Report on Panama As We Near Mid-2009
This commentary was prepared for the Members section of Retirement Wave. Due to requests that this be available to the general public, it also is being presented here.
(Posted May 10, 2009) It has been more than six months since I last provided a general overview [link opens a new page] of the situation in Panama following the onset of the global financial crisis. I do not want to get into the position where I feel I have to do this forever, but I realize that the crisis is still very much underway and that many of you continue to wonder about its effects on Panama and especially its real estate market.
So I once more will share my personal observations for those who are interested. That is the joy of the Internet. If you are not interested, one click and you are on your way! And I know nothing about it, so my feelings are not hurt either! But I hope it is of sufficient interest to make reading worthwhile.
First, A Sincere Note of Appreciation to the People of Panama
Once every five years, Panama holds elections for every office from the Presidency to neighborhood councils. This is one of those years and the elections were held last Sunday, May 3. Compared to my first election experience here in 2004, this year's version was very intense. Extremely serious charges and counter-charges flew back and forth between the two major candidates. Emotions ran very high. Despite the high emotions, I was deeply impressed with how respectfully and calmly the elections were held. I had friends who supported all three Presidential candidates, including the one who got less than 3% of the vote. The next day or two, I shared congratulations and sympathies as appropriate. The response of all my friends ranged from happy to disappointed, but I heard no real bitterness or anger, no gloating or arrogance. They were back to work and looking forward, not backward. Good for them, all of them!
I offer my congratulations to President-elect Ricardo Martinelli and Vice President-elect Juan Carlos Varela for their "landslide victory" and hope that their five-year term that begins on July 1 will see their promises fulfilled. I am not a citizen of Panama and cannot vote, but this is my home and I take it all very seriously. To me, it was less a matter of who won and more a matter of what won. Once again, the democratic process won the biggest landslide victory last Sunday, thanks to the good people of Panama.
The Global Scene (and what a scene it is)
For most of my adult life, I sat on one side of a table, sometimes figuratively, sometimes literally. On the other side of the table sat folks from any one of a long list of "developing nations". Part of my job was to teach them how to use their financial resources responsibly. Thirty or forty years ago, this was a real struggle. Today, I sit on the "other" side of the table. How ironic that the folks across from me are now the ones desperately in need of learning how to use their financial resources responsibly.
But it is much harder today. When the folks I used to work with made mistakes, most of us never noticed as they had no effect on our lives. Today, the folks who have made the mistakes are sharing their pain with everyone.
A mountain of consumer debt has collapsed. The money it represented disappeared in the collapse. A mountain of taxpayer debt is being built to replace the old mountain. Will this be an improvement? Will it prevent a more serious recession or just lengthen and worsen the one already underway?
Those of you who have read my commentaries for awhile know that I refuse to predict the future and I am not about to start now. But I do make general forecasts from time to time, knowing that the future will be whatever it will be and if Bob is right, Bob is lucky, even with a general forecast.
On the dark side; we can expect it to take several years for the results to completely unfold. Wherever we are headed, it will not be to the past. What was true is now part of our history. What will be true is another matter.
There are and will be plenty of people who will be happy to predict what the future holds and generously provide you with something on which to spend your money to "protect" yourself or to "profit" from their predictions. Whether you make or lose money following their advice is as likely as it was for those who participated in the stock and real estate markets in recent years. And if you follow their advice and it works for you, remember, it is just as much a question of when to sell as when to buy. Folks who have not figured this out in the last ten years are not very likely to be on the winning side, whatever it is.
On the bright side; never, never, never bet against the human race. They are a stubborn crowd and resist a negative reality as long as they can, but once it is accepted as real, humans can change course faster than even they would have guessed a month or two earlier. That is one of many reasons why predicting the future is so often a waste of time.
I will leave it at that for now, except to say that I am very happy I have changed sides of the table.
What's Up Down Here?
In my report last October, I provided a whole list of economic indicators of one sort or another. I have, no exaggeration, more than 140 pages of notes on various indicators from a wide variety of sources that related to the period since that earlier report. I could take up a couple pages here with statistics, but I do not want to repeat that. It takes up too much space. I prefer to summarize things so that you can get a grip on the situation without being flooded with statistics.
