Download Investment Opportunities in Costa Rica and Panama

Department of Real Estate and Construction Management
Division of Building and Real Estate Economics
Master of Science Thesis No. 426
Investment Opportunities in Costa Rica and Panama:
An Insight Into Central American Real Estate Development
Author:
Supervisor:
Loida Oyuela Aguilar
Hans Lind
Stockholm March 2008
Master of Science Thesis
Title:
Author:
Department:
Master Thesis Number:
Supervisor:
Keywords:
Investment Opportunities in Costa Rica and Panama:
An Insight into Central American Real Estate
Development
Loida Oyuela Aguilar
Department of Real Estate and Construction
Management
Division of Building and Real Estate Economics
426
Hans Lind
Costa Rica, Panama, tourism, international real estate,
FDI, transparency, baby boomers, boom, bubble
Abstract
In recent years, Central America has become a top destination for foreign investment.
Of the seven countries comprised in the region, Panama and Costa Rica have succeeded the
most in luring FDI through incentives; both their tourism and real estate sectors being the
main recipients.
This study explores the potential of the Central American region as a whole, but with
particular emphasis on Costa Rica and Panama due to their booming real estate markets and
potential for local and foreign investment. The study is based on research of the main factors
that have contributed to the surge of real estate activity in the region by relying on market
office reports, surveys and published interviews.
The study leads to the conclusion that tourism and real estate are strongly linked and
have played a determinant role in the prosperous economic condition of these two
neighbouring countries. The market for baby boomers in search for second homes, the
location of Panama City along the Panama Canal and the canal’s planned future expansion,
the increasing number of multinationals nestling in the main cities, and the expectations of
economic growth along with an inviting investment atmosphere are some of the main factors
characteristic of the real estate markets in Costa Rica and Panama.
Finally, it is unquestionable that the rest of Central America has the potential to further
develop; however the governments must speed up delivery of optimal strategies that lure more
foreign investment into the region’s remaining tourism and real estate sectors.
Acknowledgement
This work is dedicated to my parents and siblings, for all their love and support.
Without the love and devotion of my parents, I would not be the person I am today. Both are
my only inspiration and the reason I am fulfilling yet another important goal in my life.
No words can express the love, gratitude and admiration I feel for my best friend and
fiancée Manlio Martinez. Thank you! Because of you I have felt at home no matter where I
am. You have encouraged me every step of the way and a big part of this thesis could not
have been completed without your help.
Special thanks to Silvio Moro, for his support and encouragement during the time we
each wrote our thesis; as well as to the classmates and friends I made throughout my studies
and stay in Stockholm.
Finally I would like to thank my supervisor, Hans Lind for his time and valuable
contribution in guiding me throughout my research and writing. I also thank the Department
of Real Estate and Construction at KTH, especially all my professors who contributed
enormously to my experience.
This work is the result of the profound love I have for my country, Honduras. There is
no greater joy than to end my experience in beautiful Sweden, writing about where my
journey began.
March 2008
Stockholm, Sweden
Loida Oyuela Aguilar
1.
INTRODUCTION ................................................................................................. 1
1.1 Background...................................................................................................................................... 1
1.2 Problem 1.2 Problem Analysis....................................................................................................... 2
1.3 Purpose/Objectives ......................................................................................................................... 3
1.4 Key Research Questions ................................................................................................................ 3
1.5 Limitations ....................................................................................................................................... 4
1.6 Methodology .................................................................................................................................... 4
2.
THEORETICAL FRAMEWORK: IDENTIFYING MAIN CONCEPTS &
DEFINITIONS............................................................................................................. 6
2.1 Measuring the Value of Investing in International Real Estate Markets .................................... 6
2.2 Perceptions of Central American Real Estate Investment .......................................................... 9
2.3 Incentives to Attract Foreign Direct Investment ........................................................................ 13
2.4 Transparency ................................................................................................................................. 14
3.
AN ECONOMIC OVERVIEW: CENTRAL AMERICA ....................................... 17
3.1 Current Economic Conditions ..................................................................................................... 17
3.2 Central American Integration and Treaties with the World....................................................... 20
3.3 Foreign Direct Investment and Opportunities............................................................................ 21
4.
COSTA RICA AND PANAMA: TWO COUNTRIES’ ECONOMIES AND THEIR
REAL ESTATE SECTORS ...................................................................................... 24
4.1 Costa Rica ...................................................................................................................................... 26
4.1.1 Economic Overview ................................................................................................................. 27
4.1.2 Real Estate Sector ................................................................................................................... 28
4.1.3 Investment................................................................................................................................ 32
4.2 Panama........................................................................................................................................... 32
4.2.1 Economic Overview ................................................................................................................. 33
4.2.2 Real Estate Sector ................................................................................................................... 34
4.2.3 Projects .................................................................................................................................... 35
4.2.4 Investment................................................................................................................................ 41
5.
COSTA RICA AND PANAMA: PARTICULARITIES OF THEIR REAL ESTATE
MARKETS................................................................................................................ 43
5.1 The Role of Tourism in Hotel and Residential Real Estate ....................................................... 43
5.1.1 Costa Rica................................................................................................................................ 43
5.1.2 Panama .................................................................................................................................... 44
5.1.3 Tourism and Real Estate.......................................................................................................... 46
5.2 Baby Boomers and the Residential Market ................................................................................ 46
5.3 The Office Market .......................................................................................................................... 48
5.3.1 Costa Rica................................................................................................................................ 49
5.3.2 Panama .................................................................................................................................... 50
5.4 Transparency ................................................................................................................................. 51
5.5 Discussion: Boom or Bubble in Panama?.................................................................................. 52
6.
A CRITICAL ANALYSIS: WHAT’S IN STORE FOR THE FUTURE................. 55
APPENDIX I: COSTA RICAN REAL ESTATE AND SAN JOSE CITY VIEWS ....... 65
APPENDIX II: PANAMA CITY VIEWS..................................................................... 66
APPENDIX III: DONALD TRUMP INVESTS IN PANAMA....................................... 67
1.
Introduction
1.1 Background
In recent years, Central America has become at an increasing pace a top destination
for foreign investment. Central America is known as the connecting bridge between North
and South America. Due to its easy access from the United States, this area is not only
strategically located but encompasses a wide variety of resources.
Geopolitically Central America is considered to be constituted by Belize, Guatemala,
El Salvador, Honduras, Nicaragua, Costa Rica, and Panama. The region is rich in a diversity
of landscapes due to its mountainous topography, abundant natural vegetation and forests,
rivers, lakes and coastal beauty both in the Pacific and Atlantic oceans. A circum-Caribbean
region which includes the coastal lowlands of eastern Central America is home to the second
largest coral reef in the world.
As more tourism is attracted to the area, it is self explanatory that there is more
exposure to the lifestyle, resources and promising economic growth Central America offers.
This area is today inhabited in a significant percentage by Europeans and North Americans, as
a result of its booming tourism industry during the past years. Increased exposure to its
natural beauty and development opportunities has awakened an intensifying interest in foreign
investment.
On the other hand, regardless of possessing a high attraction for real estate investment,
it still presents major disadvantages in terms of political, economical and legal factors. The
poor transparency which characterizes the markets in the region’s countries is also a major
disadvantage in terms of investment. Certainly there are specific characteristics pertaining to
these markets that have made them very attractive to cross-border investors. How are then the
real estate markets in this part of the world behaving?
Today, two of these seven small countries are undergoing a real estate boom. Panama
and Costa Rica have the most successful tourism industry in the region. This has been also
enhanced by a growing interest and investment activity in their real estate sectors. This study
will consider the Central American region as a whole, but with particular emphasis on Costa
Rica and Panama due to their emerging real estate markets and potential for both local and
foreign investment.
1
Figure 1: Map of Costa Rica and Panama
Sources: Map 1 Central America http://feiertage-weltweit.com/map/central_america.gif
Map 2 Costa Rica and Panama http://www.sitesatlas.com/Maps/Maps/306.gif
U.S.A.
CENTRAL AMERICA
1.
2.
3.
4.
5.
6.
7.
Belize
Guatemala
El Salvador
Honduras
Nicaragua
Costa Rica
Panama
MEXICO
1
2
4
3
PACIFIC
OCEAN
CARIBBEAN
ISLANDS
5
6
SOUTH
AMERICA
7
COLOMBIA
1
.
2
P
r
o
b
l
e
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1.2 Problem Analysis
Due to the recent conditions which have favoured the development of the real estate
market in the Central American region alongside a boom in Costa Rica and Panama, there is a
lack of information, especially updated information on the subject. Recent events are guiding
the course for the economic development and growth in the region. Expectations of future
growth have fed the interest in several sectors such as real estate and tourism. The need for
updated information has been the main reason for addressing a study which focuses on current
significant events, and allows analysis of the factors which have contributed to real estate
development.
1.3 Purpose/Objectives
The purpose of this document is to study the current real estate market development in
the Central American region, with special focus on Costa Rica and Panama. Both countries
are undergoing a heightened growth in their real estate sectors. By exploring the factors which
have contributed to this growth as well as the characteristics of their real estate markets, it
will be possible to discuss their future behaviour as well as their effect on the other
neighbouring countries. The information studied will comprise economic data and issues
regarding development and investment opportunities.
1.4 Key Research Questions
Upon realizing the research, a series of questions were listed in order to narrow down
the search and better define the main aim of this paper. The following questions were
employed and subsequently reformulated as the research process developed:
•
What are the current economic conditions and potential for real estate investment in
Central America?
•
Which of the Central American countries are of particular interest?
•
Which characteristics predominate in the regulatory framework and national property
market of these countries?
•
How are real estate investments in the Central American region perceived by foreign
private and institutional investors?
•
What impact does foreign investment have/will have in the development of real estate
in the rest of Central America?
3
As aforementioned, it was important to narrow down the study. Central America is a
small region but for this particular subject, it was deemed important that all sources of
information be reliable and updated. For this reason, a thorough study of the most developed
real estate markets was considered essential. In addition, as all property markets have intrinsic
characteristics which determine their type of development and influence their future course,
the main characteristics of how these real estate markets have developed will be useful in
formulating expectations or assumptions of how the other countries´ markets may evolve as
well.
1.5 Limitations
In order to realize the study, the compilation of recent information was essential. The
lack of reliable and updated sources was one of the main limitations regarding researching
and gathering of information. Therefore, the information portrayed on this study has been
obtained from public or private entities, few in number but of highly authoritative character.
Furthermore, direct interviews were difficult to attain due to factors such as distance, time and
unavailability of potential interviewees. In compensation, written reports and published
interviews from highly-qualified professionals and institutions have been included. Due to the
real estate market augur in Costa Rica and Panama, it was possible to find recent and up-todate information applying to the population and sector addressed in this study, which
followed the main concepts, definitions and issues considered relevant for the elaboration of
this thesis.
Finally, as recent events have been affecting the development of the region, the reader
should keep in mind that Central America will continue to undergo changes at a fast pace and
which may not be depicted in this work.
1.6 Methodology
The first part of the study shows a compilation of information from various sources:
public and private entities. This information illustrates the current economic conditions for
Central America and gives an idea of which countries have the most developed real estate
markets and why.
4
The next part of the work consists on a description of Costa Rica and Panama. These
countries were selected based on the data available on their real estate markets, which are the
most developed in Central America.
Following is a comparison of both real estate markets, with special sections referring
to each country. It is important to note that Jones Lang LaSalle has elaborated office reports
for the two capital cities: San Jose and Panama City. In addition, CB Richard Ellis has a
report on Panama City’s office market, realized by its headquarters in Panama. Prima
Panama, a real estate promotion company, realized a survey with the objective to evaluate the
level of construction underway in Panama City as well as identify future projects planned for
development in the area. Also, an interview published in The New York Times by Summit
Communications to General Director of CB Richard Ellis Panama is included. These reports,
survey and interview are considered a reliable source and are used in this part of the study to
allow brief descriptions and discussions on how these markets relate to the overall picture of
the boom primarily on residential real estate.
For the final part of the work, a critical analysis is based on the prior comparisons and
information, as well as describing some possible directions regarding the future of the real
estate markets in those specific countries. Finally some thoughts regarding expectations of the
development for the rest of the region are included as well.
5
2.
Theoretical Framework: Identifying Main Concepts &
Definitions
2.1 Measuring the Value of Investing in International Real Estate Markets
As capital markets become global, so do commercial real estate markets; thus even
though investing in foreign real estate may pose certain risks, the potential international
investment holds for investors must not be overlooked. For this reason, “a formal and
systematic analysis of each country’s market potential should be particularly fruitful.” (Lee,
2004; p.1) According to Lee (2004), there are three issues which must be considered in order
to capitalise on the potential that real estate poses for investors: (1) the potential of the
countries’ real estate markets in general; (2) the potential of the individual market sectors and
(3) the investment process itself.
Real estate investors, unlike equity and bond investors, face major informational
problems when contemplating international investment such as: differences in property rights,
economic efficiency, market maturity; differences in size, accessibility and security of tenure
and differences in property taxes, the recoverability of out goings, and the exit liquidity (Lee,
2004). Lee (2004) refers to other studies which have concluded that the key barrier faced by
real estate investors is the acquisition of appropriate local market information, as different
countries display differing administrative, legislative and fiscal regimes, coupled with
differing property market conventions and codes of valuation practice.
Exploring new territory as an investor, involves doing a thorough assessment of the
opportunities at hand, and although all steps in the investment process are important, the first
step which is gathering information on the market, is the most crucial (Lee, 2004). Several
techniques may be applied such as gathering background information (desk research), making
individual assessments based on contacts with local investors and monitoring competitor
activity. (Lee, 2004; p.1) However, Lee (2004) refers to findings in several studies when
stating that there are numerous dimensions to be considered by investors when attempting to
gauge a country’s real estate market potential, such as the expected growth and risk of the
country in general, real estate transparency and specific risk characteristics.
