When President Martin Torrijos of Panama unveiled a £4.9bn investment project the size of central London one mile outside Panama City in July 2007, it was only part of a massive plan to drag his country into the First World through international investment, and drew comparisons to the kind of development seen in Dubai.
Panama’s government granted a 40-year concession to UK developer London & Regional, in association with Colombian business magnate Jaime Gilinski, to create a 60m m2 city on what was the US’s Howard Air Base. The move, which could transform Panama’s investment fortunes, is part of a range of economic policies from President Torrijos, elected in 2004 on a reform ticket, who has vowed to tackle corruption and pursue a free-trade agreement with the US.
The development site is on the edge of the Panama Canal, the world’s busiest trade canal, and includes a 2.75km airstrip. It has been earmarked for a massive trading hub to service the canal, which carries around 60% of goods passing in and out of the US. It also borders the Pan-American highway, running from South America to California.
L&R beat 16 other bidders to the contract to develop the 2,750 acre site and has promised to invest $705m into the former US air force base, now renamed Panama Pacifico, which was handed back to Panama by the US government under an agreement signed when former US president Jimmy Carter was in power.
The UK developer hopes its investment will increase 15-fold in the 40 years it will take to complete one of the world’s largest developments, giving it a $10bn end value. With its strategic location and relative political stability, the scheme, L&R hopes, will attract international and national corporate occupiers. “The Howard Air Force base redevelopment provided a strong strategic opportunity for us,” says Patrick Anderson, L&R’s head of international investments. “Latin America and Panama specifically has experienced tremendous economic growth. The Torrijos government has done an admirable job focusing on growth and improving the country’s fiscal prospects. Panama is an oasis of stability in a region that is not always the most stable.”
Anderson adds: “We believe others will follow us – especially as the country’s sovereign credit ratings improve. Every major bank has a presence in Panama, along with strong regional players. Spanish and US investors are also present. We believe institutional investment will be enhanced by developing market-leading institutional-quality assets within Panama Pacifico.”
Bankers flock to Panama
Panama has a population of only 3m but boasts the highest GDP per capita in Central America. GDP grew by between 8.5% and 9% in 2007, up from under 8% in 2006. It is this economic strength, plus a strategic location and lenient tax regime, that has already attracted more than 120 financial institutions, making the country the world’s second-largest banking community after Switzerland.
It is also the fifth most popular retirement destination for US retirees. Donald Trump, among others, has invested in a residential tower and hotel in Panama City’s Punto Pacifico area, pushing house prices towards those of the US.
“Panama is in an opportunistic situation,” says Zach Cheney, head of Latin American regional operations for Jones Lang LaSalle. “The widening of the canal, which will soon be able to accommodate super tankers, promises to greatly expand demand for labour, services and supplies beyond 2015.”
The government offers a favourable employment and tax regime to attract international investors. Corporate income tax is set at 10% and property investors are exempt from the 20% real estate tax for 20 years. This has spurred a property boom in the country. CBRE, which has an affiliate office in Panama City, says Class A office vacancy rates fell for the fourth sector in a row in the second half of 2007 to 2.34% and “relatively high absorption levels are expected in the foreseeable future”.
Lease rates for all buildings rose by 5% to $11.55 per m2 per month in 2007, while lease rates for class A buildings have risen by 40% since mid 2006 and average around $19 per m2 per month, with the strongest rises registered at the end of 2007. This has encouraged development and almost 190,000m2 of class A office space is under construction.
However, as the credit crunch hits many of Panama’s US backers, the flow of cash into the country could dry up. Last year, plans to build the world’s tallest residential skyscraper, the 104-storey Ice Tower in Panama City, were shelved owing to a lack of funding, suggesting that Panama’s boom in residential property is coming to an end. According to CBRE, the residential market has “reached a point of saturation”.
