Every January I visit Panama City. I’ve done so for the past five years. But this year, they had no room for me.
If you can find a room, hotels of a reasonable standard are looking for $250-$500 per night. Short-term apartment rentals are charging up to $500 per night…and some are fully booked through September.
Just 18 months ago, I only had to give a couple of days notice to any of my favorite hotels…and never paid more than $128 per night. The hotels I would have turned my nose up at then…are now out of my price range.
It looks like my Panama vacation won’t happen this year. And you should pay close attention to the reasons why.
It’s simple: Panama’s visitor numbers are growing at a much faster rate than its supply of hotel beds. And the laws of supply and demand have kicked in.
Visitors are coming from the Americas and Europe for vacations, to buy real estate, to do business, or to work. Multinationals are setting up regional HQs in Panama and the big infrastructure projects are drawing in skilled labor and contractors.
In recent years developers have made a killing selling condos during the property boom. That’s where the money was and condos were built on the prime sites; there was no money in building hotels.
In 2007, occupancy for hotels of 100 rooms or more ran at more than 90%. The hoteliers I speak with tell me 2008 is going to be even better. Mid-range and apart hotels could have filled their beds twice many nights last year.
There is supply in the pipeline. In fact there are approximately 15,000 new beds planned or under construction. This will take a couple of years to be delivered and all the time visitor numbers will continue to grow.
Statistics on occupancy and new supply aren’t available for the short-term rental market. However, friends who have short-terms rental units are seeing well over 80% occupancy. I can’t find a suitable unit to rent for my planned trip. Some of my inquiries even generate an auto response like this:
“Thank you for your enquiry about an apartment – due to high demand, all of our apartments are fully booked through September 2009.”
Believe it or not these guys charge up to $500 per night for their luxury condos.
Panama’s economy is expected to grow by 9% in 2008; in 2009 it is expected to grow by between 6.5% and 8%. The jobless rate fell to 6.4% last year from 14% in 2001. In a frozen credit market Panama has signed deals with five overseas banks to fund the $5.4 billion canal expansion. This is a boom town.
The real estate market has both fueled and been a beneficiary of this boom. However too many preconstruction units have been sold and prices have been too high. Without question there is an oversupply problem.
If you are willing to invest the time to find and negotiate with a motivated seller you can buy a prime recently completed 100-square-meter condo for about $200,000. Just 18 months ago an equivalent condo would have sold pre-construction for $350,000.
Of course the big opportunity is to make your condo available for short-term rental. The unit in my example would rent for $200 per night. Condo fees will be about $130 per month, you are exempt from property tax, and your rental management agent will take 20%.
Even at a conservative 50% occupancy you would have an incredible rental yield.
I expect a choppy couple of years for Panama City’s real estate market as this overbuilding is absorbed. Pain will be felt by developers and late comers to the pre-construction market. I expect this rental market however to remain robust. Buy well and you will see fantastic rental yields with the prospect of capital appreciation two or three years down the line once the excess supply has been absorbed.
Buying well means that not only do you look for a deal on price but you focus on quality. Don’t expand your search beyond top quality buildings in prime areas like Balboa, Paitilla, and the financial district.
Ronan McMahon
Executive Director, Pathfinder Ltd.
Editor’s note: Members of the Real Estate Trend Alert receive detailed recommendations and advice from Ronan McMahon. In a recent alert, Ronan negotiated preferential discount pricing for apartments in a short-term rental market even stronger than Panama City. You can learn more about the Real Estate Trend Alert here.
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