Panama: Don’t let this law affect your decision

I’ve received a few questions recently about a piece of legislation recently passed in Panama known as Resolution 52.

A bit of background– the construction boom and ensuing real estate bubble for Panama City condominiums lasted from 2003 until approximately 2007.  Tens of thousands of units were designed and sold off-plan to speculators, usually months before the developers broke ground.

Speculators were buying up pre-construction units so quickly that developers were encouraged to design and sell more condo towers– and to keep raising prices. In the 4-year boom, sales prices for Panama City condos more than tripled from $800 per square meter to over $2,500 per square meter.

The first of these condo towers were completed and delivered prior to the start of the global slowdown, so early speculators were able to ‘flip’ their units to end-user buyers and make a tidy profit.  Today is a different story.

The global economic slowdown has impacted Panama City’s condominium market in the same way as other real estate markets around the world– tighter demand coupled with reduced credit availability has created downward price pressure.  In addition to reduced demand, however, there has also been an increase in the supply of condominiums as more towers are completed.

Consequently, most condo speculators whose buildings were delivered in the last twelve months have recently found out that they didn’t have chair once the music stopped– the pool of potential buyers is simply too shallow.

Despite what is happening in the condo market, however, Panama’s economic fundamentals are strong. Unemployment remains relatively low, and a spate of capital-intensive projects like the Panama Canal expansion assure bustling economic activity for the next several years.

Additionally, several multinationals are relocating regional headquarters or major operations facilities to Panama.  Thus, in aggregate, the city remains a popular destination for foreign business travelers who are involved with these projects.

Due to swelling tourism statistics and this growing segment of business travelers, hotel occupancy rates in Panama have traditionally been quite high; it was not uncommon in the last few years for hotels to be operating at full capacity for several months at a time.

And so, given this stable market for transient visitors, smart property investors put 2 and 2 together– if there is no longer a market for them to sell their condos, perhaps they can still generate a return by competing with hotels in the short-stay rental market.

The idea is a popular one with travelers– why pay $150/night for a hotel when you can pay $100/night for a 2 bedroom apartment? It makes sense, and the idea took off in Panama.  The local Panama website became packed full of apartment listings, and a few real estate agents started specializing in property management.

Over the last few months, however, a couple of do-good politicians noticed that this market was not being taxed and regulated appropriately… landlords were reaping huge profits, and the government wasn’t getting its fair share.

And so, in a politically typical ‘shoot first, ask questions never’ approach, Panama’s National Assembly recently passed “Resolution 52.”  The intent of the resolution was to ensure that the government has a mechanism to collect taxes on transient rental income, in the same way that they tax hotels…

… except that’s not exactly what was written in the legislation.  What Resolution 52 actually does is make it illegal for anyone to rent his/her property for a period of less than one year.

HUGE DISCONNECT. But again, this is typical of Panama’s National Assembly– a few years ago they did something similar with their visa policy: at the time there were a lot of gringos who were residing in Panama full time on a 90-day tourist visa, without ever applying for residency.

In its efforts to fix what was not actually broken, the government (under then Tourism Minister and salsa extraordinaire Ruben Blades) decided that American tourists would only be granted a non-renewable 30-day tourist visa.

The decision did not have its desired effect– real estate sales and tourism numbers dropped, and within months, the government reversed its policy in favor of the original 90-day visa.

Undoubtedly, the same thing will happen with Resolution 52: the government will reverse its decision.

I’m very bullish on Panama’s future as the capital of Latin America, and there are definitely some undervalued opportunities in the city. My inside contacts there frequently pass me interesting deals, and frankly I wish I had the time to capitalize on more of them.

The bottom line is that if you were considering real estate in Panama, you should not let this ruling affect your decision.