Then how is it possible to quantify the investment potential of international real estate
markets? In his work “Gauging the Investment Potential of International Real Estate
Markets”, Lee (2004) develops and illustrates a methodology for quantifying the investment
6
potential of international real estate markets for 51 countries across the world. He measures
the four fundamental dimensions of international real estate as mentioned before: (1)
Expected growth1, (2) Country Risk, (3) Transparency2 and (4) Real Estate Market Specific
Risk, and elaborates a Real Estate Potential (REP) Index.
Country Risk as a Dimension of International Real Estate
Lee (2004) explores the definition of country risk and finds that few studies have been
realized up to the date of his study to evaluate the effects of country risk on international
portfolio investment. Mostly due in his criterion, to the common misconception investors
have that country risk is pertinent to less developed countries and not to developed nations.
This could be true when accounting for only political risk, however, country risk not only
includes the effects of political conditions, but economic conditions as well. These economic
conditions can be: discriminatory tax regulations, limitations on foreign ownership, lack of
information, capital controls, and transaction costs.
Moreover Lee (2004) states that additional variables should be included in a measure
of country risk, such as inflation, the countries balance-of-payment deficits or surpluses, and
the growth rate of GNP per capita. Since a government is likely to have trouble in one of
these areas, it may attempt to resolve the problem by enforcing measures which may affect
foreign investment. It could expropriate foreign-owned property or limit the repatriation of
profits to increase the government’s revenues. It could also improve its balance of payments
position by introducing exchange controls. Lee (2004) concludes that the better the economic
outlook and political stability of a country, the higher the probability that it is safe for
investment. It is important then that in order to develop an international diversification
strategy, investors employ a measure of country risk that encompasses all factors that in some
way limit market access or encumbers the normal investment process (Lee, 2004; p.5).
Real Estate Market Specific Risk
Due to the complexity of real estate transactions and the immobile quality inherent to
real property, a property investor needs more legal protection and stronger property rights
than bond and equity investors (Lee, 2004). Thus, local factors exert a strong influence on
1
To obtain expected growth, Lee (2004) estimates the expected return of each country’s real estate market by
taking the average growth rate in real GDP over the next five years from the Global Market Information base.
2
Lee (2004) uses the JLL (Jones Land LaSalle) GRET (Global Real Estate Transparency) Index for 2004 to
measure the transparency of the 51 countries examined.
7
overseas real estate investment decisions, more so than in the case of other international asset
markets (Lee, 2004).
In order to gauge the market specific risk of the local real estate market, Lee (2004)
collects data on a wide variety of property specific factors such as size, tax issues, and so on.
He adopts the approach of other authors who relate size of real estate market with country
GDP. This gives an estimate of the investable market size of each country. Then the data is
adjusted to account for factors that foreign investors may encounter when investing in real
estate versus the local market players. This adjustment gives an estimate of the countries’
investable or effective market size which is likely to be smaller.
Countries around the world differ considerably in their approaches to lease law and
tenant law (Lee, 2004). Many have established guidelines favouring tenant’s rights over the
landlord’s. Although in some countries these guidelines are limited to residential real estate,
they have further been adopted for commercial real estate as well (Lee, 2004). In addition,
Lee (2004) remarks it is important to note that tenant’s rights vary from property type and
country as well. Also, foreign ownership of real estate in many countries is subject to
ownership restrictions and prohibitions. He illustrates with the example of Mexico, a country
where direct ownership of property by a foreign individual or institution, is prohibited within
100 kilometers of the border and within 50 kilometers of the coastline. Thus, he measures the
security of property rights and the effectiveness of contracts and leasers by using a Property
Rights (PR) Index developed by Johnson and Sheehy in 1995; and the rule and enforcement
of law, especial with respect to non payment and bankruptcy, from the work of La Porte et al
(1997). Finally, in his work, the author adjusts the data to reflect taxation and ownership
issues relating to direct real estate investment.
Combination of the Four Dimensions: Expected Growth, Country Risk,
Transparency and Real Estate Market Specific Risk
After combining all dimensions into the REP Index, Lee (2004) concludes that
investors should add more weight to certain dimensions in relation to their particular interest.
For example, private equity funds might want to add more weight to expected returns than to
country risk, which may be of greater concern to risk adverse investors. Cultural and language
differences may deter certain investors from exploring some markets. Also, he observes that
when it is time to undertake the investment process, more detailed and in-depth analysis
8
should be performed. For example, whether to invest directly or indirectly, enter the market
individually or with a local partner or through a joint venture, are considerations to be
weighed since additional factors may need to be examined. He further adds that some
alternative measures to each dimension included in the REP Index may need to be considered.
Readjustments may need to be realized as some countries undergo major macroeconomic
changes or country-specific developments.
In the Growth, Risk, Transparency and Market Specific Indices and the REP Index for
51 Countries: 2004 (Lee, 2004), Costa Rica was the only Central American country to appear
and was ranked in 41st place. The Indices were ranked Excellent, Good, Average, Weak and
Poor. For Costa Rica in particular the outcome of each index was as follows:
•
Expected Growth: Good
•
Country Risk: Weak
•
Transparency: Weak
•
Market Specific: Poor
•
REP: Weak
The REP Index was realized as a useful tool allowing insight to individual
international real estate markets in a comparative sense, where investors could choose among
countries with objectivity and pursue further analysis in each country regarding the next
levels of investigation: the property-types to invest in and method of market entry.
2.2 Perceptions of Central American Real Estate Investment
As international opportunities arise, real estate investment becomes more and more
popular as a diversification tool due to the potential foreign investments offer in total risk
reduction of a portfolio (Lim, McGreal & Webb (2006)). In addition, its diversification
advantages, higher yields, and lower risk have been considered the three most popular reasons
for international property investment (Lim, McGreal & Webb (2006)). Further reference has
been made to the reality of investors seeking to reduce portfolio risk over the long term by
diversifying out of their home markets (Lim, McGreal & Webb (2006)).
Interestingly, some countries in Central/South America and Africa which appear to
offer new opportunities for development, may have a poorly developed economic
infrastructure, lack a regulatory framework for foreign investors and pose major
9
disadvantages regarding property ownership due to ambiguous land legislation (Lim,
McGreal & Webb (2006)). However the implementation of economic policies and structural
reforms in the developing countries has facilitated FDI and portfolio investment, which in
turn have led to: improved investment climate, improved access to local financial markets,
especially the stock markets, as well as improved availability and reliability of financial
information on domestic firms (Lim, McGreal & Webb (2006)).
Particularly, the Central and South American regions have made progress in
undertaking significant structural reforms. The changes undergone in the region vary widely.
Success in the implementation of macroeconomic, political and institutional reforms have
been made in some countries, while in others measures must still be taken to promote
economic growth and encourage investment (Lim, McGreal & Webb (2006)).
The study “Perception of Real Estate Investment Opportunities in Central/South
America and Africa” (Lim, McGreal & Webb (2006)) relies on an exhaustive survey which
examines from the perspective of U.S. and European real estate investors, attitudes about
direct investment into real estate in Central/South America and Africa. The main question
driving the study is whether these regions have the potential to appeal to institutional and long
term investors seeking to diversify their real estate investment portfolios.
For gathering the information, four main elements were considered by the authors:
political, economic, socio-cultural, and legal. These elements were selected due to their
influence in the investors` decision-making behaviour. The respondents revealed that the main
factor influencing their motivation for including foreign property within their investment
portfolio was the search for higher returns, followed by potential capital appreciation, steady
income stream and risk reduction. Ranked at a secondary level where: availability of
institutional investment grade properties, sound economic policies and market oriented
reforms in foreign countries, different economic and political environments, matching foreign
assets to foreign liabilities, and lack of opportunities in domestic markets. Those factors
ranked as least important or unimportant were: tax incentives, operational strategies, and poor
returns in their home country.
10
The authors concluded about their work as follows:
1. Political factors were ranked as very important by most respondents. Internal
political stability, certainty about future political climate, and removal of
restrictions on foreign investors were highly regarded. The removal of trade
barriers was considered the least important or influential factor.
2. Regarding the economic factors, expected returns were defined as the most
important
factor
influencing
foreign
property
investment.
Currency
convertibility, strength and stability of currency, currency exchange rate, good
supply and demand fundamentals, as well as risk diversification were
denominated significant factors as well. At a secondary level, the state of
general economic health, good track record of sound macroeconomic policies,
and credit worthiness of the country were identified.
3. The way of doing business, followed at a significant distance by cultural
differences, were the most important issues concerning socio-cultural factors.
Language barriers and personal contacts were considered important and lastly
custom and habit were regarded as having less significance.
4. Legal factors such as regulatory law and legal framework were highly
regarded. A small population of the respondents gave importance to
environmental protection.
Figures 2.1 and 2.2, display the perception of risk and return in Central and South
America from both European and US investors. The way both groups of investors surveyed,
perceive the same markets, differs. Most countries shift from the High Risk/ Low Return
spectrum as perceived by European investors towards the High Risk/ High Return spectrum
which depicts the U.S. respondents´ perceptions of risk and return. According to European
investors, lack of expertise in terms of local information and knowledge are reasons for the
high perceived risk. It is important to note that of the respondents, 78% were U.S. companies,
while the U.K., Belgium, Germany and Italy had a representation of 4% each. Netherlands,
Sweden and Switzerland accounted for the remaining 6%.
11
Figure 2.1: European Perception of Risk and Return in Central/South America
Source: “Perception of Real Estate Investment Opportunities in Central/South America and Africa” (Lim,
McGreal & Webb (2006)); p.271
Figure 2.2: U.S. Perception of Risk and Return in Central/South America
Source: “Perception of Real Estate Investment Opportunities in Central/South America and Africa” (Lim,
McGreal & Webb (2006)); p. 273
12
Investors’ involvement in international real estate investment opportunities and the
degree of risk and return particularly with respect to Central/South American and African
property is very limited (Lim, McGreal & Webb (2006); p.274). As destinations for
international investment, those regions are considered to be risky, and investors are reluctant
to invest there due to lack of knowledge of local markets. Not having a previous association
with these markets, makes investors uneasy about considering the regions which seem to pose
high returns but at the cost of too high risk. In a global context, the lack of knowledge and
research into the Central/South American and African real estate, together with the perception
of high risks and low returns, whether real or not, seem to pose major psychological barriers
to potential investors. (Lim, McGreal & Webb (2006); p.275)
2.3 Incentives to Attract Foreign Direct Investment
To attract Foreign Direct Investment (FDI), many developing countries have created
an array of government incentives to lure investors and businesses into their markets. In the
study “Determinants of FDI Incentive Preferences of MNE’s” (Rolfe, Ricks, Pointer &
McCarthy (1993)), managers of U.S. firms with operations in the Caribbean Region, where
asked to evaluate the attractiveness of twenty host country incentives. The countries surveyed
included all seven belonging to the Central American isthmus3.
The results of the study concluded that incentive preferences were determined by
seven factors: market orientation, type of investment (start up or expansion), country, product
produced, investment size, and investment year. Furthermore, it was deemed important that
the incentives offered by each host country, match the needs of the targeted industries.
For the study, the authors considered the Caribbean Region for several reasons. Many
countries in the Caribbean Basin have relaxed foreign exchange restrictions to make their
countries more attractive for foreign investment (Rolfe, Ricks, Pointer & McCarthy (1993);
p.337). In addition, competitiveness amongst the countries has resulted in the passing of laws
which indefinitely exempt foreign investors from local taxation. Most countries lure investors
by using incentives as a campaign to promote investment. Furthermore, with the passage of
the Caribbean Basin Initiative exempting most products from Central America and the
Caribbean Islands from U.S. customs duties, there became an increase in this region.
3
Isthmus: Narrow strip of land connecting two large land areas otherwise separated by the sea.
Source: Encyclopaedia Britannica
13
U.S. investment in Central America has since then been further encouraged by the
enforcement of treaties which have brought benefits to cross-border investors in the region
through incentives. Driven by the potential their tourism and real estate sectors have as
profitable industries, today these countries have appealed to foreign investors mostly coming
from the U.S.
2.4 Transparency
Governments’ behaviors play an important role in ensuring that the economic
development of a country is oriented towards an inviting and appealing environment for
cross-border investors. A country’s transparency has an impact on foreign investment; since it
is a vehicle used to attract capital, reduce capital market volatility, and lessen the severity of a
financial crisis. According to studies however, there is little empirical evidence that by
improving a country’s transparency alone, there will be an increase in investment inflows
(Gelos & Wei, 2005).
It is important to distinguish between government transparency, commonly associated
with corruption, and corporate transparency or the degree to which investors have access to
clear and reliable information about the companies performing on the market (Gelos & Wei,
2002). Both have distinct and positive effects on investment flows from international funds
into a particular country (Gelos & Wei, 2005).
Regarding emerging markets, statements by institutional investors suggest that
measures of a country’s transparency are taken into account when considering allocation
(Gelos & Wei, 2002). Studies have concluded that when overseas investment is considered,
institutional real estate investors, other things being equal, will opt to invest in the most
transparent, mature and least corrupt markets whenever possible (Lee, 2004; p. 2). By
increasing transparency, a country improves its chances towards international financial
integration. Studies have shown that funds systematically invest less in less transparent
countries, and that during crises they have a greater propensity to exit these countries. (Gelos
& Wei, 2005)
In the case of real estate, the direct relationship between investment and transparency
is undeniable. Countries such as Japan, Mexico and China have had low transparent markets
until recently. Along with the rise in their transparency levels, investors’ interest has
14
increased as well. Countries with high transparency levels such Singapore, Sweden and Hong
Kong benefit from cross-border investor activity; receiving large shares of direct real estate
investment.4
Nonetheless, countries with a relatively lower transparent real estate market, can offer
a more favorable business environment than other countries. The main reason is that low
transparency comes in hand with a big opportunity for investment, such as entering an
emerging consumer market or gaining access to lower cost labor. High transparency eases the
free flow of information and capital, but also it allows for encountering undiscovered bargains
or earning a “risk premium”. As efficient markets display “convergence to the mean”, low
transparency markets or inefficient markets have a wider dispersion of results, which means
that either the risk/cost will be too high in comparison with the returns/gains, or vice versa. Of
course, the other side of the spectrum which allows for running a risk or cost that could turn
out low in comparison with the gains or returns is the reason why these types of markets pose
an interesting and tempting opportunity (JLL, 2006).
