Demand in Panama shifts to low- and mid-range housing

For many years Panama’s real estate market has been one of the fastest growing in Central America. This growth has been driven by a combination of factors, including the country’s prime geographic location; sustained economic growth, which has averaged more than 8% over the past decade; and the influx of foreign investment seen in recent years. The emergence of a middle class in the country has also provided a significant boost to the sector. Today real estate is a key component of Panama’s economy, amounting to $4.6bn and representing 12% of GDP in 2014. Except for in 2008, when it experienced a slowdown in the upper-middle and upper-end of the market, the country’s real estate market has seen unprecedented growth since 2006. As a result, the cost of land has skyrocketed, sometimes as much as three-fold. Nevertheless, the outlook remains promising. A growing middle class and the significant housing deficit, coupled with thriving industrial and retail segments, should see the sector continue to post sustainable growth in coming years.

Competitive Framework

Panama offers a flexible and competitive incentive framework for local and foreign real estate investors alike. Foreigners can purchase and own land in Panama, the only restriction being on land within 10 km of national borders. Property rights for coastal zones can be obtained by filing for a concession with the National Authority for Land Administration. In addition, the purchase of real estate in the country entitles foreigners to permanent residency visas, which can be converted to citizenship after five years. For citizens of 50 countries known as “Friendly Nations”, this visa can be obtained with purchases of more than $10,000, while those of other countries can apply with purchases of more than $300,000.


With more than 400 large residential projects reported by the construction guild in 2014, growth in the residential subsector is being driven primarily by the country’s expanding middle class. “Recently the high-end residential market has slowed down,” William Herron, president of Panamericana de Avalúos, a Panama City-based real estate appraisal services firm, told OBG. “However, Panama’s housing deficit reaches 140,000 units, mostly for homes in the mid- and lower-price ranges. This, along with preferential interest rates and other benefits, has seen the real estate market re-oriented towards this segment.”

Among such benefits are state-backed, zero-interest loans for homes under $40,000, a 4% reduction on interest rates for the $40,000-80,000 range and a 2% interest reduction for homes with a value of up to $120,000. Properties costing more than $120,000 (the maximum price eligible for benefits) are subject to residential loan interest rates between 5% and 7%. Such incentives have been well received by the market. “It’s not that the high-end market is paralysed, but it has slowed down, while the low-cost markets are selling at very good prices,” Herron said, adding that mid- to low-market buildings are selling at prices similar to a semi-luxury building – the former at around $2000 per sq metre and the latter at close to $2500 per sq metre. Apartments in this segment are around 60-75 sq metres – small by Panama’s standards, according to Herron. The same tendencies can be noted for beach homes, where developers have switched from apartments of 200 sq metres to smaller units of 70-80 sq metres to serve the burgeoning middle-class market.

With the Panamanian government announcing over $1bn investment in the 2015-19 period for housing and another 20,000 homes to be built through public-private partnerships (PPPs) to reduce the housing deficit, the social interest residential subsector may become the most interesting one for realtors (see analysis).


Outside the capital, many cities have likewise seen unprecedented growth in the residential and commercial sector. In places like Penonomé, Chitré, David and Santiago – all located in the interior of the country – land prices per square metre have risen from below $100 to over $300. In some regions this growth is associated with the benefits Panama offers to retirees and immigrants who purchase real estate. Among these are tax exemptions for retirees, the right of residency (and later citizenship) for immigrants, and tax exemptions for furniture and other belongings brought into the country when moving. For example, Boquete, a town in the Chiriquí region, has attracted considerable foreign investment in the residential segment, with most homes selling in the $200,000-700,000 range.


One of the most dynamic segments within the real estate sector is retail – including both malls and individual store locations. The average vacancy rate for these in Panama City is around 8%, while high-end luxury retail malls have a vacancy rate of around 4.5%, suggesting a possible undersupply in this segment. According to CBRE Panama, a real estate services firm, in 2014 the eastern periphery of Tocumen showed the largest portion of leasable area, amounting to 35% of the roughly 1m sq metres available in the city.

However, this promising area also showed one of the highest local vacancy rates, at 10%. By contrast, the south of Panama City showed 160,000 sq metres of leasable area, with high demand indicated by a vacancy rate of under 2% and prices going up to $70 per sq metre. Overall, the monthly cost of renting retail space in 2014 averaged $44 per sq metre, ranging from $35 to $55 per sq metre for new top-of-the-line spaces to an average of $24 per sq metre for “Class B” space.

