Helping hands: The growing middle class is expected to sustain growth

Popular among North American and European retirees, the Panamanian real estate market consists of much more than beachfront property. As with construction, the sector is experiencing a boom supported by real demand and increased purchasing power among the local population. While prices are slightly on the rise in both residential and commercial segments, indicators suggest that the market is cooling off and reaching a healthy equilibrium. Such conditions, along with a stable political scene and security, are catching the attention of many investors. Preliminary data released by the National Institute of Statistics and Census suggest that real estate, corporate and leasing activities expanded by an average of 10.3% year-on-year (y-o-y) during the third quarter of 2013, in comparison to 13% in the third quarter of 2012 and 6.5% for the same period in 2011. Indeed, a mature market appears to be developing, but without a lag in economic output. In 2011 the sector contributed 8.7% of GDP; in 2012 that figure rose to 13% and is estimated to have remained there in 2013.

Tax Incentives

Like many of its neighbours, Panama offers a range of government incentives to help people own homes. Such laws have not only helped keep the housing deficit from growing; they have also generated a real estate market through consumers. Of these incentives, perhaps the most significant is exemption from property taxes for new residential buildings.

Until 2012 all newly constructed properties were exempt from taxes for 20 years, a major incentive that drew many investors and developers. Current laws, however, grant tax exemption in some cases for shorter periods: five years for new residential properties valued above $300,000, 10 years for those valued between $120,000 and $300,000, and 20 years for those valued less than $120,000. Newly constructed commercial and industrial properties will be tax exempt for 10 years.

Raúl A Hernández Sosa, the business manager of Provivienda, a leading developer, describes this new scheme as a “hard hit” to middle class and high-end segments. “The middle range market today is from $200,000 to $300,000,” Hernández told OBG. “This exemption has been one of the most dynamic elements of the market in the past, but it is now cut in half and we’ll have to see how that affects purchases.”

Even so, property taxes are quite low in Panama, ranging from 1.4-2.1%. Using an alternative calculation, the rate can be even lower, varying for properties whose total appraised worth, i.e. land plus improvements, is above $100,000 (1%), between $30,000 and $100,000 (0.75%) or under $30,000 (exempt).


Another incentive aimed at the low-income segment includes a subsidy scheme for first-time homeowners. Introduced by the current administration, the Solidarity Housing Fund offers families a subsidy of $5000 through two options that include properties up to $35,000 and up to $40,000. Although families benefit, the subsidy goes directly to the developer.

Hernández said he considers this incentive a good start towards generating social housing, though it does not work well in practice. Aside from developers encountering problems with actually charging the subsidy, few homes falling under that price range are currently being constructed. “Incentives exist but the government needs to make sure they work well,” Hernández told OBG.

“Policies can continue creating incentives for homes that cost $40,000, but nobody is going to build them.”

Also along the line of assisting low-income and middle-class segments of the population purchase a home, the government offers subsidised interest rates for mortgages. On properties valued less than $40,000, the government will pay the interest rate, while for those valued from $40,000 to $80,000, subsidies cover 4% of the interest rate. On the highest end, for properties valued from $80,001 to $120,000 families benefit from subsidies for 2% of interest rates on mortgages.

For Elisa Suárez de Gómez, executive director of the National Board of Housing Developers (Consejo Nacional de Promotores de Vivienda, Convivienda), this incentive has adapted well to the quickly changing dynamics of Panama’s real estate, following market trends and ultimately propelling demand. “These laws have significantly affected the middle class, both the working and professional middle class,” Suárez de Gómez told OBG. While in 2012 this subsidy cost the government over $147m, in 2013 the government spent just $47.5m, according to the Ministry of Economics and Financing. A total of $65.2m was allocated for this subsidy in 2014.


Panama’s mortgage portfolio has been steadily rising over the years in terms of both quantity and value. As of July 2013, residential mortgages accounted for more than $10.23bn, representing 15.2% y-o-y growth over the same period in 2012, according to the Panamanian Credit Association. This figure reflects 29.4% of the country’s total credit. Numerically, mortgages have expanded by 6.6% over the first two quarters of 2013, accounting for nearly 220,734 activated credits, as compared to some 207,121 in 2012. Suárez de Gómez attributes the country’s positive mortgage figures to low rates of late payment and a solid banking system that has not indiscriminately administered financing. “A large portion of the population is not only capable of becoming indebted but also determined to get out of debt,” she told OBG. “Heavy spending is a cultural trend among Panamanians, but when it comes to cars and homes, people diligently pay off their debt.”


