Life and Leisure
Las Lajas – Las Lajas in the most popular beach destination in the Province of Chiriqui, Panama.
Volcan Baru – Volcan Baru is the highest peak in Panama offering incredible ocean views and spectacular cloud forest.
Santa Catalina – Santa Catalina is one of Panama’s most popular destinations for surfing.
Boom Potential – A description of the trends leading to the growth of foreign investment in Panama.
City of Knowledge – General information about the area of the Panama Canal Zone that is being converted into an international center for technology and research. Interviews with some of the exchange students working there.
The following article, Tapping Into Panama’s Wealth, appeared in the January 2005 issue of Panama ALERTS, an information service for expats, international real estate investors and seekers of unique lifestyles. To subscribe to Panama ALERTS, please contact us.
This article provides the basis for all future Panama ALERTS and explains why you should even bother to consider Panama as a place to live and invest in the first place.
Tapping Into Panama’s Wealth
What sets Panama apart from any other nation under the sky? From an investment perspective, Panama offers strategic advantages to the foreign investor. These advantages revolve around Panama’s undercapitalized wealth and the mechanisms by which such wealth can be released.
Property Rights as a Store of Wealth
In The Mystery of Capital, By Hernando de Soto, the author points out that in wealthy, Westernized nations, a piece of property not only provides a physical utility (e.g. growing crops, sheltering families, or housing factories), it can also be mortgaged, which provides the property owner with a surplus value known as capital. Capital becomes a surplus value because the money raised from a mortgage can then be used to fund a new business venture, expand an existing business, or make an investment. A property that can be mortgaged releases several times more value and potential than the basic physical functions of the property.
De Soto also explains that nations in which property titles are not consistently recognized by the marketplace become nations with undercapitalized wealth. The inability of property owners in developing countries to obtain clear and recognized property titles inhibits their opportunity to capitalize their assets by restricting them from obtaining a mortgage. Without a mortgage, few individuals or businesses are able to fully realize the capital locked up in the value of their property, which prolongs poverty, stagnates property values, and stunts economic growth.
Property Rights and Mortgage Financing in Panama
Panama is an anomaly in Latin America when it comes to property rights and mortgage financing. The fact that Panamanian property owners can readily transfer property titles, and the fact that those titles are sufficiently secure to be mortgaged by a bank, puts Panama several legs above the rest of Latin America in its ability to capitalize its wealth.
De Soto points out that it is not the property title itself that enables capitalization, it is the underlying documentation and legitimacy of property rights that enables a property owner to receive financing from a bank. The critical advantage to owning property in Panama is that Panama’s property titles are standardized, accurately recorded, publicly available, and easily recognizable by the law. So secure are property titles in Panama that a bank will accept the title as collateral for a loan. This fact alone is taken for granted in Western nations, but it is a rarity in developing countries around the world.
In Lima, Peru for example, the procedure to form a legally obtainable home requires five stages of bureaucratic red tape, the first stage alone comprising an amazing 207 steps! In Venezuela, a buyer with good credit must make a 75% down payment to obtain a mortgage. By contrast, Panamanians with good credit can obtain financing for 80% of the purchase price of their home, and titles are accurately documented in a Public Registry. In other words, Panamanian real estate has additional value due to the strength of its property laws and the willingness of banks to recognize property as collateral, which enables owners to release valuable capital that would otherwise remain dormant.
Leverage and Debt in Panama
Leverage represents the degree to which debt may be used to make a purchase. Buyers of real estate in the United States, Canada, Europe, and other Western nations use a high degree of leverage, often borrowing 95% or even 100% of the purchase price. The degree of leverage used is a direct function of the interest rates offered by lenders. Therefore, when interest rates dip relatively low, it enables buyers to maximize the amount of leverage used to acquire a property and maximize the total debt load to the buyer. In an efficient market, low interest rates will drive real estate prices higher, all other factors remaining equal.
While the Panama real estate market has been positively influenced by low worldwide interest rates, the degree of leverage used by most property owners in Panama is far lower than that of the Western world, though much higher than most developing countries. Refinancing is not as common in Panama as in Western countries and buyers have been less likely to maximize the amount of leverage used to purchase real estate. The link between interest rates and real estate prices is not as firmly established in Panama, which represents an undercapitalized value in the Panama real estate market.
Financial capital is the capital we are most familiar with, and Panama has plenty of it. As one of the world’s premier offshore banking centers, few other nations in Latin America possess the sheer volume of monetary deposits possessed by Panama’s many resident banks. Bank deposits in Panama can be borrowed to fund businesses, to purchase real estate, to buy stock, or to purchase inventories. In addition, Panama’s laws protect the free movement of capital, which means international investors are free to deposit or withdraw their money from Panama without restriction.
The availability of financial capital further separates Panama from its Latin American neighbors. The propensity for development in a country with substantial bank deposits is much higher than a nation with limited banking facilities. With such a competitive banking industry, investors and property owners in Panama are more likely to receive loans than their counterparts in most other Latin American nations. Related to real estate, the ability of Panamanian property owners to extract capital from their property ownership that helps fuel property price appreciation.
The CIA World Factbook estimates that in 2004, more than 77% of Panama’s economy was generated from service industries. Banking, international trade, shipping, logistics, tourism and other services are the cornerstone of the Panamanian economy. Services are different than goods because they require knowledge and skills, not physical resources, in order to compete in the marketplace. Knowledge and skills are known as intellectual capital.