With prices in the luxury retail segment rising steadily, in 2014 the real estate retail market registered 26% overall growth in floor space. In that year, more than half a million square metres were under construction, with most of this completed as of early 2015. Among the types of business occupying top-notch retail space, speciality stores led with over 30% of the retail market, followed by department stores (17%), personal service stores (12%), restaurants (9%) and supermarkets (8%). At many of the large shopping malls in Panama City, changes in tenant purchasing power and consumer patterns has encouraged the entry of luxury retail chains (see Retail chapter), pushing up the price of retail real estate. In the luxury category, the coming entry of Megamall, a 50,000-sq-metre retail space in Panama City, already has stores lining up for the project’s waiting list, particularly providers of services such as mobile phones and internet.

Office & Commercial

In the office segment, with the stock of space growing by 15-20% in the past few years, the market is thought to be close to reaching its saturation point. Partly responsible for these high rates has been consolidation related to Panama’s growth as a finance and banking centre. A common practice in the Panamanian market is “strata” investment, whereby investors can buy or lease property floor-by-floor, widening their portfolios and reducing individual risk. By providing a larger influx of capital, this arrangement has been part of the drive behind rising prices.

Today the city has over 1m sq metres of available commercial space, with another 400,000 sq metres coming on-line in the next couple of years through developments like Evolution Tower, one of the tallest buildings in Latin America, and Soho, a mixed-use luxury development with offices and a shopping mall. Today, the vacancy rate for office space is reaching 30%. Nonetheless, as Danny Quirós, director of valuation and consulting at Colliers International Panama, told OBG, the market has not yet seen a significant fall in prices, which are still around $21.50 per sq metre per month. Only some individual cases have shown price decreases in the 10-12% range, said Quirós, while others have had incentives added to contracts, such as lower yearly rent increases or renovations.

The overall trend for developers is to hold firm on prices, and their willingness to do so in the face of such high vacancy rates may be put down to several factors. The first is excess liquidity in the economy as a result of trading in the Colón Free Trade Zone and high levels of foreign capital, which help developers access liquidity even with vacancy rates high. Financing for offices can be obtained at interest rates of 7-9% with 10-year terms. A second reason the market has not seen a steep decrease in prices, Quirós said, is the natural timeline of the sales cycle. In 2014 around 60,000 sq metres of office space were rented, suggesting that, although demand exists, new space is being developed at a faster rate than general transaction times. A third factor that has greatly helped the office market is that many multinational corporations have looked at the country as a possible location for their regional or global headquarters, including Johnson & Johnson, Caterpillar and Procter & Gamble. The incentives that the government offers at an administrative, tax and immigration level, combined with Panama’s geographic location and close fit with US time zones, has made the country an attractive choice for establishing central operations.


Hotels have been another driving force. From the end of 2013 to June 2014, more than $200m was invested in the hospitality segment, and the ongoing surge in construction and real estate has attracted many international hotel chains to Panama City, including Starwood Hotels & Resorts’ Westin chain, Hilton’s Waldorf Astoria group, and InterContinental Hotels’ Holiday Inn and Crowne Plaza series. With supply growing at a much faster rate than demand, however, hotel occupancy rates have been declining since 2010. In 2014 the average national occupancy rate was recorded at 56%, down from 67% in 2010.

New Trends

The arrival of new multinational headquarters is having an influence on real estate products themselves. Since many corporations have set standards and prerequisites for the spaces they use, office construction has gradually become more efficient and environmentally friendly. One of the most commonly requested standards is the US Green Building Council’s Leadership in Energy and Environmental Design (LEED). In 2014 Panama led the region with 48 LEED-registered and 10 LEED-certified buildings. Other increasingly popular features are open areas, natural ventilation and illumination, and co-working spaces.

The high cost of land in Panama City, sometimes reaching values of $1500-2500 per sq metre, has also pushed developers to be more creative about how they use available space. This has helped drive the success of mixed-use development. With retail space on lobby floors, in offices and sometimes even in residential units within the same building, this type of product has become widely accepted in the city, appealing to commuters in particular, by offering services they need as close as possible to their work or residence. For these reasons, mixed-used commercial buildings have some of the highest market absorption rates.

Office Space Surge

Efforts in the commercial real estate subsector, however, may not be enough to balance the equation, as Colliers states in its end-2014 report on office real estate. The report says investments may see some months of speculation and high vacancy rates. The high-end office market has nearly tripled since the beginning of the decade, and hospitality real estate saw a growth of over 60% in the 2012-13 period. Colliers reports that 2014 showed a 17.3% growth in office inventory, with over 200,000 sq metres entering the market in 2015 within Panama City, leaving gross leasable area at 1.36m sq meters, while an additional 380,000 sq metres are now under construction and will enter the market in the next two years. In 2014 the net absorption reached 62,000 sq metres, leaving a net occupation rate of 4.5% for the year and an overall vacancy rate slightly under 30%.

