Arrested Developers in Panama, Central America
(thepanamareport.com) People always ask me, why, if I'm so confident that the real estate market in Panama is oversaturated, do you still see construction crews building everywhere? It's a valid question and the answer is quite simple: the projects you can see going up in Panama, with cranes rented and workers doing whatever it is that workers do, are projects (such as Bern, ProCasa, Pacific Realty...etc) that began a long time ago, most commonly in the 2003-2004 boom period. They were like little kids holding the remote control to a crane: anything and everything worked magically at the push of a button.
This was a time before every developer and his sister was jumping on the "let's do a real estate project" bandwagon, when groups used great bank loans and took a ride on the back of abundant foreigner demand. THESE are the projects you see mid-coitus, and they have been funded (up to this point) by a flurry of once-eager buyer deposits. It is important to note that very few, if any, of the brand-spanking-newest projects to the market are actually in full construction swing due mostly to depleted sales and delayed funding.
What's the feasibility of these newer projects?
Would you build a sandcastle in the rain? The current global market is SO non-conducive to starting a real estate project right now it's just silly. There is a hoard of new projects in Panama promising the world, but instinct and common sense are stacked heavily against them. I would argue that demand for Panama real estate right now is at two/three-year low, meaning most of these new projects won't ever get off the ground. There are a number of projects in Panama that, besides maybe a ribbon cutting or gala gathering, haven't broken ground in years since they have yet to receive their loan from the bank. In this case, it is master plans, architects, engineers, and those fancy fences that show plates of sushi overlooking the sea, that all have been funded by client deposit money.
In Miami, this stage of projects freezing up into a holding pattern was followed by a wave of lawsuits (which proved to work best when victims rallied together in groups). This will undoubtedly occur in Panama. Remember too, that worked into the contracts of many Panama projects are complex clauses citing "uncontrollable circumstances" such as permit delays and material shortages as safety nets for the developers, should anything like a tardy delivery date happen to occur.
What about projects nearing completion?
Back to the projects that will actually complete their construction and deliver, as promised, albeit very late, occupancy permits to those who put down money years ago. Two scenarios come to mind, both hinging on the credit crunch and the fact that most of Panama's pre-construction real estate is paid for in stages over several years time.
Scenario A would see Buyer X (who happens to have enough cash or qualify for a loan) complete payment on the finished unit and either live in it, decide to rent it, or look desperately to sell it again.
Scenario B would see Buyer Y (who is in poor financial standing, unable to come up with the remaining portion, or can't qualify for a loan) with no choice but to return the unit to the developer and lose their deposit money.
To me, Scenario B seems most likely, with developers permitted to keep payment up-to-date, in addition to repossessing a brand new unit. This could result in entire floors, if not buildings re-acquired by the developer. The ball will then be in the court of the developer who will fall into two groups:
Group 1: They are in need of cash and will try to re-sell off the units at whatever price possible (probably equal, if not lower than their original asking prices)
Group 2: They are financially stable developers and decide to rent out their newly re-acquired units out as apart-hotel rooms making anywhere from $150-$400/night.
The smart or fortunate developers will have made money throughout this process while those who might seem like the unfortunate ones will have come close to breaking even. But what, you might ask, does a developer gain from breaking even or busting on a multi-year project? Expert Paul McBride of Prima Panama believes it's the power of possessing interest-free money. Throughout the process, developers were in control of deposit money that was theirs to freely use as they wish in other business endeavors. Ready for the kicker? When (if) buyers are returned their money at the end, Paul explains that they feel relieved and fortunate to have escaped unscathed. It's like a mugger returning your pocketbook having only kept the cash.
It's natural to think that with a real estate bust, developers default, which is where Panama's real estate market is plagued with hoax-like misconceptions. The old developers who are finishing projects will do just fine. Some of the new developers should be able to refund their clients using insurance plans. And the scariest of circumstances will involve Panama's developers who claim bankruptcy, not unlike the department stores, restaurants, and bars of Panama's late 1990's and either disappeared without a trace or simply ejected debt-ridden projects to start new ones down the road. Development may seem about to be arrested in Panama's impending slowdown, but to those on the inside, it's as free as a bird.