Risks may be mitigated; therefore a semi-transparent market can be advantageous. By
collecting the right data, the right safeguards can be put in place. Partnering with a local
investor and having support from a trustworthy and knowledgeable advisor are some
examples of what can make cross-border investment more easy and effective (JLL, 2006).
Transparency is therefore the gauge of a market’s maturity and efficiency. The
definition of real estate transparency according to the 2006 Jones Lang LaSalle (JLL) Real
Estate Transparency Index (RETI) is: an indicator of the level of corruption, a highly
transparent market being fairly free of corruption, and of the availability of information on a
market. Furthermore, it defines a market operating in a legal and regulatory framework,
characterized by the consistent approach to the enforcement of rules and regulations, and that
respects private property rights.
According to Jones Lang LaSalle some of the top attributes that constitute a
transparent market are:
•
4
Good Investment Performance
Referring to the correlation between real estate transparency and the Economist Intelligence Unit’s (EIU)
Business Environment Index , findings show that countries in the highest real estate transparency category also
have the most favourable business environments and vice versa. (JLL,2006; p.5)
15
•
Market Data Availability
•
Level of Disclosure and Governance
•
Regulatory and Legal Framework
•
Professional Standards (private sector advisors, agents and brokers) and Transaction
Process
As real estate becomes more international oriented, the aforementioned attributes
ensure businesses and investors that they will encounter reliable and accurate market and
financial information, reliable performance and benchmarks, fair treatment in the transaction
process and ethical standards among professionals hired to transact business (JLL, 2006). The
enforceability of contracts and property rights, as well as clarity regarding the taxation and
regulation of real estate (including tax procedures and zoning and building codes which may
not be published or are selectively enforced), also influence in the attractiveness of investing
in a particular market. (JLL, 2006) Particularly in the American markets, these are the issues
of most concern to foreign investors who are at a disadvantage. In Uruguay, Peru, Panama,
Venezuela and Canada, foreign investors generally experience less transparency with real
estate taxes than their domestic counterparts (JLL, 2006; p. 15). There are ways to reduce
payable taxes in these countries, but only if there is knowledge regarding ways to maneuver
the system, and usually it is only the local investors which have the know-how. Planning and
building codes can also pose a disadvantage to foreign occupiers and investors. In Costa Rica,
Panama and Venezuela, foreign investors find these codes to be more transparent to domestic
investors. The codes tend to be inconsistently applied for foreign investors, and obtaining
variances is difficult. The third main problem is that of eminent domain. In countries like
Venezuela and Panama this can be a big problem. The Venezuelan government may
appropriate property with little notice and no compensation. In Panama, compensation is
given, however this compensation tends to be below market value.
The report elaborated by JLL, indicates that Latin American countries have room for
improvement with regards to the availability of investment performance indices. Investment
performance in the region is tightly held by private investors and the institutional investment
community is not well-developed. However, the region has attracted institutional capital over
the last five to six years, and as institutional investors become more comfortable with these
markets, it is expected that more capital will enter them. This will allow and increase
transparency levels, as more transactions take place.
16
3.
An Economic Overview: Central America
3.1 Current Economic Conditions
Latin America is an extensive region which countries have struggled at times through
economical and political conditions that have limited their potential for development and
growth. However, since 2003, Latin American countries as a whole have shown constant
growth (United Nations ECLAC, 2007c). In 2006 the region posted a growth rate of 5.6%
(United Nations ECLAC, 2007c). According the projections by the Economic Commission
for Latin America and the Caribbean (ECLAC), GDP growth would result in 5.0% in 2007,
and 4.6% in 2008. The latter would be the sixth year of consecutive growth since 2003 for the
region, and if the projections are consequently accurate, the region’s GDP per capita will have
raised by 20.6%, or more than 3.0% per year on average (United Nations ECLAC, 2007c).
Investment is expected to continue as the main component of growth, while unemployment
rates are to decrease at the same time that job quality improves.
As a result, the small Central American isthmus which constitutes an important part of
this greater region has also benefited from these positive outlooks. Central America’s
economy has become stronger and has prospered considerably in recent years, due in great
part to a booming tourism industry, the inflow of remittances, interest rate reduction and an
increase in the levels of foreign direct investment in the region. The inflow of remittances
from emigrant workers constitutes 11.1% of Central America’s GDP, (Guatemala, El
Salvador and especially Honduras) and has acquired significant importance due to its effect in
the inflow of foreign currency to the region (United Nations ECLAC, 2007). As well, the
world economy has helped reduce interest rates and increase the liquidity of financial
markets, which has resulted in a raise of foreign direct investment in the region, particularly
in the financial sector (Mondragón, 2007).
Mondragón (2007), regarding sources provided by the ECLAC, describes how the
CACM economies5 have grown in the period of 2003 to 2006, on an average of 4 percent per
year. Costa Rica, El Salvador and Guatemala, being the strongest of the five, account for 84
percent of the regional gross domestic product (GDP). An increase of 2.3 percent in GDP per
capita for the same period was observed. The ECLAC predicts a 7.5% GDP for 2008 for
Panama, which is expected to propel its economic growth surpassing the other countries.
5
CACM, or Central American Common Market is constituted by the countries of Guatemala, El Salvador,
Honduras, Nicaragua, and Costa Rica.
17
However, it is important to observe that in order to reduce poverty levels, the region’s
GDP must reach 7%, and as we can see from the data available, only Panama is well above
that figure. Panama differs from the CACM countries in that its tourism and maquilas6
dominate the economy while remittances are of lesser contribution (Mondragón, 2007).
Panama’s service sector is the most important comprising 78% of its GDP (Mondragón,
2007). In 2006, 31% of exports were accounted for by income from the Panama Canal, 22%
by financial services, 21% tourism, 15% re-exports from the Colon Free Zone, 6% goods and
5% ports (Mondragón, 2007).
Table 3.1: GDP Growth Rates for Central America
GDP GROWTH RATES
(Percentages based on figures expressed in millions of dollars at constant
2000 prices)
COUNTRY
2004
2005
2006*
2007**
2008**
Central America and
4.1
3.2
5.1
3.6
4.0
Mexico
Costa Rica
4.3
5.9
7.9
6
5.5
El Salvador
1.8
2.8
4.2
4.5
4.0
Guatemala
3.2
3.2
4.6
5.0
4.5
Honduras
5.0
4.1
6.0
5.5
5.0
Nicaragua
5.3
4.0
3.7
4.3
4.0
Panama
7.5
6.9
8.1
8.5
7.5
Belize
4.6
3.5
5.8
2.5
…
Source: Economic Commission for Latin America and the Caribbean (ECLAC)
* Preliminary Figures
**Projections
The countries have undergone a decrease in their inflation rates, compared to 2004
which high inflation rates were the result of increases in oil prices (Mondragón, 2007).
Inflation has since, been controlled by increased discipline in managing fiscal and monetary
policies along with exchange rate stability (Mondragón, 2007). Of concern for the future
which may affect internal prices in the region are: the price of corn and excess of liquidity,
reflected in sharp increases in credit (Mondragón, 2007).
6
Maquila: The Spanish term referring to assembly production.
18
Table 3.2: Interannual Inflation Rates for Central America
COUNTRY
Costa Rica
El Salvador
Guatemala
Honduras
Nicaragua
Panama
INTERANNUAL INFLATION RATE
(Measured December of each year)
2002 2003
2004
2005
9.7
9.9
13.1
14.1
2.8
2.5
5.4
4.3
6.3
5.9
9.2
8.6
8.1
6.8
9.2
7.7
4.0
6.6
8.9
9.6
1.9
1.5
1.5
3.4
2006
9.4
4.9
5.8
5.3
10.2
2.2
2007*
8.8
3.7
5.3
6.2
9.0
3.7
Source: Economic Commission for Latin America and the Caribbean (ECLAC)
* Interannual Variation Measured in June
Not only have the countries attained growth and regulated their inflation, but have also
taken measures to maintain fiscal discipline (Mondragón, 2007). Honduras and Nicaragua
have solicited foreign debt relief through the Heavily Indebted Poor Country Initiative
(HIPC), Paris Club and the Multilateral Debt Relief Initiative (MDRI) (Mondragón, 2007).
This has contributed significantly to improve their public finances. Moreover, it is important
to recapitulate that the decreasing unemployment rate and increase in job quality, combined
with a growing economy are already positively affecting poverty indicators.
Today, the region’s increasing exchange rate stability is considered a good indicator of
augur in the region (Mondragón, 2007). This has been a result of improved position of
international reserves. It is important to observe that of all the Central American countries, El
Salvador and Panama have dollar based economies. The U.S. dollar became El Salvador’s
currency in 2001.7 Panamanian currencies are equivalent in size and value to those of the
U.S.8
Zuvekas (2000) refers to Central America’s economic growth potential for the next
two decades as lying primarily in the services sectors, followed by manufacturing, including
maquila operations. Furthermore, the sectors or sub sectors for which Central America has
good prospects include maquila operations and other labour intensive manufacturing;
horticultural products and other non traditional agricultural exports; telecommunications and
information technology; financial services; and tourism (Zuvekas, 2000; p.2).
7
CIA: The World Factbook
See: https://www.cia.gov/library/publications/the-world-factbook/geos/es.html
8
Panama Official Site See: http://www.ipat.gob.pa/html/panama.php
19
3.2 Central American Integration and Treaties with the World
The Central American Common Market (CACM), constituted by five of the region’s
countries: Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica, was established in
1960 to create a customs union and encourage integration and economic collaboration among
each. It was intended that by creating an economic network, trade would increase, duties on
products traded and transported within the region would be removed, and external tariffs
could be unified.
Since then, Central America has undergone many changes, including a severe and
extended economic depression in the beginning of the 1980s (Zuvekas, 2000). At the time,
per capita GDP for the five countries of the CACM fell by a weighted average 18% between
1979 and 1986 (Zuvekas, 2000; p.1). The countries economic declines where halted by large
scale U.S. economic assistance, which aided in their recovery but in some cases at a
significant and political cost (Zuvekas, 2000; p.1). The 1990s were a decade of moderate
economic recovery, due to policy reforms within the Central American countries and the
strong U.S. economy (Zuvekas, 2000; p.10). Today, many treaties have been established in
order to boost the region’s economic performance within an expanding international
economy.
Among these, and one of most significance is the Central America-Dominican
Republic-United States Free Trade Agreement or CAFTA-DR. All partner countries include:
the United States, Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Dominican
Republic. The Agreement has been approved by legislatures of all countries.9 It is designed to
“eliminate trade barriers and tariffs, creating and expanding regional opportunities for all
labour force including: workers, manufacturers, consumers, farmers, ranchers and service
providers of all the countries.”10 Within the Agreement, requirements addressing government
transparency and corruption, worker rights, protection of the environment, trade capacity
building, and dispute settlement, are also included.11
In addition to CAFTA-DR, the negotiation of an Association Agreement with the
European Union is underway. Together, both treaties should have a positive impact on the
Central American Economy. (Mondragón, 2007) Furthermore, the Mexican-sponsored Plan
9
Costa Rica was the last to hold a public referendum on the Agreement and approve it in October of 2007.
Office of the United States Trade Representative, CAFTA-DR
See: http://www.ustr.gov/Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/Section_Index.html
11
U.S. Commercial Service in Central America See: http://www.buyusa.gov/centralamerica/en/
10
20
Puebla-Panama (PPP), which includes the CACM countries as well as Mexico, Belize,
Panama and Colombia, is expected to enhance the region’s development. Involving a series of
projects and a hefty investment, transportation infrastructure as well as the commerce, tourism
and telecommunications sectors will be comprised within the plan’s top priorities
(Mondragón, 2007).
While still a work in progress, the establishment of a Custom Union is being
contemplated upon in order to allow intraregional trade and strengthen ties amongst all
members. Agreements between Chile, Taiwan and others have also been established.
3.3 Foreign Direct Investment and Opportunities
The Central American market is promising, due to its unexploited resources, potential
and availability of land in prime areas such as beaches and natural environments. This along
with an increasing liquidity in the region and a positive outlook on returns has lured foreign
private and institutional investors into the region.
As can be observed from the table, during the five year period of 2002-2006, Costa
Rica was the recipient of most investment out of all the CACM economies. Panama surpassed
those figures, and received twice of the FDI inflow received by Costa Rica in 2006. The
increase in investment is Panama was attributable to the purchase of Banistmo by the British
Hong-Kong Shanghai Bank Corporation (HSBC), for $1,771 billion (United Nations ECLAC,
2006a). In fact, that year Panama’s figures of $2,560 million dollars are almost equal to the
sum of all the CACM economies together. Of all FDI, 95% comes from outside the region,
mainly from the United States, and is oriented mostly towards the service sector:
telecommunications, commerce and real estate; and the maquila industry (Mondragón, 2007).