Panama is an unusual nation and forgetting that is always a mistake. At the center of everything economic sits the Panama Canal and the Free Trade Zone that exists because of the Canal. For those not familiar with what a "free trade zone" is, the Zone provides a nice English summary (this link will bring up a separate page on your monitor). For now, think of it as a huge warehousing compound where goods arriving via the canal are stored, usually for later shipment to other nations. There are over 3,000 such zones on the planet and ours is the second-largest, only Hong Kong's is bigger. These two wonderful blessings provide thousands of jobs and billions of dollars of income every year.
Movement through the Canal, after remaining stable far longer than most people expected, has slowed down, but nothing very dramatic. The real drop has been at the Colon Free Trade Zone where reductions of 11% from the year earlier have been recorded. It is important to remember that any reduction of traffic at these two affects the Panamanian economy, but does not reflect the Panamanian economy since nearly everything they handle just passes through Panama.
Reductions reflect changes in the economies of our neighbors in the Western Hemisphere and are a sign that other economies are being hit. Their negative impact here is to reduce revenues to Panama. These are real losses and nothing to cheer, but they are nowhere near as damaging as the "reductions" suffered by the great majority of nations today.
The local economy is not in bad shape at all. The last official unemployment rare published by Contraloría General (Controller-General), the source of all official statistics, was 5.6% as of August of 2008. Separately, recent monthly employment reports indicate that employment has continued to rise since then. The unofficial rate, discussed during the recent political campaign, is currently 4.7%.
I will wait for the Contraloría's official report, but that sounds reasonable, given other indications. In any event, the point is simple. Some 95% of Panamanian workers, the highest percentage in many years, probably decades, wake up every morning and leave for work. Many other nations wish they could say that.
Otherwise, we just move along. Other than the small Panama branch of the infamous Stanford Bank, our banks are fine. They are making money and no one is offering any bail-outs because they are not needed. Their strength lies in not having provided "sub-prime loans" or the other foolishness of the northern banks. Their already conservative practices have tightened more, so it has become difficult for some folks to qualify for loans. The government has put together a fund from which they can draw to increase loans, but they have expressed no interest in it yet. They really do not need it. Something will eventually be worked out, I suppose, but the term "bail-out" is not used here.
The government is not discussing, much less offering, to buy up corporate stocks to save businesses. Businesses here are taking care of themselves. If they go bankrupt, it is their problem, not the taxpayer's problem.
I could go on, but we simply are not experiencing the financial crisis in any way similar to what RW members are facing in North America and Europe. We just passed through a very competitive election campaign without the global financial crisis being an issue. It is not an issue because workers are not losing their jobs, taxpayers are not being asked to bail anyone out, and we are not facing a flood of home foreclosures. Those are the issues that really strike home with voters, but they are not issues here.
Despite the lack of any substantial indication that the Panamanian people have been suffering from the global financial crisis as their distant cousins elsewhere have, when and if the day comes that the Panamanian economy really sinks, people here will be way better prepared, psychologically and financially, to deal with it than the folks were in the Old World of North America and Europe where it all began. We have been reading and hearing a steady stream of warnings for a year and a half from our news media that "the crisis is coming!" Every time something negative arises, it is brought to our attention immediately.
Let me give you an example. Recently, it was reported widely that Panama's GDP (gross domestic product, the sum of all wealth created in the nation) had grown at an annual rate of only 2.87% during the first two months of 2009. This compared with 9.3% for all of 2008 and 7.3% for the last quarter of 2008. In fact, that was not a GDP estimate; it was the Monthly Index of Economic Activity. This is a much less precise measure than GDP, designed to give an idea of the direction the GDP is taking, but it is not GDP. In fact, two numbers were provided, the 2.87% and a "trend estimate" which corrects for seasonality and other extraneous factors and which is considered a more accurate indicator. That figure was 3.83%.
In any event, the potential drop in future GDP growth suggested by this statistic is a concern. But if we were to compare the same statistics through 2008 and to date in 2009 for Panama and for the US, as one of many examples, we would find a difference running from roughly 8% to 13% in Panama's favor. GDP estimates are not perfect, but when you get differences that huge, there is no question who is in better shape. Just having a positive number in today's world sets you apart.
There are some three dozen nations in North America and Europe that would be very happy to trade economic statistics with Panama. Yes, sir! Right now! Hand them over! Well, please forgive us, but we are going to keep ours.
