Panama Real Estate Update: Trump Tower

Introduction – Donald Trump has been involved in one of the massive prestigious condo projects in Panama City called Trump Ocean Club. This project involves a boat marina, Hilton Hotel, gambling casino, restaurants, shops and of course residential condos. The project is supposed to be 855 feet high with 2,400,000 sq. feet under roof. The project will cover 140,000 sq. feet of land.

Details – The Trump project is supposed to have begun construction on May 5th. We have not driven by the site to see what is or is not yet taking place in terms of the build out. We have seen major projects start a build out and not complete (Ice Tower being one). When we see the structure go up a few hundred feet into the sky we know the build out is well on its way.

Trump Bond Offering of $220,000,000 – Now we see a new development. Back in 2006 it was said the cost of the Trump Ocean Club would be $220,000,000 according to Internet web sites anyway. Now we see Newland International Properties Corp., the developer of the Trump Ocean Club, planning to float a bond for $220,000,000 to do the build out on the Trump Ocean Club. The bonds will have a nominal value of $10,000 and they will have a maturity date in 2014 while construction is scheduled for completion in 2009. This bond offering is not yet approved by the Panama Government and if approved it will be the second largest such offering on the Panama Exchange.

Financing Previously Announced in Place – In early July 2007 Roger Khafif the developer of Trump Ocean Club announced on the internet (allegedly we should say but it is our opinion this is true) that with some help from Donald Trump they managed to obtain the financing commitment of what is now called a 2.8 million sq, foot building requiring $397,000,000.

Discussion – It appears based on the situation that the financing thought to have been obtained in July 2007 is not in place. It is doubted by some that $220,000,000 will be a realistic figure to raise in these times with turbulent stock market conditions taking place. Trump has had some blemishes recently with some bankruptcies.

So far we understand the Trump project to have collected 20% from the buyers in place with another 5% due in six months.

Our Opinion – We think that the Trump Project bit the poison apple that is the plague of developers worldwide and this poison apple is selling to flippers and speculators. These people have no intention of ever owner occupying the condo. They just place as small of a down payment as possible so they can sell the unit for gain down the road. They never have to go out and get financing, and have the burden of home ownership. They put out a small down payment (10% or less) and try to make outrageous profits in a buying frenzy market down the road. It works sometimes. If it never worked no one would ever do it. Now the financiers are not confident enough in these speculators to put out real money to build out the project. They are afraid the prices are too high already and the speculators will not be able to flip the units for a gain. They have to have enough profit to cover the real estate commission and closing expenses. These people may just not close.

In Panama the developer can collect up to 30% of the actual sale price before the project has a certificate of occupancy. When they have the certificate of occupancy the balance (70%) is due at that time. If the flippers cannot see a reasonable profit they may very well just cut their losses and walk away from the project. Flippers are generally driven by a feeding frenzy and act emotionally seeking fast gains with little investment. This is often a formula for disaster. They can get cold feet quite easily. Many of them cannot come up with the funds to close on the property. What happens next remains to be seen?

If the bond issue fails then it means the project will probably not get the required financing and could result in a bankruptcy. It is being claimed on websites that the developer put some $34,000,000 into the project already but we do not know for sure. We are fairly certain some millions of dollars went into plans, drawings, advertising and promotion.

They may have paid some partial real estate commissions out to the realtors doing the pre-selling for them. It would be interesting to know if these realtors have to pay back the commissions if the project fails to go forward. Our guess is they have to pay it back but we have never seen the contracts so it is just a guess. If a lot of pre-sell commissions need to be paid back we might see some realtor bankruptcies as well down the road but only time will tell.

If a project like this fails it could head into bankruptcy. Deposits could be credited towards marketing and whatever foundation construction has been done plus plans, permits, legal expenses etc. If such a bankruptcy occurred it would trigger the end of the real estate boom and the onset of the burst bubble. Speculators would be demanding refunds whenever they could. Speculators would flip their positions for breakeven or even at losses just to get out of the market before collapse.

What A Panama Real Estate Burst Bubble will Look Like – There will be 50 story buildings that have shells up that fail to complete. The projects will be for sale, foreclosed and/or involved in all sorts of legal complications for some years. Banks will want to get 40% or 50% down for a mortgage or possibly just pull out of the mortgage market entirely. Banks if they are writing mortgages will be using their own appraisers and those appraisals will come in 10% to 20% under what the other appraisers come up with so the bank will be able to sustain at least a 50% market drop. Some projects the banks will not touch. High dollar value units will probably require 70% to finance. Anytime more than 50% down is required financing loses most of its appeal. Many Latin American countries have strictly a 100% cash market for real estate and Panama may become one of those.

Many completed units will have speculators who have placed deposits down who will fail to close. These units will go one of two ways – one is they will be sold into the market at prices 20% to 50% under the original price just to recover the investment capital, two they will be turned into rental units hoping for a bounce back in the market, three would be a combination of the two. Either scenario will result in a further drop in market prices. We often said Panama could sustain real estate prices of $900 to $1100 a sq. meter for the nicer product and that is it. This places a basic 250 sq. meter three-bedroom condo at $250,000, which is about the most the retirees can or will pay. Now some of the new condos are of such a low quality that if they hit the market on liquidation terms they may go for as little as $600 a sq. meter if there are enough of them on the market.

One needs to understand that a nice three-bedroom ocean front condo in South Florida can be had for $250,000 today that before was a lot higher. Florida prices have dropped perhaps 40% and other pockets in the USA are expected to drop significantly as well. This means retirees can not sell their homes clearing enough equity to outright purchase a home in Panama as they could two years ago. People coming to Panama and buying $100,000 beachfront homes was a reality in 2005. If the Trump Project fails to get financing and does not go forward it could pull the trigger thus bursting the bubble. If it goes forward we are confident that another trigger will be likely to occur. The awful economy in the USA, which is unlikely to improve for years to come if at all, is at least in part responsible for the drop in demand. The North American Retirees are no longer able to sell their homes and clear enough profit to come here. This is called a drop in demand.

Conclusion – Buy an already existing home and retire in Panama if you are able. Your cost of living will be significantly lower and your quality of life will increase. The value of these homes is unlikely to drop.