21
Table 3.3: FDI in Central America, Period 1992-2006
FDI IN CENTRAL AMERICA, BY RECEIVING COUNTRY, 1992-2006
(Millions of dollars)
COUNTRY
1992-1996*
1997-2001*
2002-2006* 2005 2006
Costa Rica
307
502
830
861 1,436
El Salvador
13
366
342
517
204
Guatemala
91
319
186
208
325
Honduras
50
187
301
372
385
Nicaragua
62
235
237
241
290
CACM
523
1609
1896 2199 2640
Panama
271
892
1,094 1,027 2,560
Source: Economic Comission for Latin America and the Caribbean (ECLAC)
* Annual averages
In general growth prospects for the isthmus are high, especially with the entry in force
of CAFTA-DR. The CAFTA-DR Agreement will have a positive impact on FDI by
contributing to the region’s economic growth, with an expected improvement in transparency
and by removing barriers on investment.12 The agreement addresses restrictions on foreign
ownership of real estate and cross-border activity which growth is expected to increase. More
importantly, US investors will gain the right to receive a fair market value for property in the
event of an expropriation.13 Thus Central America offers the opportunity to establish, acquire
and operate investments with no disadvantages regarding domestic and other international
investors. This promises a safer investment environment for the region in a very near future.
The agreement has shifted the attention of global financial groups towards the
potential of investing in the area. In recent years there has been an increase of FDI in the
banking sector, mostly from international banks which have purchased regional banks that
had expanded within Central America (United Nations ECLAC, 2006a). Growth in
remittances from residents abroad, have contributed to boosting the market for banking and
the finances sector (United Nations ECLAC, 2006a). Financial institutions such as the HSBC
(United Kingdom), Citibank and GE Money (United States), and Scotiabank (Canada) are
nestling down all over the region.
In some countries more than others, there is work behind providing a good investment
atmosphere. The Central American countries all are pursuing the enablement of foreign
12
13
Export.Gov See: http://www.export.gov/fta/CAFTA/Investment.asp?dName=CAFTA
Export.Gov See: http://www.export.gov/fta/CAFTA/Investment.asp?dName=CAFTA
22
investment under equal terms and conditions as provided to local investors. Investors in the
tourism sector of the countries can encounter sets of very attractive laws, incentive packages,
tax exemptions and tax breaks, luring them to invest and furthermore, be guaranteed that their
capital and assets will be protected. As mentioned before, Costa Rica and Panama have thus
far discovered and well managed their potential. According to many sources, the other
countries will also benefit from this attention, and although some countries are already
experiencing positive effects, it is too early to size to what extent they will prosper.
23
4.
Costa Rica and Panama: Two Countries’ Economies
and their Real Estate Sectors
Panama and Costa Rica, two of the largest economies in Central America, which
together conform 43% of the GDP for the region, posted the highest growth rates in 2006
(United Nations ECLAC, 2007d; p. 48). They have slowly outpaced their neighboring Central
American neighbors, through their economic augur and particularly their real estate and
tourism industries, both tightly linked to one another. However, in order to compare the
progress they have accomplished in relation to the rest of the region, it is always important to
see figures pertinent to their neighbors. For this reason and before focusing solely on Costa
Rica and Panama, the following data is included to initially gauge the seven countries’
progress.
Both countries ranked right in the middle of the placing in the Global Competitiveness
Index for 2007-2008, where 131 countries/economies where included.14 Out of all the Central
American countries, Panama in 59th place and Costa Rica in 63rd where ranked the highest.
The previous year Costa Rica had ranked at number 68. Moving up five places was in great
part due to its relatively transparent institutions, satisfactory levels of primary and higher
education as well as for its well skilled work force. El Salvador followed closely at number
67, while Honduras, Guatemala and Nicaragua ranked quite low. Belize was not amongst the
countries to make it into the index.
Table 4.1: Global Competitiveness Index Rankings and Scores for Central America,
Period 2007-2008
GLOBAL COMPETITIVENESS INDEX 2007-2008
COUNTRY/ECONOMY
Panama
Costa Rica
El Salvador
Honduras
Guatemala
Nicaragua
RANK/131
59
63
67
83
87
111
SCORE/7
4.18
4.11
4.05
3.89
3.86
3.45
Source: The Global Competitiveness Report 2007-2008 (World Economic Forum)
14
The two nations have been ranked amongst other world countries/economies in indices and competitiveness
reports elaborated by the World Economic Forum. Among these reports and indices are the Global
Competitiveness Report and Index for 2007-2008, the Business Competitiveness Index for 2007-2008 and the
Travel and Tourism Competitiveness Report and Index for 2007.
24
Regarding Business Competitiveness, two main aspects where taken into account:
sophistication of company operations and strategy as well as quality of the national business
environment. Followed by Panama in second place and by Guatemala and El Salvador in third
and fourth place respectively; Costa Rica ranked the highest of all the countries, with a
remarkably high rank regarding the aspect of sophistication of company operations and
strategy.
Table 4.2: Business Competitiveness Index Rankings and Scores for Central America,
Period 2007-2008
BUSINESS COMPETITIVENESS INDEX 2007-2008
COUNTRY/ECONOMY
Costa Rica
Panama
Guatemala
El Salvador
Honduras
Nicaragua
BCI
2007-2008/127
50
58
67
69
88
113
Sub-Index A: Sophistication of
Company Operations and
Strategy/127
Sub-Index B: Quality of the
National Business
Environment/127
34
58
49
71
80
112
53
58
69
68
87
112
Source: The Global Competitiveness Report 2007-2008 (World Economic Forum)
As mentioned numerous times in the previous sections, tourism is a major industry in
the region. As an industry, tourism has been the most developed in Costa Rica and Panama.
Costa Rica is the most developed in the Central American region, holding second place for all
of Latin America and the Caribbean. It currently holds place 41 after Barbados, and has been
considered to be well positioned (12th) with regard to its natural resources and percentage of
nationally protected areas. Its policy environment (17th) is highly conducive to the
development of this sector for which a very open bilateral Air Service Agreement, low visa
requirement, and an environment that welcomes foreign investment is enforced. Of concern
are safety and security (67th); while its tourism infrastructure (36th) is well developed, there is
still room for improvement in its ground transport infrastructure (93rd).
25
Table 4.3: Travel and Tourism Competitiveness Index Rankings for Central America,
Period 2007
TRAVEL AND TOURISM COMPETITIVENESS INDEX 2007
COUNTRY/ECONOMY
RANK/124
Costa Rica
Panama
Guatemala
El Salvador
Honduras
Nicaragua
41
55
69
77
87
89
Sub-Index C:
Sub-Index A:
Sub-Index B:
Human, Cultural
Regulatory
Environment and
and Natural
Framework/124 Infrastructure/124
Resources/124
39
56
68
75
83
82
52
53
83
66
76
99
20
63
69
98
91
82
Source: The Travel and Tourism Competitiveness Report 2007 (World Economic Forum)
In the last years, Central America has emerged as a strong performer in the tourism
sector. Along with South America, this small region has exceeded growth averages,
benefiting in great part from higher expenditures by U.S. travelers and increased arrivals of
European tourists.
The following sections give a description of the current economic condition of both
countries, as well as an insight into the situation and development of their real estate sectors.
Both countries have common denominators in their real estate market conditions which will
be further explored in the next chapter.
4.1 Costa Rica
Costa Rica has in recent years, gained higher recognition for its increasing real estate
industry. The country’s strategic location, rich biodiversity, beautiful rainforests and
coastlines, as well as a diverse rich culture, have been for long the main resource behind a
powerful and world renowned tourism industry. Not only has it become the main engine of
the Costa Rican economy, but has impacted the real estate sector as well. Today, one cannot
discuss the country’s real estate without discussing tourism as well.
But there is also more about the country’s economic condition and political
environment which have allowed FDI to become a main inflow to the country through its real
estate sector. The country provides the highest standards of living in the Caribbean Basin and
26
has long enjoyed a democracy, which welcomes investments promoted through incentives
(KPMG, 2005).
For 50 years Costa Rica has both enjoyed political stability and has become known for
being a peaceful nation after having abolished the military government rule. Costa Ricans are
highly educated, and a majority have good domain of the English language as much as their
native Spanish (KPMG, 2005). This is the result of an education system where in both private
and public schools the study of a foreign language is mandatory (KPMG, 2005; p.5). This
factor has allowed an easiness of doing business in Costa Rica for foreigners, by allowing a
clearer understanding of available information as well as employing the human resources the
highly qualified Costa Rican workforce has to offer.
Comprising land and water, the country has a total of 51,100 sq km. Approximately
337,00015 of its population of 4,133,88416 live in San Jose, the country’s capital.
4.1.1 Economic Overview
Net inflows of FDI for the year 2006 were US$1,436 billion, 67% higher than in 2005.
The main recipients of this FDI were the industry and property sector, and the financial sector
all together accounting for 78% of the total, with major investments in the real estate and
tourism sectors (United Nations ECLAC, 2006a; p.57).
In 2006, current income rose, along with improvements in tax administration.
However, the rise in wages and salary along with interest payments resulted in a larger
increase of expenditure. Lending was concentrated in construction, tourism, housing and
consumption (United Nations ECLAC, 2006b; p.91).
By 2007, the Costa Rican economy slowed from 8.2% in 2006 to 7.0%, which was
still 2% more than the previously projected GDP of 5% (United Nations ECLAC, 2007d;
p.107). Growth rate remained high, with the tourism and finance sectors showing the most
increase. Buoyant exports continued to rise at 9%, allowing for a decrease in unemployment
from 6.0% to 4.6% (United Nations ECLAC, 2007d; p. 108). Inflation however, picked up
during the last months of 2007 and is expected to surpass the 9.4% figure of 2006 and the
target set by the Central Bank which is of 8%. Given this target and the upswing of inflation,
15
16
Jones Lang LaSalle (January 2007). Costa Rica Real Estate Profile - Year End 2006
July 2007 estimate. CIA: The World Factbook.
27
it is likely that there will be an increase in interest rates (United Nations ECLAC, 2007d; p.
108). The manufacturing, construction and agriculture sectors remained as those of most
activity, in addition to telecommunications, tourism, financial intermediation services and
commerce and international business services. All this in great part was due to the output of
companies operating in the free trade zones and those which export mostly to Central
America (United Nations ECLAC, 2007d).
It is important to mention the ratification of the CAFTA-DR Agreement in October
2007, which the President of Costa Rica passed as a law of the Republic. Furthermore, trade
and investment cooperation agreements were signed with China following the establishment
of diplomatic relations in July of 2007. The agreements included are those of protection of
investments and an agreement to explore the possibility of signing a free trade agreement. An
agreement was also reached between the Costa Rican Oil Refinery (RECOPE) and the China
National Petroleum Corporation (United Nations ECLAC, 2007d; p. 108).
4.1.2 Real Estate Sector
In 2004 and 2005, Costa Rica was considered one of the Latin American economies
with the most success in attracting FDI through its real estate sector (Central Bank of Costa
Rica, August 2006). In past years Costa Rica has witnessed an unprecedented purchase of
property, predominantly in coastal areas. Residential complexes with pools and golf courts
have been favourites amongst foreign non-residents. This has geared a never before-seen
interest in company franchises, hotel chains and private investors seeking to attain property in
a country which previously had attracted FDI through the industrial and tourism sectors.
Recently, investment of the non-traditional kind has surfaced, as more and more foreigners
invest in residences, land plots, condominiums, villas, commercial space and hotels (Central
Bank of Costa Rica, August 2006).
According to an August 2006 report by the Monetary Department of the Central Bank
of Costa Rica, real estate investment by foreign non-residents remains on the rise. The table
below provides the figures for FDI in the real estate sector in the country for the years 2004
and 2005, estimated along with building permits solicited by foreign non-residents. A total of
$176, 5 million was estimated for year 2004 and $224, 5 million for 2005. The Costa Rican
provinces with the most FDI inflows for the two consecutive years were Guanacaste and
Puntarenas respectively. Regardless of the real estate development acquiring more impetus in
28
the coastal areas, the province of San José also records development in the sector (Central
Bank of Costa Rica, August 2006).
Table 4.4: Total FDI in Costa Rica’s Real Estate Sector, Period 2004-2005
Costa Rica: Total FDI in Real Estate Sector 2004-2005
(Measured in Millions of Dollars)
Province
2004
2005
San José
37.0
37.8
Alajuela
13.5
15.7
Cartago
5.0
9.6
Heredia
13.3
17.2
Guanacaste
64.4
82.8
Puntarenas
39.8
56.6
3.5
4.9
Limón
Total
176.6
224.5
Source: Central Bank of Costa Rica
The Pacific Coast of Costa Rica is the chosen place amongst foreigners to retreat for
a vacation or to enjoy a second home. Some of Costa Rica’s beaches famous for their beauty
and ecotourism attraction are: Hermosa, El Coco, Ocotal, Conchal, Flamingo, Salinas,
Tamarindo, Samara, Nacascolo and the Papagayo Gulf17 in the province of Guanacaste; Jacó
and Manuel Antonio are located in the province of Puntarenas (Central Bank of Costa Rica,
July 2006; p.17). The prosperous real estate sector in the area has also been benefited and
stimulated by the arrival of big hotel chains such as: Marriott, Conchal, Hacienda La Pinilla
and the Four Season hotel (Central Bank of Costa Rica, July 2006; p.17).
As to the international investors’ countries of origin, the Central Bank of Costa Rica
states that 60% come from the USA. Canada and Europe also represent significant importance
to the sector. The graph below depicts the percentage of FDI per country for the year 2005.
17
In 1974, the Central American Development Bank (BCIE) analyzed Central America’s tourism potential, and
selected Papagayo Gulf as the most favourable location to develop a premium tourism project. After being
selected in 1974 as the most favorable location for tourism development, Costa Rica’s legislature enacted Act
No. 5847, through which a loan was obtained to develop the area. This excluded Papagayo Gulf from the
Terrestrial Maritime Zone Act, and its development and management assigned to the ICT. The Municipalities are
limited to collecting the concession tax. The ICT is pursuing the approval of a Master Plan to develop the area.
This has attracted market leaders, such as the Four Seasons amongst other renowned hotels and developers.
