per square meter ($234 per square foot). In 2011, the average price for a two year-old condo was right around $1,900 per meter. This represents a 25% price correction over a two-year span.

In  December, 2011, there were approximately 1,498 completed condo units on Balboa

Avenue. Due for delivery in the first quarter of 2012 are four new condo projects totaling 744 new units and due for delivery over the next three quarters of 2012 are an additional 898 units.

That means that at the beginning of 2012, there ere roughly 1,500 condo units and by the end of the year we are looking at 3,142 completed condo units. This represents a DOUBLING of  available, completed, move-in-ready condos in a very finite area of the city.

Not all of these condos are going immediately to market for sale or rent, but some will. Exactly how many? We have no idea, but based on the general demographic of sellers who we are representing, we estimate that at least 50% of the condos in construction were purchased between the years 2007 and 2008, just before the financial crisis.

Some of these new Balboa Avenue condo owners are not going to be in a position to come up with the balance that they owe the developers and will be forced to liquidate their contract positions and take whatever percentage of their deposits that they can recover.

 How do you find the deals?

The best deals come just after the developers start calling for the final deposit: here, timing is everything. In most cases, the price point of units in a specific building can fall dramatically during this brief window, only to recover to “market” levels once the desperate sellers are out.

We saw it happen in the Trump Ocean Club, we saw it happen in buildings like Destiny and Sky, and we are going to see it with Rivage, Yacht Club Tower, White Tower, Waters Tower, Arts Tower, and Yoo Tower, all of which are slated for delivery this year. There are some exceptional deals out there right now, you just have to find the right sellers. Very few of the best deals are ever published on the internet, so it’s up to the savvy buyer to work with an equally savvy real estate agent (or building administrator, lawyer, or anyone else with access to the “distressed” sellers).

if you buy right now, you can buy in anticipation of the correction and either find a tenant immediately or enjoy your condo and resell once the market has recovered.

 In 2013, Panama will be a city that has undergone a complete face-lift: new Metro commuter rail, newly expanded Panama Canal, fully operational Coastal Beltline, and a world economy slowly working its way out of a recession. That means new buyers and a totally new Panama City.

We’re bullish on the real estate market and Panama in general over the next 3-5 years, however we believe that sellers must be realistic and buyers must be calculative.

The math of a deal

Most of the buyers along Balboa Avenue got in anywhere from $1,700 to $3,200 per square meter, depending on when they purchased. Most of these buyers (you can call them sellers now) have anywhere from 20 to 40% deposits down with the balance coming due when the building receives its occupancy permit. To use a very general example, let’s say a new buyer has $90,000 down on a $300,000 condo. The developers in most cases are probably still sitting on at least 20% of their unsold inventory in this particular building, and we can conservatively speculate that another 20% will be defaulting and/or trying to liquidate their positions.

In the example above, let’s say our buyer purchased a 150  sq meter two-bedroom condo back in 2009. That condo in today’s market is worth about the same amount that they paid, maybe slightly less, but what happens when 100 other condo owners in the same building cannot close? (And don’t forget about the developer who is sitting on their unsold inventory and will be bank motivated to burn out their units).

This will force the price point lower as distressed sellers fight to recoup any portion of their deposit that they can and developers scramble to unload their remaining inventory. I know of a small handful of developers right now who are slashing their prices multi-fold in anticipation of the correction. They see the writing on the wall and, when the offer is presented properly, are prepared to come down to an aggressive purchase price point rather than lose a buyer. There are, however, some developers who refuse to acknowledge a market correction and are unwilling to negotiate off of their list prices.

Add to the mix of sellers in preconstruction projects the owners in existing buildings along Balboa Avenue like Bayfront, Grandbay and Sky who decide for whatever reason to put their condos up for sale. They’ll have to compete against brand new inventory entering the market, meaning prices will face further pressure. And who is going to pay $1,700 per meter in a neighborhood like San Francisco when they can get an equivalent ocean front unit for only slightly more along Balboa Avenue?

*The views expressed are  those of the author who has no affiliation with Newsroom, other than as a contributor. He is the founder of Panama Equity Real Estate.