Panamanians have feared the worst for over a year and many have "tightened their belts" in preparation. Economic activity has indeed slowed down. If you speak to them privately, many of my Panamanian friends express relief. They had feared that the "boom" would become a genuine "bubble" and see this period as a good time to slow down and catch up with the rapid growth of past years. I am very comfortable with that attitude.
Ah, you say, but Bob, what about the sector that interests most of us who are thinking of coming down? What about real estate?
I am thoroughly convinced that there is no sector of the Panamanian economy less understood and more poorly analyzed than residential real estate. This has not improved an iota since my arrival a little over five years ago.
As I said in my October report, there are really two markets that concern us – the market of buyers and the market of sellers. Let us take a moment to consider each.
The Market of Buyers
First, I have to apologize to my many members who are not Americans. The statistical evidence I will mention below is solely of the American people. I would love to have done the same with other nations, but there is a financial limit. The surveys mentioned are not done for free. However, we may have some sense of what Canadians and even Europeans are thinking in the process. They may have different national backgrounds, but they also have a great deal in common. Above all, they have the current crisis in common.
Most of you who have been members for some time or who have wandered around the site, reading my article in 2007 for Barron's or similar efforts, know that my US firm, New Global Initiatives, sponsored seven professionally-administered, statistically-valid surveys of the American people on the subject of relocation and/or investment in property outside the US. The last of those surveys was held in June of 2007. How fortunate. We have results from just before the crisis hit the headlines. Well, we completed another survey in early March of 2009.
I discuss the subject in some more depth at my US firm's site, but that addresses other issues as well and does not focus on Panama, so let me briefly outline the results here that are most likely to be of interest to members.
Simply put, we organize the results into six categories ranging in their "seriousness" from a group we call "the Committed", who have made up their minds to move, to "the Dreamers", the folks who visualize themselves on an empty white sand beach in a hammock hung between a couple palm trees. I do not mean to make fun of them. Many of us started there, but that group is the most volatile. Its numbers can rise or fall quickly. The Committed can rise and fall as well, but usually not so quickly. Between these two groups are four others at different levels of interest between the two extremes.
Well, no surprises. The Committed have fallen by more than 40% from June of 2007. There is your evidence that the falling real estate market in the US has taken its toll of people who were close to making the move. It should be noted that the Committed still represent roughly a million US households, so they are still quite capable of buying every square inch of available house space in Panama many times over, but that does not deny that they have been seriously hurt.
The Dreamers have fallen by nearly 50% as they have had to forget their dreams for now and deal with an unpleasant reality.
What about the four groups between the two extremes? Combined, they have increased.
The Dreamers are by far the biggest group and the least seriously interested. If we take them out of the picture and focus only on the five groups that are further along in their planning, what happens? The total falls from 12.2% in 2007 to 12.0% in 2009, a statistically insignificant difference, despite the dramatic drop in the Committed.
What conclusions might I draw from all this? Firstly, the number of Americans likely to buy real estate outside the US in the near future has fallen. Well, that certainly comes as no surprise to anyone in real estate down here! But secondly, the number of Americans moving in that direction (pardon the pun) has increased and can provide the basis for substantial new growth in real estate sales here in the months and years to come.
There are many interesting results showing up in the latest survey. In the past, I have freely shared the details with many people, including RW members. That has had to stop. Charity is an important virtue, but there is a point where it can be overdone and we have reached that point. But I will add a few extra comments of a general nature.
I write a lot for many websites and print publications. One essay I keep putting off for another publication is titled, "From Excess to Distress". Basically, it argues that the major increase in Americans (and others) moving to nations like Panama through 2007 was rooted in an "excess". I am referring to an excess of credit that led to an excess of debt for some and what we now think of as an excess of profit for others. Those "excess profits" bought a lot of homes in Panama.
There is a shift apparent. I say "shift" because change does not come to societies overnight, it comes over time, but a shift seems to be clearly underway. A growing number of people are looking to move and/or invest in property outside the US (and I suspect other Old World nations) because of their distress with what is happening at home, the situation facing their society. Some have less money than they did a couple years ago, but more interest in relocating or investing what they have overseas. Others have as much or more money than before, but are less and less comfortable at home.