(KPMG, 2005; p.67)
29
Figure 4.1: Total FDI in Costa Rica’s Real Estate Sector in Percentages by Country
Costa Rica: FDI Real Estate Sector in Percetages
France
2%
Spain
2%
(Source: Central Bank of Costa Rica)
Others
16%
Central
America
2%
Germany
3%
USA
60%
Italy
4%
Canada
5%
Holland
6%
It is important to note that the inclusion of FDI attained through the real estate sector,
consequently affects positively the financial structure of the deficit in Costa Rica’s current
account, equivalent to 23.4% of such deficit for year 2005. At the same time, FDI
proportionate to the country’s production proves an increase in one point, as a result of this
inclusion (Central Bank of Costa Rica, August 2006).
Real Estate Transactions and Availability of Information
Costa Rica has worked in the improvement of the National Property Registry, by
introducing in the 1990’s the Folio Real System and substituting the previous Books which
consisted of handwritten or typewritten entries. The latest system is accessible through
internet and is free of charge (KPMG, 2005).
Since all real estate titles are to be recorded, there is a full description of recorded real
estate available to the public. Such information includes location, boundaries, measurements
and owner. A history of prior real estate transactions as well as information on pending land
transfers, annotations, liens or other restrictions on property is available through the two
systems for real estate registration. It is important to note that changes in property titles, real
estate claims, liens and real estate transactions in general must be filed and recorded with the
NPR in order to be officially recognized (KPMG, 2005).
The important point to be observed is that steps are being taken to update the
recording system, thus improving accessibility and availability of information.
30
Coastal Properties: Ownership and Regulations
There are no licenses, certificates or authorizations required in order to own residential
real estate in Costa Rica, however, special laws and restrictions established by law regulate
ownership of coastal properties, by both foreigners and nationals (KPMG, 2005). In addition,
different permits are required according to construction type, the intended use of the
construction and the location. The Terrestrial Maritime Act ensures that property of the State
in the terrestrial maritime zone may not be bought or sold. This zone comprises the first 200
meters of property on both the Atlantic and Pacific Coasts (KPMG, 2005).
The first fifty of these two hundred meters are declared public. This zone is accessible
to the public and its possession or occupation is not permitted. The remaining one hundred
fifty meters are declared the “restricted zone”, since it may be used but not owned through a
special permit (KPMG, 2005). The permit or valid concession agreement is issued for a
period of 5 to 20 years and may be renewed. These concessions may be granted by the
Municipal Government or by the ICT in the case that it is extended for tourism related activity
(KPMG, 2005).
It is important to observe that maritime private property is subject to maritime zone
regulations, and registered property in the area is only permitted if the property has been
exempt from the zone restrictions by special legislation as is the case for the Papagayo Gulf
(KPMG, 2005).
The Terrestrial Maritime Zone Act establishes that concessions for the use and
enjoyment of the restricted zone shall not be granted to:
•
Foreigners that have resided in Costa Rica for less than two years.
•
Offshore entities.
•
Local entities incorporated by foreign nationals, or
•
Local entities more than 50% owned by foreign nationals (KPMG, 2005; p.66-67).
After an increased high demand for properties in coastal areas, Costa Ricans are
ensuring that foreign investment is indeed promoted, but allowing the local investors to
also participate and profit from this sector.
31
4.1.3 Investment
The Costa Rican government has worked towards the improvement of investment
conditions since 1982, when CINDE was founded (KPMG, 2005). The Costa Rican
Investment Promotion Agency (CINDE) has as one of its main objectives, to enhance the
country's social and economic development, through the promotion of foreign direct
investment (FDI) into the country.18 This promotion is realized through numerous offices
located in different countries. This association of private sector leaders is one of many means
of drawing focus to the investment potential (KPMG, 2005).
4.2 Panama
Best known for the Panama Canal which links both costs from the Atlantic and Pacific
Oceans, this small country connects Central and South America and is located between Costa
Rica and Colombia. Its landscapes are conformed by mountains and coastlines; its tropical
climate and scenic beauty, along with a current strengthening economy and political stability
have lured both visitors and investors to the area, alike.
It has a total area of 78,20019 sq km comprising both land and water. While the
country has a population of 3,242,17320, approximately 830,00021 lived in Panama City’s
greater metropolitan area in 2006. The capital is situated along the Gulf of Panama, on the
Pacific Ocean. Spanish is the main language; however a large percentage of Panamanians is
bilingual and speak English as well, primarily in the cities of Panama and Colon (KPMG,
2006).
Colon, is the country’s second largest city, and is located on the Caribbean Coast. Its
economy is dependent on traffic through the Panama Canal and on business activity in the
Colon Free Trade Zone, the largest duty-free zone in the Americas.22
Technically Panama’s currency is the Balboa, however in 1941 the Balboa stopped
being emitted and has become interchangeable at a 1:1 rate with the U.S. Dollar since.23The
U.S. dollar has circulated in Panama since 1904.
18
Costa Rican Investment Promotion Agency (CINDE) See: http://www.cinde.org/eng-cinde.shtml
CIA: The World Factbook.
20
July 2007 estimate. CIA: The World Factbook.
21
Jones Lang LaSalle (January 2007). Panama Real Estate Profile 2006
22
Business Panama See: http://www.businesspanama.com/about_panama/glance.php
19
32
It is also important to observe that Panama does not have a Central Bank, and in its
effect created in 1998 a Superintendence of Banks, which determines a reserve system and
interest rates (KPMG, 2006).
4.2.1 Economic Overview
According to the ECLAC figures, the Panamanian economy grew at a rapid pace in
2006, its consecutive third year of growth with a GDP of 7.5%. The country’s inflation
dropped below 2.0 %, from a previous 2.9%, at the same time that nationwide unemployment
decreased from 9.8% to 8.6%. For the first time in three years, minimum wages were raised
by 8.0% (United Nations ECLAC, 2006b).
Panama’s undeniable growth for year 2006 was the result of an international favorable
condition, as well as decreasing unemployment rates and inflation. An increase in credit, also
positively affected the Panamanian economy that year. Throughout 2006, investment was
especially buoyant (15.0%), driven by a real estate boom and by Panama’s rapid-pace
growing construction sector; the latter being named the engine of the country’s economy. The
mining sector also posed a strong performance as the supplier of construction inputs.
Improvements in transportation, particularly air and rail, posted positive figures (United
Nations ECLAC, 2006b).
Bank assets grew by 8.0%, reflecting favorable conditions among the leading external
customers and the prosperous domestic situation. The country’s largest bank, Primer Banco
del Istmo, was purchased by Hong-Kong Shanghai Bank Corporation (HSBC) for US$ 1.7
billion (United Nations ECLAC, 2006b).
In 2007, Panama’s prosperous condition prevailed. Panama’s GDP grew by 9.5% and
is expected to remain strong for 2008, but at a slightly lower rate of 8.5% (United Nations
ECLAC, 2007d). However, measures were taken to mitigate the impact of inflation and
decrease the cost of the basic basket; consumer prices had doubled since 2006 due to high
import prices and delays in some production sectors. In addition, unemployment fell
significantly and some wage adjustment measures were taken (United Nations ECLAC,
2007d).
23
CIA:
The
World
Factbook
See:
https://www.cia.gov/library/publications/the-worldfactbook/geos/pm.html#Econ Panama Official Site See: http://www.ipat.gob.pa/html/panama.php Municipio de
Panama See: http://www.municipio.gob.pa/ciudad.php
33
In the second half of the year, expansion of the Panama Canal began, with almost 25%
of the nation’s GDP to be invested for the expansion period to take place between 2007 and
2012. Public investment was oriented mostly towards improvements in the health, housing
and education infrastructure, sanitation in Panama City and the Bay of Panama, as well as
improvements in the Pan-American Highway and domestic roads (United Nations ECLAC,
2007d).
The construction boom remained in 2007, based mostly in the development of luxury
apartment buildings of over 60 floors high and middle class housing, partly supported by
subsidized mortgages for low income groups. Among other projects were: ports, shopping
centers and hotels. As the revitalization of urban land and some rural areas continued,
productions costs rose as well (United Nations ECLAC, 2007d).
Regarding the domestic market, credit expanded by 15% as a result of the country’s
impressive economic growth, while external demand for credit rose by 27%. Inflows of FDI
were estimated at US$1.0 billion for 2007. This is twice as much of the FDI inflows received
in 2006, when two major national banks were sold. The main recipient sectors of this capital
inflow were the real estate and hotel sectors (United Nations ECLAC, 2007d).
4.2.2 Real Estate Sector
As can be observed from the figures in the previous section, Panama is undergoing a
boom in real estate, mostly due to an increasing market for retirees and baby boomers seeking
to invest and acquire a second home-away-from-home. Most of Panama’s retirees come from
the US while the rest from Europe and Canada. Low prices, scenic beauty and life style and
quality, equal or better than retirees have in their home countries, are some reasons why
Panama along with Dubai and Cap Cana in the Dominican Republic, has become a top
destination for investing in real estate (Coronado, 2007).
The construction of luxury buildings more than 100 stories high in Panama City as
well as increase in residential construction in several parts of the country, have resulted in a
shift of attracting foreign investors instead of the domestic market. The Panamanian
government estimates building construction represents a fifth of the country’s GDP24
24
This has contributed to an overall growth in mortgage lending. According to Panama’s Bank Superintendence,
the nation’s bank total mortgage portfolio has grown at a compounded annual growth rate (CAGR) of 6.32%
from 2003-2005 (Coronado, 2007).
34
(Coronado, 2007). Public spending on road construction, and improvement of urban
infrastructure as well as public transportation, has been of importance to the government, in
order to support the construction boom.
Investors are looking at Panama’s current situation, but also at the country’s
expectations for increasing successes and strengthening economy. On 2006, Panama approved
expansion of its canal. A third set of locks allowing larger vessels to pass through will cost an
approximate US$5.3 billion and is expected to be finished around 2014. Throughout its
expansion, construction will generate thousands of onsite jobs, increasing demand from local
suppliers for goods and services. It is expected that such an increase in employment will allow
Panama’s economy to grow and strengthen for up to one point per year during the
construction phase, and two points thereafter (Ardito-Barletta, 2007).
Taking into account the Canal expansion plan, associated construction, continued
development of cluster activities, and increasing traffic through the Canal, experts estimate a
sustained economic growth averaging over 5 percent per year for the next two decades
(Ardito-Barletta, 2007). This project will enforce a catalytic effect, not only on the country’s
economy, but will positively impact the regional and international markets as well.
4.2.3 Projects
Understanding the magnitude of the boom Panama undergoes today can be observed
through the numerous listings for residential and mixed use projects already constructed or on
the rise. Since the construction of the Panama Canal, growth in the construction sector has
been in the last years without precedent. Most of the projects have already been planned for
and are under construction. As new information comes up about new plans for development,
it is hard to keep track of accurate numbers and data that might illustrate in an objective
manner the current situation in the city. However there are some main elements influencing
project construction in the city. These factors are the following:
Location
Due to an interest in providing oceanfront properties, the most popular locations for
project development are Balboa Avenue, Punta Pacifica and Costa del Este. Balboa Avenue
contours the bay and its proximity to the water is its main force behind its popularity. Punta
Paitilla is also another location which has received notoriety in latest years. Other locations of
35
equal significant value are: Altos del Golf, Bella Vista, Coco del Mar, Dos Mares, Edison
Park, El Cangrejo, La Loma, Marbella, Obarrio, San Francisco and Villa de las Fuentes
(Prima Panama, 2006).
Figure 4.2: Panama City Map: Most popular locations for project development and
other sites of relevance.
Sources:
City
Map:
(http://vsseminar.com/new-img/panama%20map.JPG);
Balboa
Avenue:
(http://img169.imageshack.us/img169/2290/panamaview3ol1.jpg); Punta Pacífica: (www.skyscrapercity.com);
Punta Paitilla: (www.panamarealestatenow.com); Costa del Este: (www.panamarealestatenow.com)
36
A survey published by Prima Panama, a real estate promotion company, was realized
with the objective to evaluate the level of construction underway in the city as well as identify
future projects planned for development in the area. The survey considered 107 buildings
within the metropolitan area and provided information regarding the expectations for
development in Panama. In that survey Balboa Avenue and Punta Pacifica were regarded as
having the highest density. These two locations along with Costa del Este comprised 45% of
the projects surveyed. One characteristic that differentiates Costa del Este from the other two
is that it is better known for being a new urbanization with wide boulevards and a low density
residential area characterized for its gated communities. An industrial park, mix use buildings
and office buildings are also comprised in this area. It is important to observe that 60% of the
units comprised in those three areas were under construction at the time.
Table 4.5: Buildings under construction by location within Panama City
NUMBER OF BUILDINGS UNDER CONSTRUCTION BY LOCATION
N. OF
% OF
% OF
LOCATION
N. OF UNITS
BUILDINGS
TOTAL
TOTAL
1. Altos del Golfo
2
1.87%
85
0.77%
2. Balboa Avenue
8
7.48%
1872
17.05%
3. Bella Vista
6
5.61%
549
5.00%
4. Coco del Mar
6
5.61%
437
3.98%
5. Costa del Este
17
15.89%
1439
13.11%
6. Dos Mares
4
3.74%
288
2.62%
7. Edison Park
1
0.93%
63
0.57%
8. El Cangrejo
6
5.61%
315
2.87%
9. La Loma
1
0.93%
120
1.09%
10. Marbella
1
0.93%
60
0.55%
11. Obarrio
4
3.74%
304
2.77%
12. Punta Pacífica
23
21.50%
3294
30.00%
13. Punta Paitilla
4
3.74%
218
1.99%
14. San Francisco
23
21.50%
1861
16.95%
15. Villa de las Fuentes
1
0.93%
75
0.68%
TOTALS
Source: Prima Panama (2006)
37
107
10980
Balboa Avenue will redefine the skyline with some of the highest skyscrapers in
Central and South America. Today’s Panamanian towers are more than 40 floors high, and
there are more than 10 projects soon to surpass 100 floors in height; while the average price
for an apartment ranges around US$2,500/M2 and in a few cases US$3,000/M2 (Reporte
Inmobiliario, 2006). Balboa Avenue, along with Punta Paitilla and Punta Pacifica, offer great
amenities such as ocean views and immediate access to the waterfront, reasons enough for
these areas to be experiencing the highest increase in prices. Figures have duplicated since last
estimated two years ago, when they had already increased due to the sound of a boom in real
estate (Reporte Inmobiliario, 2006).