The reference interest rate fell from 7% in 2007 to 5.75% during the first half of 2013. State-run mortgage bank Banco Hipotecario Nacional (BHN) offers the most competitive fixed interest rates at 5% and deals with clients interested in homes valued up to $120,000. According to Juan C Robles, BHN’s financial manager, this market is not attractive to private banks. However, with changing dynamics and rising property prices, BHN is pushing authorities to increase the limit to properties valued at $170,000. “We are already capturing clients from the private banking system and this increased coverage would add to that clientele,” Robles told OBG. Though the banking system has been quite strict in the past, Robles said the market is now starting to measure all credits and clients by factors of risk. “Based on the experiences of the US real estate market, credit regulation in Panama has mitigated levels of risk for mortgages,” he told OBG. Banks take into account the location, security and quality of construction before granting mortgages, criteria which have become more stringent over the years, Robles said.

Middle & High End

Panama’s growth is evident in the emergence of a strong middle class with increased purchasing power. This is also reflected in rising property prices, especially in the downtown districts of the capital city. As limited space is a huge issue for urban development, residential construction has aimed to continue densification. For example, the new metro system will provide a map for new development, since both residential and commercial construction is expected to shoot off around the new stations, as well as contribute to property value increases.

Prices of apartments in the downtown area currently are in the $130,000-160,000 range, according to Michael B Fernández, economic director of the Panamanian Chamber of Construction. These prices have risen significantly in the past decade, when Fernández said those same properties were selling at around $80,000. Most of these properties begin at 70 sq metres and include two bedrooms and a bathroom.

Gross absorption rates for Class B and C properties have been extremely high, closing the first semester of 2013 at 86%, according to CB Richard Ellis Panamá (CBRE Panamá). The average sale price for these properties ended the first semester of 2013 at $1608 per sq metre. On the higher end, property values are also increasing, a tendency expected to continue as the economy expands. The average sales price for Class A properties in Panama City decreased only slightly over the first semester of 2013 from $2146 to $2092 per sq metre, according to CBRE Panamá. In exclusive neighbourhoods in the city, such as Avenida Balboa, Punta Paitilla and Punta Pacífica, average sale prices closed 2013 at $2696 per sq metre, although many properties in those areas can surpass $3000 per sq metre.

Bubble Trouble

The combination of impressive growth rates, price speculation and a slight oversupply of properties has led to many rumours of a possible bubble. However, the market is still benefitting from real demand. “There is still ample inventory from 2010 and 2011, when the effects of the global slowdown appeared, especially along Avenida Balboa and Punta Pacífica,” Hernández told OBG. “But that inventory is slowly being filled and few new projects are aiming at the luxury markets, where most of the idle stock exists. This is a positive sign.”

Before the economic crisis was truly felt in Panama at the end of 2009, there were isolated cases of fly-by-nights set up in search of easy profits in the real estate market. The remains of such false projects can be seen in several parts of the capital city. According to Herná ndez, the economy did not suffer greatly from this activity in part because of a strong banking system with strict lending procedures. However, he said banks have begun to open up their faucets for lending, which he believes may attract similar schemes again.

Foreign Investors

Foreigners continue to make up a substantial proportion of the market. Kent Davis, founder and head broker of Panama Equity, says many come from Venezuela, Spain and North America. “Steady and even increased demand has helped to offset what was once looked at as potential oversupply, and prices have stabilised and, in many cases, started to move up once again,” he told OBG.

One major obstacle foreigners often encounter when searching for real estate in Panama is the fragmented system in which agencies operate, making it almost impossible to identify all available properties. Although several attempts have been made to unify the system into something like the multiple listing service in the US, such efforts have come to no avail. Demand from foreign investors has also grown due to the country’s political stability, reputation for safety within Central America and job growth. In general, foreigners receive the same legal rights as Panamanians for purchasing and renting property, and can apply for mortgages without accumulating debt in their country of origin.


Many personal investors coming from abroad look to Panama as a sure bet in the buy-to-let market. While this venture has more elements of myth than reality, opportunities do exist, especially among foreign tenants and with an emerging corporate sector. Davis told OBG investors are seeing an internal rate of return of 5-6.5% across a five-year holding period on their investments for rentals, mainly concentrated within Panama City but also in and around other urban areas such as the Pacific Coast. “Though these returns are not exceptional, they are quite reasonable. Rental absorption is quite positive,” Davis said.

According to CBRE Panamá, residential lease prices within Panama City have been on the upswing, but only slightly. The first semester of 2013 ended with average leases at $11.30 per sq metre per month, the highest prices located in the southern coastline, reaching up to $13 per sq metre per month. Among Panamanians, the rental market is virtually non-existent, however, since supply continues to increase and many are now finding the means to purchase through government or private mortgage assistance.


While sector activity is growing at moderate rates, several dynamics indicate that real estate will continue to offer much potential in the near future. Not only are foreign investors finding attractive tax incentives on newly constructed properties and profitable leasing, but a residential demand has been generated with the help of government policies. Although investment is expected to slow down as Panama enters the presidential campaign in 2014, there is a general expectation that fundamental policies and political stability will continue with beneficial effects for the market.

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