According to Colliers, rental prices saw a 6% decrease by December 2014 compared to the same period a year earlier, a figure that seems small given the overall vacancy rates. A comparison of closing and list prices shows an average difference of 5%, which again is not large in light of the current market conditions.

Other sources show similar rates for vacancy but a sharper decline in lease prices. According to global real estate services firm Jones Lang LaSalle, the office vacancy rate in Panama City is the highest in Latin America, at 33.6%, and lease rates have declined by as much as 30%. A separate report by Smith Travel Research shows hotel occupancy in 2014 dropping by more than 70%, using 2008 as a baseline. According to Panamericana de Avalúos, only about 40% of the vacant offices belong to the original developers, whereas the remaining 60% is owned by individuals that speculated and purchased the property for resale. This would bring vacancy rates for developers down to only 12%, which may help explain why office development is still ongoing.


One of the fastest-growing segments in Panama has been industrial real estate. The inclusion of value-added activities to the already strong logistics chains in the country has proved very successful. Areas like East Panama City, or Tocumen, and most of the free zones and special economic areas have seen considerable growth in the past few years (see analysis).

The Reit Law

In an effort to diversify and boost real estate investment, for two years Panama has been working to adopt legislation necessary for its first publicly traded real estate investment trusts (REITs). In mid-2014, a new REIT Law was established and approved, allowing the creation of such entities and giving them special consideration for lower dividend taxation. REIT instruments are to begin public trading in 2015.

Under the new law, whose formulation was led by the Panamanian Chamber of Managers of Mutual Funds and Pension Funds, REITs must meet a number of criteria to be able to operate. They must be a legally formed company or trust. They should have investment horizons of at least a five-year period and must be carried out in Panama by the company itself, either directly or through subsidiaries. A minimum of $50,000 in starting capital is required, and REITs must be registered at Panama’s Stock Market Superintendency and the National Authority of Public Revenue. The minimum portion going to real estate has been set at 80%. No restrictions have been imposed on the nationality of investors, but their number has been set at a minimum of five for the first year, 25 for the second and 50 for the third. Regarding dividend distribution, this minimum was set at 90% of net profit in each fiscal period to apply for special tax incentives, otherwise the REIT loses such advantages. This portion is then exempted during the first two years of the REIT’s existence.

Tax advantages for REITs that meet the above requirements include a 20% income tax exemption, leaving the total income tax at 5%, as opposed to 25% for any non-compliant funds. Compliant REITs will also not be required to pay the advances on estimated income tax, and will be exempted from the rules regarding earnings on the sale of real estate and securities.

The success of Panama’s REIT market compared to similar markets is up for debate. According to Kris Hudson of The Wall Street Journal, it may be some time before the REIT market gains popularity, given the limited expansion seen with similar strategies in Central America, such as in Costa Rica, where the REIT market has only been able to attract regional investors. The main challenges, the REITs may find, will be in the market itself, especially for commercial real estate.


Panama City’s sustained growth in the past few years has posed several challenges. One of the foremost is space. With the canal and protected zones to the north, and the bay to the south, the only remaining lands for expansion are east, towards Tocumen airport, or west, past Puente de las Américas. This in turn brings a second challenge, transport. Though some important solutions like the metrobus and metro have been implemented, the city still has a ways to go to avoid the infamous trancones, as traffic jams are locally known (see Transport chapter). A third key issue the market has had to deal with is speculation, especially in the commercial segment, which is starting to feel the effects of near-saturation. However, dynamism in real estate has meant the sector has been able to keep up and compensate in other segments. As a further challenge, many believe the shortage of qualified labour, especially bilinguals, has crimped the sector’s development. As a solution to the lack of qualifications, the Panamanian Association of Brokers and Real Estate Developers has proposed a law to regulate the sector by creating a Superintendent of Real Estate Agencies and a Real Estate Technical Board within the Ministry of Trade and Industry. The bill and new agencies would regulate the sector and its brokers to organise and inform the market, and to prevent fraud.


These and other challenges colour the sector’s outlook. The rising costs of land, combined with a large amount of speculation in past years, has made it harder for the commercial segment to lease its widely available office space. Though prices have not seen very large reductions, the overall concern is whether these can be sustained given the large amount of space entering the market in the next few years.

A different story is unfolding in other segments, especially industrial and retail, which may come to pick up the slack in commercial. Growing demand for luxury retail has kept most developed floor space occupied, often before it is fully completed. Non-luxury retail, though less sought-after, has been keeping up as well. The industrial market has also seen recent expansion and could be set for more. Industrial space near the Tocumen airport and in special economic areas has seen a surge. Above all, the opening of the widened Panama Canal may further help the growth of the industrial subsector, making this segment one to watch.

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The Report: Panama 2015

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