Figure 4.3: (i) Panama City illuminated skyline along Balboa Avenue, (ii) Buildings
along Balboa Avenue(iii) Punta Paitilla
Source:
(i)
http://www.maycompanyalliance.com/wbimg/galerias/Panama_at_night.jpg;
(ii)
http://www.reganimages.com/images/balboaave.jpg; (iii) http://www.panamarealestatenow.com/PanamaImages
38
Value and Space
Construction activity in total at the time of the survey was estimated at almost $3.175
billion of which $1.344 billion correspond to Punta Pacifica, the highest valued area.
Regardless, Balboa Avenue ranked the highest per meter squared with units costing around
$1,600 per meter. However after further inquiries, Prima Panama found indications that the
three main areas mentioned above: Balboa Avenue, Costa del Este and Punta Pacifica had
began to average $2,000 per square meter not long after the survey was realized.
At the time, the average condominium unit under construction in Panama City was
approximately 213 square meters in size and valued at a little over $289,000. Costa del Este
displayed having the largest and most expensive condominiums in the market the largest
being 330 square meters and costing an average price of almost $418,500. One of the most
popular locations, Balboa Avenue showed on the other hand that its condominiums were
lower in cost than the average price at almost $246,000 however being significantly smaller
than average at 154 square meters.
Table 4.6 shows the figures that resulted from the survey. Their estimations indicated
that 1,696 apartment units would be completed during the fourth quarter of 2006 and the first
three quarters of 2007; representing 15.50% of the total number of projects under
development. For the last quarter of 2007 and throughout 2008, nearly 6,000 units or a little
over 53% of the total were expected for completion. For 2009 and 2010 they estimated a
completion of almost 3,500 units; over 30% of the total.
39
Table 4.6: Estimated value of buildings under construction in Panama City.
ESTIMATED VALUE OF BUILDINGS UNDER CONSTRUCTION
TOTAL
% OF
LOCATION
N. OF M2
$/M2
VALUE
TOTAL
1. Altos del Golfo
17,938
$18,442,560
0.77%
$1,028
2. Balboa Avenue
287,743 $460,492,892
12.29%
$1,600
3. Bella Vista
79,240
$85,510,828
3.39%
$1,079
4. Coco del Mar
73,652
$87,431,650
3.15%
$1,187
5. Costa del Este
474,187 $602,155,225
20.26%
$1,270
6. Dos Mares
40,760
$36,911,350
1.74%
$906
7. Edison Park
8,127
$5,762,043
0.35%
$709
8. El Cangrejo
53,651
$47,708,805
2.29%
$889
9. La Loma
11,400
$9,120,000
0.49%
$800
10. Marbella
14,400
$14,400,000
0.62%
$1,000
11. Obarrio
49,863
$48,285,766
2.13%
$968
12. Punta Pacífica
847,024 $1,343,906,580
36.19%
$1,587
13. Punta Paitilla
89,593 $124,028,200
3.83%
$1,384
14. San Francisco
284,663 $282,797,565
12.16%
$993
15. Villa de las Fuentes
8,445
$7,482,270
0.36%
$886
TOTALS
2,340,685 $3,174,435,733
$1,356
Source: Prima Panama (2006)
Amenities
After 2005, amenities were increased in order to better suit foreign demand, mostly
from retirees, baby boomers and investors. Since then, the project proposals find more ways
to better suit their prospective clients. Aside from views to the oceanfront, which have
determined the price value of certain neighborhoods, the following are worth mentioning:
exclusive memberships, recreational centers and sports facilities, pools, jacuzzis, saunas and
spas, valet parking, tanning terraces, restaurants, lounge bars, gardens and boutiques. Some of
these residential and mixed use complexes include concierge and cleaning services.
According to Ramón Roux, Director General of CBRE Panama (2007b), real estate
development in Panama will continue to grow with high levels of design and product quality.
Many amenities are included in the projects, as mentioned before such as golf courses,
marinas, pools and spas. As foreign demand for high-rise luxury apartments is expected to
increase over the next years, it is expected that more projects will enter the market with more
40
innovative design and high-quality products that will increase competitiveness and value
(Summit Communications, 2007b).
4.2.4 Investment
As is the case of Costa Rica, Panama’s private-business-oriented government
encourages foreign investment in the country. Many tax advantages and financial incentives
are offered to firms in exchange for doing business in various sectors such as trade, services,
banking,
manufacturing,
agro-industrial
sector,
tourism,
transportation
logistics,
communication technologies, real estate amongst others (KPMG, 2006).
Panama is considered to be one of the best countries in the region, for establishing
corporate coordination and distribution centers for multinational enterprises. The country
offers great flexibility as to the possibilities of structuring international transactions (KPMG,
2006).
Doing business in Panama is a great opportunity for any foreign investor. The
Panamanian Constitution guarantees private property and freedom of investment, while
foreign investors’ intellectual and industrial property is subject to the same regulations as a
national investor (KPMG, 2006). Law 54 passed on 1998 defines investment in Panama,
entitles equal treatment for national and foreign investors, grants stability for direct taxes
regime and guarantees repatriation of capital, dividends, interests, profits and capital gains,
among other benefits. (KPMG, 2006; p.13) This law states that obligations for investors
include planning of investment of no less than two million US dollars (US$2,000,000)25 and
being registered at the Ministry of Commerce and Industries (MICI) 26. Stability for a ten year
period is granted to any national or foreigner individual or corporation in compliance with the
requirements unless public interest causes shall exist. Whilst indirect taxes are excluded from
this regime (e.g. ITBMS or Panamanian VAT), stability for local regime (municipal taxes) is
granted for a five year period (KPMG, 2006).
The construction sector is one that is benefiting enormously from such tax exemptions
and incentives. There are new urbanism rules in Panama for real estate, which tax exemption
25
Recently, Business Panama has stated that minimum investment for the metropolitan area has been raised to
$3,000,000, while $50,000 is required for the rest of the country.
26
The Ministry of Commerce and Industries (MICI) is the entity in charge of coordinating, developing, assisting,
promoting and executing, governmental policies in matters dealing with commerce, industry, insurance, finance
companies, and development of mineral resources, hydrocarbons, foreign commerce and all other areas
established by law (KPMG, 2006; p.12).
41
relies on the issuance of an occupational permit following the register of property.
Constructions commenced after February 1, 1990 are exempt from real estate tax for 20 years
from the moment when the occupational permit is issued (KPMG, 2006).
42
5.
Costa Rica and Panama: Particularities of their Real
Estate Markets
Lim, McGreal and Webb (2006) refer to a country’s prevailing legal, economic, social
and political systems as the elements defining the context within which a real estate market
exists; they further add: “Each country’s real estate market is conditioned, amongst other
things, by landlord and tenant law, planning law, and urban policy, which in turn provide a
context for the activities of those who participate in the market to develop, use or invest in
property.”(p. 262)
Upon reflecting on this statement, undoubtedly there are characteristics intrinsic to the
current conditions whether they are social, political or economical that have allowed for the
development of Costa Rica’s and Panama’s booming real estate markets. This chapter
explores and analyses these circumstances and takes a close look at some of the main factors
which have led those countries towards a successful strengthening economic state.
5.1 The Role of Tourism in Hotel and Residential Real Estate
One of the main characteristics these two countries share is their tourist potential. Both
countries have modeled and marketed their tourism industries in a very efficient and
successful way. In the case of Costa Rica, its main thriving industry is tourism, growing at a
7.1% annual growth rate.27 According to CINDE, every year more than 1.73 million tourists
visit the country while revenues amount to a US$1.63 billion in foreign exchange reserves
annually. This is the sector that generates the most foreign currency, and authorities predict it
will continue to grow with coming years. In the case of Panama, the tourism industry is
gaining strength, as the government has recognized through laws the potential this industry
poses for economic development. The government is beginning to call tourism the main
income generating industry when compared to others, adding it has impacted the general
economic cycle noticeably in the last years.
5.1.1 Costa Rica
There is no doubt that tourism is impacting real estate development, which in Costa
Rica includes the creation of golf courses and marinas. Such developments have risen in value
27
Costa
Rican
Investment
otrasoportunidadesturismo.shtml
43
Promotion
Agency
(CINDE)
See:
http://www.cinde.org/eng-
from US$500,000 to US$900 million.28 CINDE’s estimates state that hotel occupancy during
the first three months of 2005 increased by 15% compared to the 2004 period, for a total
occupancy rate of 90%. By 2006, hotel infrastructure investment was US$130 million.
Due to Costa Rica’s evident successful tourism industry, the Costa Rica Tourism
Board Act has created the Costa Rica Tourism Board (ICT), an entity in charge of supervising
tourism activities and regulating tourism publicity both locally and abroad (KPMG, 2005;
p.59-60). The formation of this entity is another way in which Costa Rica attempts to further
encourage investment. If a company is awarded a Tourism Declaration, it may obtain certain
benefits, such as tourism incentives and free publicity on the ICT website (KPMG, 2005).
This is due to the fact that tourism activities are considered to be of public service, according
to the Tourism Act. Incentives are granted to and for hotels, domestic and international
airlines, water transportation, car rentals, travel agencies, amongst others that involve tourism
activities (KPMG, 2005). Today, among the biggest hotel chains that have established
important tourism operations in Costa Rica as listed by CINDE are: Four Seasons,
InterContinental, Marriot, Holiday Inn, Best Western, Barceló and Sol Meliá.
Not only are Costa Ricans skilled and prepared to enter the tourism industry
workforce, but as aforementioned, the country has well conducted its efforts into promoting
and maintaining interest for investment in that profitable sector. In addition to all the
conditions mentioned above, Costa Rica has consultants specialized in architecture,
engineering and the environment with a specialty in hotel development.29
5.1.2 Panama
Tourism in Panama remains a strong income generator for the nation’s economy, and
as mentioned in previous sections, has drawn FDI to a growing economy, primarily oriented
towards real estate development. Therefore, it is important to analyse figures which give the
idea of how tourism is in effect linked to the fast-developing construction industry which is
now shaping the face of Panama. Specially, it is important to mention the establishment of
Law 8 in 1994, which regulates tourism activities and promotes incentives and grants benefits
to projects such as hotels, restaurants, nightclubs, convention centers, condominiums, airports
ecological tourism, infrastructure and restoration of historical buildings and monuments
28
Costa
Rican
Investment
otrasoportunidadesturismo.shtml
29
Costa
Rican
Investment
otrasoportunidadesturismo.shtml
44
Promotion
Agency
(CINDE)
See:
http://www.cinde.org/eng-
Promotion
Agency
(CINDE)
See:
http://www.cinde.org/eng-
(KPMG, 2006). Incentives include 100% exemptions from taxes such as income and real
estate, as well as exemption from imports duties for construction materials and equipment,
among other taxes.
According to the Annual Statistics Report emitted by the Panama Tourist Bureau30
144,936 additional visitors entered Panama in 2006 in comparison to 2005, depicting a 13.5%
increase. The average global lodging occupancy between January and November 2006,
increased by 53.9%: of which 65.11% depicted first-class hotels and 35.3% for second tier
hotels.31 Revenues ascended to US$ 1,445.5 million, which was US$ 340.5 million dollars
more versus the year 2005, or a 30.8% increase. In the ten year period between 1997 and
2006, tourism increased 11% while the average participation of tourist expenditure in the
GNP (Gross National Product) was 6.2%.
For the year 2007, hotels, bars and restaurants posted increased growth in relation to
the high tourism activity and inflows with relation to the tourism sector. There was increased
activity in the Panama Canal and international flights. Visitor arrivals were up 16% compared
to the previous year, with average tourist spending climbing by 14% (United Nations
ECLAC, 2007d).
According to Business Panama, the hotel supply has increased in the capital city as
well as in the rest of the country. Hotel chains such as: Miramar Intercontinental, Marriott,
Courtyard Marriott, Radisson Decápolis, Decameron, Country Inn, Gamboa Rain Forest
Resort, The Bristol, Four Points Sheraton, Sheraton Hotel and Convention Center, Crowne
Plaza Panama, Veneto Hotel and Casino, Inter-Continental Playa Bonita and Avalon Grand
Panama were all built in Panama City. In the province of Colón, the second largest city, Hotel
Meliá Panama Canal was constructed.
As mentioned in the previous section, one of the main recipients of FDI was the hotel
sector. By 2010, according to Business Panama, the country hopes to double the room offer of
the hotel sector of 28,000, enough to receive 1,500,000 visitors. Moreover, tourism is
expected to continue growing, along with the income it generates.
30
31
Panama Tourist Bureau (IPAT) See: http://www.ipat.gob.pa/html/estadisticas.php
Business Panama See: http://www.businesspanama.com/investing/opportunities/tourism.php
45
5.1.3 Tourism and Real Estate
The figures aforementioned show that Costa Rica’s hotel industry benefits enormously
from tourism. The 90% occupancy for 2004 is greater in comparison to Panama’s 53.6%
lodging occupancy for 2006. It is an additional testament of how much more mature tourism
is in Costa Rica and the time the country has had to develop this industry and transform it into
the main driving force behind its economy. Nevertheless, it is also important to observe
Panama’s quick response in creating incentives and following example from its neighbour in
treating every aspect of the tourism industry as a very important and relevant investment for
the economy.