We are seeing a shift in motivations and in the demographic make-up of folks who are or may become buyers. This is both a threat and a promise to the real estate sector in many nations, including Panama. The threat is to those who persist in marketing real estate in the same way as they always have based on past experience and unsubstantiated guesswork as to what the market of buyers is thinking. The promise is to those willing to set past experience aside for a moment and not guess the thinking of buyers, but who will ask them what they think. It is utterly ridiculous that my firm, that does not sell real estate, is the only one to have done this detailed research in the US.
As I have said many times here at RW, it is not a question of demand for real estate outside the US, Canada, Europe and elsewhere that will determine the fate of Panama's market, it is a question of marketing.
The next couple years will separate the men from the boys and the women from the girls in the real estate business in Panama. The men and the women will catch on to the shift. The boys and girls will not.
Let us now move on to the second market.
The Market of Sellers
In recent years, literally thousands of homes and lots have been sold to foreigners. Everybody knows that down here. Many folks complained about "speculators", focusing their criticisms on the tiny expensive sliver of our market along the bay in Panama City. In truth, there was plenty of speculation elsewhere, sometimes by the very people complaining about speculation in Panama City.
Not all, but many people did buy more than one house or lot in the hopes of being able to sell the second (or third or fourth) for a profit later. For the first three years in Panama, I had to deal with RW members and other expats who arrived with stars in their eyes, determined to repeat their real estate success in Nevada, Florida, British Columbia, San Francisco, London or any of a long list of states, provinces, and cities. I grew to hate the word "flip".
For obvious reasons, that has almost stopped in recent months, although I still hear it once in awhile. But it does not deny that many folks did buy extra property in the hopes of making money. I have no problem with this, but I did warn people that flipping houses in Panama was not the same as flipping in the US or the UK.
Others, including several RW members, bought larger land parcels and began their own mini-developments, much smaller than the big guys, but still with multiple homes. I have visited quite a few of them. They commonly have from 10 to 40 properties for sale. Too small to bother being counted among the big guys, but impressive when taken together as a group.
Whatever the background, those properties were bought or built. Today, we have people who want to sell before "the market gets worse", those who want to sell because they lost a lot in the stock market and need the cash, and a whole list of other reasons. I hear from them frequently.
However, despite the simple fact that this is happening on a large scale for as small a nation as Panama, people seem to forget about it. I have not forgotten.
Too many people in Panama, certainly including the real estate sector, believe that the real estate market in Panama is almost entirely represented by the big developers with developments of 200, 400 or more units. Five years ago, these folks dominated the market in Panama and it was obvious. Today, they have new competition – individual expats and Panamanians selling their investment homes, lots, and mini-developments.
I cannot tell you how many properties are involved, but I can say without hesitation that there are more today than there were five years ago, or three years ago, or probably even one year ago. They are the portion of the market of sellers that flies below the real estate sector's radar; and everyone else's radar too.
No, I do not have and will not have objective statistical evidence of this, but I have a growing mountain of anecdotal evidence, plus enough common sense to realize that this was inevitable. One thing that is true, but was not inevitable, is the global financial crisis. That very crisis has led some expats here to put their properties on the market much earlier than they had expected. In other words, this "stealth market" has grown in importance very suddenly and increased at a faster pace than would have been the case without the crisis.
The important thing is to recognize that this stealth market exists. I was told by a friend a couple months ago that one of Panama's major developers had told him that Americans were not buying properties in his flagship development. I had to laugh. I knew Americans had bought there, some of them RW members, but they had not bought new properties from the developer, they bought re-sales from individual expatriate and Panamanian owners.
I also know that some, probably many, of these expatriate sellers are refusing to use local real estate agencies. They want to save the commission money and many simply do not trust the agencies to do the job properly. They sell by word of mouth or by email and the Internet (what I call, "word of mouse"). They definitely are flying beneath the statistical radar.
You can read articles in the local press that complain of a dramatic drop in sales to foreigners. These articles are entirely based on the opinions of the big developers and they are correct. Their sales have fallen. Their understanding of the market of buyers consists of what the last expat said who happened to come into their office and what they hear from each other while sitting around the bar in Panama City or on a fishing yacht in the bay. If you ask them about competition from re-sales by owners, it is obvious that the thought has never crossed their minds. As English slang puts it, they have no clue.
