The Explosion of Panama's Property Market - Who Lit the Fuse?

Simply incredible. That's the only way to describe the property boom in Panama.

About 30,000 units were built between July 2006 and July 2007, another 40,000 announced and/or being built, and rental yields are going through the roof. Tourism and business are equally attracted. Global corporations like Hilton are building skyscraping hotel complexes and giving Panama City a skyline to rival any of the world's greatest cities. This may go some of the way to explain the influx of American retirees chasing cheap living in the sun. But where has it all came from, and why now?

In the case of property booms in Eastern Europe, it was easy to see where they came from: breakup of the Soviet Union and entrance into the European Union. But in the case of Panama, it is really more to do with what Panama hasn't done and what the U.S. wants to try and stop them doing: joining forces with Hugo Chavez's Venezuela in his socialist war of rhetoric with the U.S. and the West.

The closest thing to a trigger for the boom arising from this U.S. policy track is handing over control of Panama's canal. The Panama Canal is one of the most important in the history of international freighting, because it runs right through Panama to connect the Atlantic and Pacific oceans. This meant ships no longer had to take the treacherous routes of Drake Passage around Cape Horn at the southernmost tip of South America.

Handing over the Canal has been a massive boost to the Panamanian economy. But more than that, the U.S. is putting money into the Panamanian economy in the hope that the boom will set an example for other states that either already are, or are considering joining or forming an alliance against Western interests.

This U.S. policy actually seems to be working. More U.S. retirees are buying their retirement homes in Panama than anywhere else, and the country that has secured its place as the fastest growing Latin American economy is lining up to take its place as one of the hottest property investment destinations of 2008. Here's why:

A very conservative estimate on capital appreciation is 15-20%. Rental yields in the big cities are an astonishing 11.23% on a property of 190 sq.m, amazing for a property of such a size; another plus is the pro-landlord rental laws. The buying process for foreign investors is also incredibly simple, with only 7 stages that can be completed in around 44 days. There are no restrictions on foreign ownership - according to the salespeople I have spoken to, those are two of the key issues people look for when buying an overseas property: an easy buying process and freehold rights.

Other reasons are the low roundtrip transaction costs of around 7-9% including agent's fees of 3-5% and no inheritance tax, all things buyers look for in overseas purchases. Another plus point for an investment in Panama is the low capital gains tax. Foreign owners can choose to be taxed on their gain in two ways:

5% of the sum of the following, 10% of the property's cadastral value for every year the property has been held, plus the cost of any improvements, plus the property's cadastral value at time of sale. This option consolidates transfer tax and capital gains tax, and means the final sum for the above calculation is all that a foreigner pays upon selling a Panama property.

The second option is: 2% of the higher value between the sales price, and the sum of the property's cadastral value at time of acquisition, improvement costs during ownership, and 5% of the property's cadastral value, (including improvement costs) for each year the property has been held. The second option incurs a further taxation on the selling or transfer price, less transfer costs, the acquisition cost or cadastral value, and 10% of acquisition costs for each year the property has been held, the sum of which is then taxed at standard income tax rates.

In my humble opinion, the first option is best, but advice from a financial advisor and solicitor should go hand-in-hand with any property transaction, buying and selling. Their advice on which option is best for you is far more valuable than mine. Before that, though, you have to actually buy a property; and the volume of new properties coming onto the Panama market will have you spoilt for choices.

Liam Bailey is Media Relations Executive for overseas property specialist David Stanley Redfern Ltd. He also runs blogs for every country they have property in, all linked from his main blog Emigration Now?.