It is understandable in this sense that there is a strong interest in hotel real estate in
these countries, and that this type of investment is of appeal to foreign investors. Upon
increasing demand, and a rising occupancy rate, lenders, developers and investors alike have
invested in the hotel industry of these countries. Hotel chains have now nestled in the cities in
order to seize the market’s increase.
5.2 Baby Boomers and the Residential Market
Following World War II, 76 million Americans were born after a new wave of
household formation took place upon the return of American soldiers. These Americans born
between the years 1946-1964 are called “baby boomers”. Today, the boomer generation
consists of retirees between the ages of 40 and 60 years of age. Real estate developers have
understood that this generation is characterized by three main traits and values: (1) the fact
that they expect being catered to, (2) they are strongly focused on themselves, along with
satisfying their personal needs and wants, (3) their idea of retirement, is not the same their
parents had (Parrott, 2007).
Furthermore, it must be observed that baby boomers are the healthiest and highest
educated generation in the U.S. and some have already identified them as individuals going
through a phase in their life were they begin to “trade their books for a golf bag” (Parrott,
2007). However, baby boomers seek active retirement and intend to mix work with pleasure.
For them, enjoying retirement is a time of flexible schedules when they may relax but also
work. One reason for their need to still work is being able to afford the escalating health care
costs (Parrott, 2007).
46
Undoubtedly baby boomers play a primary role in how the real estate markets in Costa
Rica and Panama have and will grow further. The boomer generation is likely to remain close
to home, were they can be close to friends and family (Parrott, 2007). While some will and
are moving temporarily, these two countries pose an excellent alternative to second-home
living. Both countries enjoy a good quality living, have invested in their health sectors and
offer lower cost services and benefits than the U.S. Real estate is being developed in such a
way that the projects launched into the market include amenities and living alternatives that
highly appeal to the generation concerned most with enjoying high quality living.
Compared to U.S. home prices and alternatives, Costa Rica poses a great opportunity
for establishing a residence. Regardless of prices which are rising; they are still a more
affordable option than those sold in the U.S. The location and all the extra amenities this
factor contributes, aggregate value to Costa Rican homes and villas.
According to CINDE, today, more than 20,000 U.S. expatriates reside in Costa Rica,
many of them as retirees. Costa Rica has been ranked as the third country in Latin America
with highest quality life. It has been considered inexpensive, and having very prestigious
public and private clinics within its strongly developed health sector.
Intrinsic to Panama’s boom is also the new alternative it has provided to others
looking forward to investing and retiring in Central America. The residential market, in this
case, has been approached in a different way, by providing apartment space through mixed
use buildings or through high rise condominium projects, as well as multilevel buildings
offering a varied array of amenities. As Ramon Roux, General Director of CBRE Panama
states: “ there are major incentives for retirees or active adults who will find in a Panama a
product on an international level, yet which requires an investment of 50% to 70% less than
other markets, where the cost of living is low or very moderate, a safe country with a fantastic
standard of living, ease in obtaining a visa or residency, excellent long-term financing, and
the country's greatest asset: our people” (Summit Communications, 2007b).
Panama is also well known for having some of the most modern health care facilities
in Latin America, while the medical staff is highly educated and bilingual (Hanna, 2006). In
his article, Hanna (2006) classifies Panama’s hospitals as excellent, further stating that USA’s
number 1 ranked hospital, Johns Hopkins Medical Center, affiliates itself with the new Punta
47
Pacifica Hospital in Panama City. He than refers to the Johns Hopkins publication The Dome,
which states that Punta Pacifica Hospital “offers state-of-the-art diagnostic and clinical care”.
Other renowned hospitals in Panama City are: Centro Medico Paitilla, which catered
to the ex-Shah of Iran; Hospital Nacional which is an affiliate of Family Hospital Group of
Boston, Massachusetts; and Hospital Santo Tomas which is considered to be one of the best
public hospitals in Latin America (Hanna, 2006). Standard medical care, surgery,
hospitalization, and dental care in Panama are less than half of the costs in the U.S. or Europe
(Hanna, 2006).
Today, Panama expects more US professionals to move to Panama. In the survey by
Prima Panama, it is stated that of a total of 2,058 residency visas, 67% were emitted for U.S.
citizens by the Panamanian Immigration Authority during the period between 2003 and 2006.
Roux adds: “Foreign interest in Panama is growing day by day, above all that of people from
the USA, Canada and Europe, and most importantly those from Spain and Colombia. We
must realize that nowadays the baby boomers are beginning to make decisions about where
they want to invest or to purchase their second home, and for many of them Panama is an
increasingly real and excellent option” (Summit Communications, 2007b).
As can be noted from the projects developed or underway in both of the countries,
there is a huge percentage of development activity oriented towards the residential market.
High rise buildings, condominiums, hotels and resorts are now sculpting skylines. Particularly
in Panama there is a wave of international investment shaping the main cities. Costa Rica’s
real estate has developed well, but it has been characterized by a more conservative type of
project: villas, resorts and hotels. While some multilevel buildings have been built, Panama is
at the top of the list when it comes to state of the art high rise buildings.
5.3 The Office Market
As aforementioned, development activity is oriented towards the residential market. In
particular Panama is at the summit of its augur. As reported by CBRE, in 2006 Panama’s
construction activity in the residential market remained strong but had slowed the increase in
the price in the commercial market. However, according to market reports by JLL, in 2007
Costa Rica and Panama were both located in the rising office market section of the Latin
America Office Clock.
48
Figure 5.1: Latin America Office Clock
Source: Jones Lang LaSalle (June 2007). Costa Rica Real Estate Profile - Year End 2006
The following is an insight to both countries´ office markets in 2006 (Panama) and
2007 (Costa Rica). The information has been extracted from JLL’s office market reports,
unless indicated otherwise.
5.3.1 Costa Rica
Costa Rica’s office market is comprised of Class A and Class AB buildings,
amounting to a total 375,000 m2 of office space, according to the 2007 JLL mid year report.
Divided into three main submarkets: (i) in and around the metropolitan area, (ii) north of the
city and (iii) west of the city, sale value ranges for Class A/AB space are approximately U.S.
$ 1,500-2,000 and U.S.$1,000-1,400 per m2 respectively.
An estimated Class A/AB office space production of 30,000 m2, 25,000 m2, and
80,000 m2 was completed or is underway for 2005, 2006 and 2007-2008 respectively.
According to the report, there has been an increase in annual absorption rates as multinationals realize the corporate tax advantages presented by Costa Rica and centralize
operations in and around San Jose. This increase had not been seen before, when over the last
ten years, absorption rate had been maintained at 5,000-6,000 m2 per year.
The trends for the last six months of 2007 until mid year of 2008 indicate that Class A
rents and occupational costs will remain the same; however Class AB will experience an
increase in both. Stock will increase, while space vacancy and vacancy rate will decrease. As
is mentioned in the report, the interest of multi-nationals to invest in Costa Rica is in part
49
affecting the direction that the office market in San Jose will take. Positive changes are
expected to occur regarding demand for office space.
5.3.2 Panama
Panama’s office market corresponds to 350,000 m2 of space. The first Class A
building was introduced in Panama in 1997 and since then 10 buildings made up for this
class. In 2006, only 4 Class A projects were under construction. Two buildings are located at
the traditional financial district (Calle 50 and Marbella/Balboa) and two in Punta Pacífica and
Costa del Este. The one in Costa del Este was the first low rise office park in Panama City
(CBRE, 2006). Those projects were to add 50,000+ m2 of Class A office space to the
150,000 m2 of rentable space already on the market. Reports indicated that due to an
improvement in the economic condition absorption rates were increasing.
Class B office space in Panama is comprised of smaller buildings, scattered in less
desirable locations. Those located in the CBD are office towers in a not so good condition.
This class makes up for 200,000 m2 of all rentable space in the market.
Lease rates for Class A buildings were ranging between US$ 13-20 per m2 and Class
B spaces between US$ 8-13. These variations in lease rates have been attributed to factors
such as location, age, and current conditions. However individual landlords have also
contributed to this difference as they determined their own rent levels. It is important to also
observe, that maintenance costs are excluded from this estimate and can amount to US $1-2
per m2/month (CBRE, 2006).
Sales prices for Class A at the time were ranged between US$ 1,200-1,400 per m2,
while Class B ranged between US$ 900-1,000 per m2. Class A vacancy was estimated at 10%
while overall market vacancy (Class A and B) at 15-20%.
Panama’s boom is no doubt driven by the residential market. However after
comparing the above data, this could be taken as a sign that the approved expansion of the
Panama Canal has done its part. It is easy to understand that there is an increase in the
demand for office space, as more transnational firms will be eager to locate in such a
concurred business center. Regardless, residential high rise buildings remain the main focus
50
of the market at the moment and although economic augur for the region is expected, there is
no “buzz” yet of a high supply of office space entering the market.
5.4 Transparency
The Central American market is one of poor transparency. For many years there has
been an absence of a regulatory framework for foreign investors, which has been addressed
until recently and partially through CAFTA-DR. Another issue addressed in the agreement is
land legislation, which in some countries may be ambiguous and face issues concerning
property ownership.
Costa Rica and Panama alike, have been positioned in the 2006 Real Estate
Transparency Index by Jones Lang LaSalle, having a transparency score ranked from 1-5 as
3.83 and 4.18 respectively. Both are located in the 4th of 5 tiers, and are the only two Central
American nations to be included in the index. The real estate activity in the two nations is
very promising, regardless Costa Rica has already had a head start. Although the countries are
not labeled as the most transparent nations, this may be influenced by unavailability of data,
as in understandable in the case of Panama which has just recently undergone heightened
activity in the sector.
To address this matter, “the CAFTA-DR includes an effective, impartial, and
transparent investor-state dispute settlement procedure, which provides investors recourse
outside of Central American courts. This is particularly important in a region where the slow
pace and uncertainty of legal systems has historically been an impediment to investment. In
addition, under the CAFTA-DR, investors also have recourse to arbitration to enforce certain
contractual rights, including any concessions that Central American governments may grant
to U.S. investors.”32 This agreement particularly addresses a procedural activity in which
foreign investors must invest too much time when it comes to entering a non-transparent
market. Most of the time, an investor must develop commercial relationships with local
market players. Albeit transparent markets imply a safer, less risky environment for
investment, less transparent markets also indicate an opportunity to gain access to an
emerging consumer market. As mentioned above a series of measures are being taken in order
to improve all of the countries´ economies and to establish a welcoming atmosphere for
investors.
32
Export.Gov See: http://www.export.gov/fta/CAFTA/Investment.asp?dName=CAFTA
51
The laws that the Costa Rican and Panamanian governments have passed in order to
make investment equally fair for foreigners as for local market investors must not go
unmentioned. There are national efforts to promote transparency in private and public entities,
to provide clear information with easy accessibility and in the English language.
5.5 Discussion: Boom or Bubble in Panama?
Although both markets have experienced a rising development in their real estate
sectors, by far Panama’s boom has transformed in a very short period of time, not only the
city’s skyline but its image to the rest of the world. In an article by Molano (2006), it is stated
that Panama “is a bubble waiting to burst”. The author adds: “Panama City's waterfront is
starting to resemble the glittering skyline of Hong Kong, with a flair of South Beach.” And
amongst many articles surfacing related to this subject, indeed Panama is being compared to
the rise that Shanghai experienced in recent years.
Molano (2006) refers to the increased activity in the construction sector and the supply
of housing waiting to accommodate senior citizens from North America and Europe, as a
miscalculation resulting in overbuilding. Regardless, the expected migration from those
countries to the region is not a complete assumption since as previously mentioned visas and
residence permits have been solicited and extended in increasing numbers over the past years.
In an interview conducted in 2007 by Summit Communications to Director General of
CB Richard Ellis Panama, Ramón Roux, he discusses and comments on the Panamanian
market. Describing Panama as being 80% service oriented, were all can benefit from a
fantastic standard of living, he states that the development is indeed sustainable for several
reasons.
First, regardless the element of speculation, the market interested in Panama is
international, looking for primary or secondary residence, where there is excellent potential
for capital gains.
Secondly he stresses the important proactive participation that the Panama Banking
System has had in assisting to provide incentives for real estate purchases through very
competitive long-term financing. “Over the last three years there has been 20 year financing
for 70%” (Summit Communications, 2007b).
52
As for the last reason in relation to the absorption of available space, he reminds of the
80 million retirees, of which 10% to 12%, that is, 8 to 10 million people in a span of 20 years
will consider moving to Latin America. Thus the figures are promising he further comments.
Not all these retirees will be moving to Panama, but Roux, in a conservative thought believes
that even if only 1% or 2% consider moving to Panama, it represents 80,000 to 90,000 people
moving to the country. Thus, in a combination with the local market, the projects will have
excellent pre-sales and profitability levels. Panamanian citizens can apply for government
assisted, 5 percent down, low-interest loans, thus the local housing market which is
moderately priced in comparison to that targeted for the international investors, is booming as
well (Hanna, 2006).
Since these numbers show that Panama has set its eye on the international market,
there also will be absorption, not only from American retirees, but from South America and
Europe as well. Alongside Donald Trump, Spanish firms are also participating in the market.
Roux affirms that “although 70% of apartments or residences assessed at more than $150,000
will go to foreign residents or investors, there will indeed be periods or projects where the
opposite will apply” (Summit Communications, 2007b).
Discussion for whether Panama is experiencing a boom or the symptoms of a bubble
is the result of one main factor. Panama is now experiencing its best economic condition, and
growth and development have been rising at a fast pace.