I know they are rich and have "deep pockets", so they have chosen to wait until the market comes back to them. Many of our major "real estate developers" are just rich guys who made their money on something other than real estate, but who owned a big piece of land and took a chance at the right moment. It was not their marketing genius that did the job. They got lucky. They may get lucky again, but they may not. If not, they had better learn how to bring the market down, not just sit on their rich butts and expect it to show up. Frankly, I do not care. If they lose what they have gained, they have no one to blame but themselves.
In the long run, I am not as worried as I might be. The older generation of developers will slowly be replaced by a younger generation that I have also met, along with expatriate developers. These young men and women are better-educated and, honestly, sharper than many in the older generation. The day will come when they get to make their mark and I look forward to that.
I have spent more paragraphs on this subject than I wanted to, but I cannot ignore the fact that the market of sellers is becoming as misunderstood as the market of buyers. As I will mention shortly, you can benefit from this misunderstanding.
But Bob, What am I Supposed to Do?
So you are interested in relocating and/or purchasing a property in Panama. Here are a few suggestions.
- If you are expecting hundreds of homes in major developments at huge discounts due to the global financial crisis, you are going to be disappointed. However, you can offer a lower price and you may get it. Or you may not, but it never hurts to ask. At least you have a decent change of getting something.
- Beware of pre-construction offers that are deeply discounted, should you run across any. The developer may be looking for some cash flow while he "waits for the market to come back". If the market does not come back in time for him, you may be lucky to get your money back. If you want a pre-construction unit, I would look for a project that offers no discount or possibly 5%, if you are lucky. These are the projects much more likely to have their financing together and are not staring at disaster.
- Because the real estate market has slowed down, there are more already-constructed homes and condos available than in recent years. In the past, some people had trouble finding anything already constructed in the area that interested them. That is not likely to be true today, so do not assume that pre-construction units are the only good ones available in your area. And, by all means, do not ignore older condos and homes. Their property tax exemption may be shorter, but many are far better built than the newest projects and that can save you money in the long run.
- Definitely keep your eyes and ears open for expatriates selling individual properties and do not hesitate to stick you nose into small developments, whether they are expatriate-funded or Panamanian, These can be where you find the real discounts.
- On the other hand, do not assume that someone who comes from your home nation or speaks your home language fluently is any more honest than anyone else. I have seen some homes offered by expatriates as "distress sales" that are asking the same price as before they became "distress sales". Human behavior, good and bad, knows no nationality.
- Talk to agents. Talk to expatriates. Talk to Panamanians. If you see something for sale that looks at all interesting, pull over and check it out. The more you talk and the more you see, the better off you are. Sure, you may look at a number of homes or lots that turn out to be of no interest to you, but you are getting a sense of market prices and what is available. That sort of information can be extremely helpful when you finally find something you really like.
- The only thing that interests sellers here is whether you are going to buy or not. Your nationality is not important. Ignore those who insist there is a "gringo price". There is no gringo price, but there is an "ignorance price". If you have not done your homework and followed the suggestion just above this one, the odds go way up that you do not know what a normal or good price is. Trust me, an ignorant Panamanian buyer is not going to get a break either. They are just much more likely to spot an outrageously high price more easily. Your job is to gather enough information that you can spot an outrageously high price too.
- If you sign a legally-binding contract for the purchase of a property in Panama without having a Panamanian lawyer review it first and explain each clause in a language you understand, you have no one to blame but yourself if you later discover you have agreed to something you knew nothing about. 95% of the serious problems I hear about from members do not result from a bad lawyer, but from having no lawyer or ignoring their lawyer's warnings. Go ahead. Fall in love with a property, but when you sit down to sign a contract, use your head, not your heart.
- I read your messages. I meet some of you when you are down here. I know that things are not going well back home, wherever home may be. I know and I sympathize, But at some point when you've gotten through immigration and customs and you are actually here in Panama, take a very deep breath and smile. The best thing that can happen is that you have found a new home. The worst that can happen is that you will have a nice vacation. You win either way, if you let yourself relax and enjoy your visit.
If you have read my real estate commentaries before, you know what is about to happen. You will find these words at the end of every real estate commentary at this site. And, as always, I encourage my readers who have read them before to read them again. I do, every time. They are the only words I can safely present as "fact".
No one knows the future. Free markets go up and free markets go down. The future is not a simple extrapolation of the present. Anything can happen. Everyone has an opinion and those words above are just opinions.