Panama Goes Boom!

Panama.  Not just a song by Van Halen, but also a thriving country in Central America.

I was lucky to join a delegation of Canadians business people in January that went to Panama City.   When we were there we had the opportunity to meet with a number of prominent Panamanians, particularly in the real estate sector.

Panama City is the economic engine of Panama, and due to the canal it plays an important role in global trade.  The simple math on the canal is that a commercial vessel would spend up to $150,000 to pass through the canal.  The estimated savings of passing through the canal – in labour, operating costs etc – for that same vessel is up to $1 million.

The largest of the ships that can currently go through the canal is called a Panamax ship, which can transport 5000 twenty-foot equivalent unit containers (TEU.)  We got up close to one on an afternoon cruise to see the skyline of Panama City.

IMG_00000870

A significant expansion project of the canal expected to completed in 2015 will allow a new breed of ‘post-Panamex’ ships through the canal, which could house up to 16,000 TEU.  To put this in perspective it is the cargo equivalent of 16 trains.  While I haven’t seen it in print, I was told that the largest of ships, could pay up to $2.5mm USD for passage through the canal.

While the claim is that the canal will be ready in 2015, infighting, delays and cost overruns seem to be a daily news story in Panama.  The shot below was taken a few weeks back, and shows the current 1st lock on the Colon (Atlantic) side of the canal to the right, with the expansion project to the left.

While by no means an engineer, it seems to me that this project still has quite a ways to go, and that those hoping for a 2015 completion may be overly optimistic.

IMG_00000900

The economic might of the canal, paired with Panama City’s convenient geography between North and South America has made the capital a centre for banking and an emerging locale for multinationals to headquarter their operations for the Americas.

An accommodative tax regime, has also made Panama a destination for retirees and international business people, two other factors providing support for an explosion in condo and commercial developments as well as gentrification in the older parts of Panama City.

IMG_000008911

Certain things did raise certain red flags of the superb growth story we witnessed in Panama.

Comments from a developer about starting construction on a building that was only 17% sold, while said as a sign of strength and a show of their ability to sell condos (the building subsequently sold out,) raised my fears that a glut could develop and wondering who would be holding the bag if the proverbial music did indeed stop.

The 5 key developers in Panama are partners in a bank, whose focus is on financing development and purchases of property.

The skyline is impressive, however at night a large part of the buildings remain dark.  The explanation is that many units are for investors or businesspeople who are seldom there.

A colleague went to pick up some documentation for a condo that was supposed to have closed months before, only to find his name misspelled on legal documents.

Another, who bought property for investment has complained about construction delays in his own condo unit and his  remark that getting ones money out of Panama’s property market was proving more difficult than putting it in, was offhanded, but still concerning.

There is no doubt that Panama is currently experiencing a boom.  The completion of the Panama Canal expansion will see the economic importance of the canal to global trade grow significantly and the revenues derived from it increase exponentially.  This will certainly add to an economy that grew over 10% in 2012 and likely did about the same in 2013.

As with any developing country, especially one that in recent memory was a military dictatorship, choosing your partners on the ground, the highest quality representatives for your money there, is key to your success.

Return to Blog