There are so many projects that will go hand in hand with the supply of space. The
government as mentioned before has plans to expand the canal, work along with the private
sector in order to provide the country with the best infrastructure and improve public
transportation (Hanna, 2006). The expansion of employment in the construction sector, will as
a multiplier effect, expand employment in other industries, and the education system is
preparing Panamanians for the challenge of competing with international skilled labor
(Hanna, 2006). With all these elements set, the government, and institutions world wide, are
positive the country will have a very prosperous economy for years to come (Hanna, 2006). It
is most likely that this indicates Panama’s market as being in the midst of a boom, rather than
approaching the burst of a bubble.
53
As was depicted in the 2006 survey by Prima Panama:
“Over the next five years, nearly 11,000 apartment units will be built in Panama City. To put
this building activity into perspective, according to the recent Large Scale Development
Report prepared by the City of Miami Planning Department, a total of 11,967 apartments
were completed in the Miami metro area between January 1st, 1995 and March 31st, 2006.
This means that in just the next five years, nearly as many apartments will be built in Panama
City than were built in the entire city of Miami during the past 10 years.”
54
6.
A Critical Analysis: What’s in Store for the Future
The numerous dimensions that Lee (2004) finds in several studies of consideration for
investors when attempting to gauge a country’s real estate market potential are: expected
growth and risk of the country in general, real estate transparency and specific risk
characteristics. Costa Rica and Panama are the two countries of the Central American region
that are doing best with regards to economic development and growth. The range of aspects in
which their neighboring countries are showing improvement still are irregular in comparison
to the leveled progress witnessed in many aspects of the Costa Rican and Panamanian
economies.
Both countries show political stability and have attracted through many incentives,
FDI to their economies. Incentives have played a major and important role in luring
investment. Studies have shown that by matching the right incentives to the targeted
industries, the better the role incentives will play as determinants in luring investment (Rolfe,
Ricks, Pointer & McCarthy (1993)). At the moment, multinationals are nestling in the Central
American region. San Jose and Panama City are no exception; particularly Panama which is a
business center of great importance due to its Panama Canal and Free Trade Zones. The
incentives both countries have promoted are oriented towards benefiting multinationals of the
finance and tourism sectors. By taking advantage of the strong link both tourism and real
estate have at the moment, these economies have been able to capture the right market:
international companies and private foreign investors.
As studies have shown, Central America has been considered risky, and lack of
knowledge on the market has deterred investors´ involvement. Regardless, many indices and
reports have illustrated how the region is undergoing changes quickly, growing economically
and moving towards a more transparent and less corrupt state. One aspect considered in
studies is the role socio-cultural factors play in the way investors perceive a market. Language
barriers, and the way of doing business are esteemed important. Costa Rica and Panama have
a highly educated and skilled bilingual work force. In addition, information in English
regarding laws, regulations, benefits and tax exemptions is available to the public and free of
charge.
Studies have concluded that when considering overseas investment, most institutional
real estate investors, other things being equal, will opt to invest in the most mature,
55
transparent, least corrupt countries whenever they can. If the markets of Costa Rica and
Panama are headed towards an increase in transparency it is likely that interest for investment
in the region will remain for a long time. The CAFTA-DR agreement is already addressing
issues of corporate transparency. This allows for the creation of a safe environment which
ensures that foreign investment is protected. As well, the agreement with the European Union
and other countries is a positive step towards attracting interest. I must add that upon doing
my research, I was surprised at the limited reliable data available regarding the real estate
sectors of the other countries: Belize, Guatemala, El Salvador, Honduras and Nicaragua.
These countries have experienced some sequels of their neighbors’ augur; however it is
difficult to measure to which degree and for how long they will benefit from this. On the
contrary, Panama and Costa Rica have both increased the number of official sites, available
information and reports both in Spanish and English. The presence of companies such as CB
Richard Ellis in Panama and Colliers International in Costa Rica is indicative of the demand
of foreign services in the region. In addition, I believe that both countries’ placements in the
JLL RETI, will soon change and that in some years they will have climbed up the
transparency ladder.
Baby boomers have played and will continue to play an important role in the real
estate development and the behavior of their market cycles. Developers and investors have
taken into account some essential aspects about the opportunities Central American estates
offer: (i) proximity to international airports, some main cities being only a few hours flight
away from main airports in the U.S., (ii) the high quality life offered due to prospering
economies, political stability, and affordable high quality health care, (iii) scenic beauty,
natural resources and mild climate, (iv) incentives, tax exemptions and benefits for investors,
(v) the increasing presence of international chains, offering several services as in the case of
the hotel industry offering housing units (primary or secondary) with a wide range of
amenities. Panama has already been rated as one of the World’s Top Retirement Destinations,
by International Living Magazine, the New York Times and Modern Maturity, the magazine
of the American Association of Retired Persons (Summit Communications, 2007b).
Since both real estate markets are relying heavily on the expected number of baby
boomers to purchase and settle in these countries, it will be interesting to observe how the
current U.S. housing slump will affect the absorption of residential premises which are now
under execution, especially in Panama. The residential market in Panama, as mentioned
56
before is characterized by multi-story buildings and sky scrapers, offering amenities for an
exclusive market of retirees. The current events affecting the U.S. economy cannot be
disregarded as they constitute an important factor to impact the Panamanian dollar based
economy as well. For example, the dollar value has gone down, yet the minimum required
investment for the metropolitan area of Panama City has gone up by U.S. 1,000,000. I believe
that the acquisitive power of the expected retirees will be affected, both in terms of the dollar
as their currency and regarding the devaluation of their homes and assets in the U.S.
There is also the European market to consider. As Lim, McGreal & Webb (2006)
illustrate, Central America as a destination for international investment is still considered to
be risky, and having no previous association with this market makes especially European
investors, uneasy about considering a region which seems to pose high returns at the cost of
too high risk. Central America competes with other parts of the world which also have
booming tourism and real estate sectors, and which are more viable investment destinations
for Europeans. Asian countries for example are more accessible from Europe and more riskfree asserted investment decisions. However this is slowly changing, and more investment
from European countries into Central America is beginning to show that opportunities in the
region are promising. As the Euro continues to gain momentum versus the Dollar, I would not
be surprised to see a significant increase in investment coming from this part of the world.
Already, Spanish investors have a presence in the region.
Another important factor to consider is the impact the expansion of the Panama Canal
will have on the Panamanian economy. The enormous influx of capital the expansion project
will have on the Panamanian economy is, as Roux stated in his interview, positive in
sustaining the real estate market growth for years to come. The Panama Canal is a unique
landmark, equaled by no other. It unites two oceans, and multinational companies have
already understood the importance of settling onsite one of the most transited business hubs in
the world. The increasing job supply in Panama due to the presence of multinationals will
definitely have a positive impact in the economy. Panamanians have invested therefore in
their education, as they understand the supply for office jobs will come in hand with the
establishment of their cities as business centers.
More important to consider is the contagion effect the growth of the Panamanian
economy may have on the rest of Central America. I have reflected upon the availability of
57
stock, or land, in those other countries, where tourism is also an important industry and where
these economies have also provided investment alternatives for foreigners through different
incentives. What will happen when investors, both private and institutional, realize that a
short distance away there is land available with some of the same characteristics as the land in
Costa Rica and Panama? The other countries’ real estate markets are not mature; however
there is already much activity related to project development in the finance and tourism
sectors.
The association between tourism and real estate in Costa Rica and Panama is strong
and determinant in the further development of both sectors. In previous sections I refer to the
surge not only of residential premises, but also to the increasing hotel developments and
international chains establishing their presence in the main cities of Costa Rica and Panama.
Studies have shown that hotel real estate cycles, just like office real estate cycles share
some main characteristics, such as the substantial lag that exists between initiation and
completion of a project (Gallagher & Mansour, 1999). The lagged or slow response of hotel
supply is a major cause of the lodging market real estate cycle. In the past, new hotels have
been built upon an increase in demand which may be due to unexpected growth in a particular
area, an abundance of capital or an interest for investment: such as the case of areas with a
high tourist affluence. Once occupancy rates increase, lenders, developers, hotel chains and
management companies are lured to the area. Regarding historical evidence, it has been
observed that among the major commercial property sectors overbuilding has been proven to
be the greatest risk for the hotel industry (Gallagher & Mansour, 1999).
Construction activity in both countries has propelled in the last two years.
Overbuilding has been a major topic of discussion in Panama due to the unprecedented
amount of projects popping up all over the main cities. The cancellation of Palacio de la
Bahia, a mixed use building offering hotel, office and residential units, sent a wave of concern
to investors. Construction commenced in 2006 and was to be concluded in 2009. The 97 floor
project to be developed by Spanish firm Grupo Olloqui, consisted on an initial investment of
U.S. $200 million. Once completed it was to be the second tallest building in Latin America,
after Ice Tower, another project to be developed in Panama. The Ice Tower was cancelled in
2007; with 104 floors it was supposed to be completed in 2010. On both cases, the
cancellation was said to be the result of lack of funds.
58
The cancellations of these projects and the delayed completion of many others have
posed the question whether Panama’s boom could in fact be a bubble waiting to burst. As
mentioned in the previous sections, expectations of high space demand are the main drive
behind the proliferation of developments. Experts state that the boom is real and it is there to
stay. The hotel market has usually been the first hit in view of negative economic shock,
suffering immediately (Gallagher & Mansour, 1999; p.136). Demand for hotel rooms is very
sensitive to “event risk”, due to its lease structure (Gallagher & Mansour, 1999). Hotels rely
on daily check-ins and check-outs, which are highly sensitive to economic conditions; if a
room is not used, the hotel looses immediately. (Gallagher & Mansour, 1999). High and low
seasons play an important role. I consider that regardless the speculation and overbuilding; we
cannot overlook the figures of the pre-sales. Most buildings are as many local papers state,
“just an empty lot with a fancy advertisement board…” but surprisingly all space units have
been sold. Also developers have found a way to combine hotel and residence space all in one,
in a way that no matter the season, loss be minimal or none.
The truth is, now many projects are under construction and foreign firms are still
entering the market. Multinational firms moving into the region have now propelled the office
and retail markets as well. Costa Rica’s office market is slowly growing. Class AB buildings
are expected to become high in demand. The same goes for Panama which is already
supplying office space with its many projects. Although the boom is oriented more towards
the residential market, the office and retail markets will also be positively affected.
The rest of Central America has in my opinion much potential to develop further their
tourism sector and in effect exploit their real estate. As increasing development in Costa Rica
and Panama draws more attention to the region and there is interest on behalf of foreign
investors to invest in the other countries, their governments will understand the need to
embrace this opportunity to develop. Due to the competitive nature of real estate markets, the
governments have to speed up delivery of strategies to lure foreign investment into the real
estate sector, implement better marketing plans to promote their exotic tourist destinations
and invest more in their tourism industries (i.e. invest in transport infrastructure such as roads
and airports). Central American tourism and real estate investment is not a mirage, but a wide
window of opportunities.
59
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Appendix I: Costa Rican Real Estate and San Jose City
Views
Top Left: Coco Bay, Guanacaste (http://www.costaricapages.com/blog/wp-content/uploads/2007/11/coco.jpg),
Top Right: Downtown San Jose City (http://www.britannica.com/eb/art/print?id=89520&articleTypeId=0),
Middle
Left:
Hotel
Tamarindo
Diriá
Beach
and
Golf
Resort
(http://www.1costaricalink.com/hotels_guanacaste_costa_rica/hotel_tamarindo_diria_costa_rica.htm),
Middle
Right:
Guanacaste Bay (www.coastal-estate.com), Bottom: Villas Costa Grande are preconstruction luxury villas
located in the beachside community of Playa Grande Estates. The colonial architecture and villa type
design, located 150 meters from the beach, are characteristic traits of Costa Rican estate that make it
highly appealing for investment. (http://www.coldwellbankerbeachproperties.com/property_listings)
65
Appendix II: Panama City Views
Top Left: Panamanian Sunset, Top Right: Bridge of the Americas, Colon Zone, Middle Left: Punta
Paitilla, Middle Right: Balboa Avenue, (http://www.panamarealestatenow.com/PanamaImages); Bottom:
Reflection
of
the
Panama
City
Skyline
(http://www.maycompanyalliance.com/wbimg/galerias/Panama_at_night.jpg)
66
Appendix III: Donald Trump Invests in Panama
Trump
Ocean
Club
International Hotel & Tower
is
currently
undergoing
construction in the Punta
Pacífica peninsula in Panama
City. It consists of a high
luxury, mixed-use project,
comprising residential, hotel,
and office and retail spaces.
The 68 story building upon
completion in 2010, will have
a total of 252,000 m2 and
include: condo residences,
hotel condominium, wellness
spa, pool deck, boutiques and
shops, gourmet dining, beach
club, yacht club and pier,
business
center,
Trump
International
casino
and
Trump Ocean Club privileges.
The ambitious real estate
project has an estimated
investment of over $200
million dollars, making it the
largest real estate investment
in Latin America. It is a joint
venture of various prestigious
firms: Trump Organization, KGroup
Developers,
the
Colombian
construction
company Arias Serna Saravia,
and the American and
Colombian
real
estate
promoters, International Sales
Group and Espacios Urbanos.
Images Top Left: (1)
Luxury
Hotel
Suite
(http://www.panamarealestate
now.com/xsites/Agents/panam
arealestatenow/content/upload
edFiles/TRUMP-HOTELSUITE.jpg),
(2)
Lobby
(http://www.condohotelcenter.
com/images/trump-panamalobby.jpg), (3) Conference
(http://www.condocompany.c
om/View_Images?type=buildi
ng&id=2301#floorplan), The
Trump
Ocean
Club
International Hotel & Tower
Views
(http://www.condohotelcenter.
com/images/trump-panamabuilding.jpg),
(http://panama.condocompany
.com/Panama-CityPanama/Trump-Ocean-ClubPanama/images/trump-ceanclub-main.jpg),
(http://www.panamarealestatet
rends.com/xSites/Agents/pana
marealestate/Content/Uploade
dFiles/Trump-Ocean-ClubDay.gif)
67