There’s Still Time to Make Big Profits in Panama City

Saturday, Aug. 16, 2008

Read more about investing in international real estate in International Living Postcards —Saturday Edition

Dear International Living Reader,

I have just returned from a 10-day trip to Panama, where I was speaking at IL’s Live and Invest in Panama conference. While I was there, I was keen to see if there is still a chronic shortage of hotel beds in Panama City.

The answer is a most definite yes…and that means opportunity for you. Even in early August (Panama’s low season), many hotels were full, and every hotelier I spoke with was seeing occupancy rates higher than last year’s record numbers. Room rates also continue to drift up after two years, which saw room rates double in several instances.

I have been visiting Panama City regularly for nearly five years. Up to the middle of last year, I would call one of my favorite hotels a couple of days before traveling. I never had a problem getting a room, and never paid more than $128 per night.

These days are gone...

There isn’t availability…and when there is, you would pay at least $180 per night. Last December, I tried to book a hotel room for a visit in January. I was told that there was no availability until May at the first two hotels I contacted. Extensive searching for an apartment rental was unsuccessful. I was lucky to find a hotel room for $285 per night. Thanks to IL’s room block at Playa Bonita, getting a room wasn’t an issue for me this trip. However, lack of hotel bed space did restrict the attendees who were staying in the city after the event—there simply were not enough rooms to fit the demand.

Panama’s visitor numbers are growing at a much faster rate than its supply of hotel beds. Visitors are coming from the Americas and Europe for vacation, to buy real estate, to do business, or to work. Multinationals are setting up regional headquarters in Panama and the big infrastructure projects are drawing in skilled labor and contractors. In recent years, developers have made a killing from the property boom selling condos. That’s where the money was, and condos were built on the prime sites. Official stats for 2007 indicate that hotel occupancy for hotels of 100 rooms or more was at more than 90%. The hoteliers I speak with tell me this year is going to be even better. I have seen the books of two 80-bed apart-hotels that had occupancy in excess of 95% last year. Both said they could fill their beds twice most nights this year.

There is supply in the pipeline. Last year IPAT (the Panamanian Institute of Tourism) approved 40 hotel projects and is currently reviewing 18 applications. There are about 10,000 hotel beds in the pipeline. This will take a couple of years to be delivered, and all the time visitor numbers will continue to grow. Assuming Panama continues on its current path (which I think it will), supply will be at least five years catching up with demand. On my recent trip I met with one hotelier who told me that he had just increased the planned number of rooms from 400 to 600 off the back of the announcement by Caterpillar to establish a major presence in Panama. (Expect to hear further announcements of major multinational investments, particularly in Howard.)

It’s boom times for Panama’s hoteliers. You too can profit from the Panama City hotel boom, even if you don’t have the capital, expertise, or time required to be in the hotel business.

How? Buy a hotel room.

Under a typical condo-hotel program, a developer will construct a hotel and sign an agreement with a hotel group to run the hotel. The developer then sells the units to individual investors. Revenue from the hotel operation is pooled and divided among the hotel operator and the owners of the individual units. Splits between owner and operator can be as high as 70/30 in favor of the owner, although the big-name, high-end operators will typically take a bigger cut.

If you go down this route, it’s important to take a medium-term view of where the market is going. You need to be satisfied that demand for your unit will hold as the supply of hotel beds increases. The location and target market segment needs to be right. Of course, you should also check out the hotel operator. Who are they? What is their track record? What is their commitment to the project? Ensure you aren’t paying too much on a square-meter basis for your unit, and do conservative math to guarantee you get a good rental yield.

A second strategy to profit from the undersupply of hotel rooms is to buy a condo and make it available for short-term rental. Buy a quality condo in a prime area like Ave. Balboa, Punta Paitilla, or Marbella in the financial district—ideally in a newly completed building. Today there is a pricing anomaly in Panama City whereby newly completed units can be purchased for up to 30% less than pre-construction pricing in an equivalent building. With the help of a strong rental management company, even very conservative numbers show a yield of 13%.

IL reader and U.K. native Adam Miller saw what was happening and took it a step further. He bought high-end condos, gave them a luxury design, and added a concierge service and a fully stocked kitchen. His company charges up to $345 for a night’s stay in one of its luxury condos and is seeing occupancy in the region of 80%.

The vast majority of new hotel bed supply is targeted to the top end of the market. In each of the examples above, we’re talking nightly room rates of $200 and up. There is a growing niche in the market for mid-range hotels. Frequent business travelers and mid-range vacationers want clean and convenient hotel beds in the $100 range. There is a big opportunity in this space. Offer this and watch out for the stampede.

Ronan McMahon

Editor’s Note: Ronan is constantly watching the ongoing trends in the global real estate market and knows when it’s the best time to invest in one particular country or type of property. If you would like to get serious about property investing, Ronan can give you precise information on how to start making profits from global real estate in his Real Estate Trend Alert service. Interested? Sign up today.

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- Why Now Is the Time to Invest in Fortaleza…

- Hot Tips for Armchair Real Estate Investors

- How to Get the Best Rental Yields in Panama