As noted by the Latin Business Chronicle, “The star of the per capita ranking is undoubtedly Panama. The country has the 13th-largest economy in Latin America and yet it scores third [in Latin America] on the GDP per capita list”. Panama has become one of the richest countries per capita in Latin America, not because of its natural resources, but because of its considerable intellectual capital. The highly specialized knowledge, skills and training possessed by the people of Panama distinguish this nation from the vast majority of its Latin American counterparts. Intellectual capital, particularly when combined with other forms of capital, can be powerful creators of wealth and asset appreciation over the long run.
Roadways, water, electricity and communication in Panama are by far the most advanced in Central America. A drive through Nicaragua, Guatemala, or even Costa Rica will quickly demonstrate Panama’s superior infrastructure. Infrastructure is often the basis for property price appreciation and direct foreign investment from the private sector. Much of the region’s fiber optic cable networks meet in Panama, and the capacity of former U.S. military facilities are perfectly designed to manage advanced communication equipment. Advanced infrastructure further capacitates Panama to capitalize on its assets and increase its long-term prosperity.
The Reversion of the Panama Canal
Not only does the Panama Canal provide enormous amounts of steady cash flow for the Panamanian government and private sector, the surrounding land and infrastructure that was reverted to Panamanian control on January 1, 2000, represents a fantastic undercapitalized resource to the Panamanian economy.
The Panama Canal Zone represents approximately 7,000 buildings within 233,000 acres surrounding the shores of the Panama Canal. The infrastructure includes roads and highways, airports, electric services, water systems and sewage. The presence of shopping centers, schools, houses, offices, hospitals, medical facilities and recreational facilities such as tennis courts, golf courses, swimming pools and movie theaters creates enormous potential for recreational lifestyles and investment.
In addition, the land and buildings in the Panama Canal can be purchased and mortgaged, making the property much more valuable than its physical utility. Mortgaging releases capital which provides surplus value that can be invested in business ventures, new construction, renovation and other improvements. Job creation and economic surpluses arising from development in this Zone provide the fundamental undercurrent for real estate price appreciation.
Geographically, Panama truly is the Bridge of the Americas with its location at the fulcrum of the North and South American continents. This positioning offers significant and permanent advantages as a hub for trade, transportation and other services. For example, Copa Airlines, one of the most successful airlines in the Americas, has based their headquarters in Panama. Already a dominant player in global marine shipping, Panama is poised to capitalize on its favorable geographic location for air transportation as well. Panama’s geographical location provides it with a natural advantage over other countries and further represents potential for wealth generation and capitalization of its assets.
Climate-wise, Panama is below the hurricane belt, earthquakes are rare (the reason why Panama City is the only city in Central America with high-rise buildings), and its only volcano is dormant. Unlike much of the Caribbean, which suffered severe damage earlier this year during multiple hurricanes, Panama enjoys a low risk of natural disasters.When insurance companies evaluate the risks associated with owning property in Panama, Panama receives favorable terms due a historically low number of natural disasters.
Ecologically, Panama serves as the only land corridor for rare species of birds and other species that migrate between North and South America. With more species of birds than all of North America and over 10,000 species of vascular plants, Panama sustains an incredibly diverse ecosystem upon which neighboring systems rely. Panama is fortunate to have retained some of its precious ecological diversity while the bulk of the world’s tropical rainforests and ecological diversity rapidly depletes.
Intact ecological systems in Panama will not only attract increasing numbers of international tourists, they attract researchers, students, and international conservation organizations, while providing a host of health and economic benefits to the nation as a whole.In addition to other forms of capital, Panama is endowed with an abundance of natural capital, adding to its overall potential for long-term stability and sustainable development.
Baby-Boomers and Panama’s Lifestyle Advantages
Panama has only begun to tap into the wealthiest market segment ever witnessed on planet earth. The middle to upper class baby-boomers who are looking to ramp up their lifestyles during their Golden Years have already begun to invest in Panama. Less than five years ago, hardly a tourist could be found in Panama. Today, Panama has consolidated its status as an emerging destination for retirement and international tourism, which is one of the single biggest factors attributed to the recent escalation of real estate prices in selective zones in Panama over the past five years.
Panama continues to attract a growing number of baby-boomers who are looking for an investment that will not only appreciate in value, but an investment that will provide them and their families with immeasurable lifestyle advantages and personal enjoyment. Panama has one of the best residency visas for pensioners, a vast array of exotic tropical beaches and highlands, a diverse combination of cosmopolitan and natural living, plus top-notch medical, transportation, and communication services. With access to both the Caribbean and Pacific coastlines, more than 1600 islands, and convenient connections to more than 30 international destinations around the world, Panama is a gateway to an enormous range of possibilities for the baby-boomer retiree and lifestyle-oriented traveler.
The Bottom Line From an Investment Perspective
Panama’s unique combination of characteristics, especially the opportunities for property owners to mortgage property, dramatically improves its potential for wealth realization and property price appreciation in the future. Panama is in a unique position to realize its wealth, and has long provided the basis for increasing amounts of foreign investment. The lifestyle advantages offered by Panama are its final trump card, making it a worthy destination for the unmatched purchasing power of the baby-boomer retirement and travel markets.
By Michael Manville
Panama At Your Service
The above article, Tapping Into Panama’s Wealth, appeared in the January 2005 issue of Panama ALERTS, an information service for expats, international real estate investors and seekers of unique lifestyles.