The following are the brief commentaries and reflections of our CEO, Bob Adams, discussing matters related to Panama, its development, and its investment climate. They're not meant to be academic or profound, but you may find some of them interesting, perhaps even instructive. We hope so.
A Five-Year Forecast
At Panama Wave S.A., we do not make predictions. We do not have a crystal ball, and if we had one, we wouldn't waste our time looking at it. We do make forecasts for internal use regularly. Forecasts are observations based on currently available information and our analysis of future scenarios and their probabilities.
For the first time, we are sharing a summary of our current five-year forecast for investment in Panama. Why five years? Beyond that point the scenarios become so varied, and the probabilities so difficult to estimate, that such a forecast is of little use. Why not one year or two? The trends in Panama and globally make forecasting a year from now more difficult than three or five years from now. That seems counter-intuitive, but that is based on our past corporate experience under similar circumstances as exist today.
We know there are many other opinions and we respect those, but this forecast is not meant to generate debate with others. This summary is simply an explanation to our clients and readers of our direction.
A forecast is based on information. Over time, new information becomes available and the details of a forecast must change. However, we are very comfortable with this forecast as a basis for our future planning. Please keep in mind that this is only a summary of a far more detailed forecast. However, it is a fair overview of where we are focused and why we are focused there.
Panama's economy will continue above-average growth. It will have problems and challenges as is true everywhere, but the last few years have demonstrated substantial resiliency as GDP growth continued to outstrip population growth, as well as the growth rates of most North American and European markets during a disastrous global recession that may yet be referred to as another "depression". Panama has met a serious test successfully that most others have failed. Currently, its growth is accelerating once again and all indications are that it will continue to be a leader. In Latin America, Panama is seen as a socially, politically, and economically stable "haven" when many other nations are facing declining economies and/or internal socio-political strife. As a result, it is attracting far more than North American and European investment and should continue to. Panama is rapidly becoming one of the primary financial and business centers in all of Latin America, South and Central. We expect this to continue. Large-scale spending on Panama's infrastructure, already one of the best in the region, will assist economic development overall. In addition to the massive program to improve Panama's internal infrastructure, there are other positive developments. As one example, the expansion and improvement of the "Pacific Corridor" from Mexico to Panama is expected to decrease road travel time from Puebla, Mexico to Panama City from eight days to two days. That will increase economic activity, as well as lead to more people from North America driving to Panama than is currently the case. This upgrade will take time, but the necessary funds are obligated, the work has begun, and it will have an impact during our five-year period. Panama's real estate "industry" will continue to be imitative, rather than innovative. That will change and we will see the changes develop over the five years, but they have not yet begun on a sufficient scale to be noticeable. The road from imitation to innovation is one followed by every market and every industry in their early years. There is nothing wrong with this, but it will mean that the industry will continue to be slow to respond to changes that can only be understood through market research. Real market research in terms of expatriate markets is all but unknown at the moment. Our proprietary database resulting from eight professional, statistically-valid surveys of the US population conducted over a five-year period continues to be the only one of its kind. The old model of "build it and they will come" no longer works so easily. Developing a new and more successful model takes resources, commitment and, above all, true market research. That research will eventually help Panama move from the imitative to the successfully innovative, when they get around to actually doing it. The construction of an "Atlantic highway" along our Caribbean coast will likely be undertaken in the next five years. We believe it will have a significant impact on property values and growth on the Pacific side. For the first time, the Pacific coast will have real competition. We do not believe that the local business community has really considered the potential challenges and consequences that will result, but it will make life "interesting" in some regions, while adding greatly to the national economy as a whole. We believe this will have the single greatest destabilizing impact on the current status-quo in Panama's economic and real estate development, more so because it is not being considered carefully in advance. The area of the Caribbean coast that everyone expects to open for development will certainly draw investment, it already has, but it is also very obvious. Its development will require learning the business of Caribbean resorts and communities as practiced in other nations that have been in the "Caribbean market" for decades. Panama's Caribbean coast has a major learning curve ahead of it. It will pass through that over time, but we do not intend to join the large group of investors who have patiently been waiting for this to happen for a few years now. We think it will be exciting, but nowhere near as easy as some seem to think now. Bocas del Toro will continue to provide something comparable to a "Key West of Panama" role. It remains the area furthest from the capital, international airport, best hospitals, and other amenities, as well as government oversight. Development elsewhere along the Atlantic coastline, but closer to Panama City, will also provide Bocas with far more serious Caribbean competition than is currently the case. Bocas will remain funky, fun, and enjoyable for many, especially short-term tourists, but it is not an appropriate focus for us. Chiriqui province and the Azuero region may find difficulties due both to the competition from the Caribbean and the increased congestion separating them from Panama City. Local airports help, but they are not a simple solution. These areas are already dependent in great part on northern foreigners buying winter vacation homes and retirees. The two groups are important, but they are not the majority of the buyer's market. We also will not focus on those areas. Urban congestion (especially road congestion) will only get worse in the area along the Pacific coast immediately to the west of Panama City, the very area that has shown the greatest growth in middle and upper-income housing in recent years. A point will be reached when that will lead to slower growth. As mentioned above, the Atlantic coast will also have an impact here. And, of course, there is potential for environmental degradation that eventually clouds the public image of that area, as well as more practical (and damaging) problems if the population exceeds the "carrying capacity" of the area. This is not just a question of Coronado, Gorgona, and other well-known coastal communities, but also of La Chorrera, Araiján, and similar communities. In any event, we feel that major appreciation opportunities are limited. We will ignore this region for our purposes. Panama City will continue to be the commercial, social, political, and economic capital of Panama. It is well-serviced now and we see no reason to enter that expensive and crowded market.
So where does that leave us? Literally, where does that leave us? We seem to have eliminated the entire nation! If you think so, you need to spend more time with a map of Panama.
Panama Wave S.A. intends to devote its attention and efforts for the next five years on the area east of Panama City. Initially, this will focus on Chepo District and the western shores of Lake Bayano, with special emphasis on the Lake, but extend further east as our business plan unfolds. We are not only interested in real estate, but in value-added investments, particularly those related to tourists and to residents, both Panamanian and expatriate: eco-resorts, restaurants, tours, residential development and so forth.
Why begin with Lago Bayano? Remember the three requirements for good real estate: location, location, and location.
An hour and a half from downtown Panama City on the Pan-American Highway. An hour from Tocumen International Airport. Less than an hour from the December 24th shopping malls. Less travel time as the Pan-American continues its current expansion to four lanes. East of the city, avoid city traffic, no Canal to cross, no bottlenecks at the bridges. Easy access to Panama's best shopping (MultiPlaza mall) and best hospital (Punta Pacifica, an affiliate of Johns Hopkins) without becoming entangled in the congested downtown traffic. Access to other famous tourist areas, including Kuna Yala and the Caribbean coast, without entering the city.
And there's more beyond geographical location:
80% of Lago Bayano's lakefront is part of the Comarca de Kuna de Madungandí under the direct control of Panama's Native Americans for traditional use and not available for sale, thus helping assure that the lake will retain its tranquil beauty and increasing the value of the remaining 20%. The Lake's 135 square miles (350 square kilometers) includes many small and medium-sized islands, fun to visit, fun to explore. In addition, the Bayano caves on the Lake are easily entered by boat and are already a significant tourist attraction. The Lake is heavily stocked with tilapia, a major portion of the local population's income and diet. Commercial "fish farming" is established and gaining in popularity as well. Although there are few game fish in the lake, it is a short drive to Puerto Coquira on the Rio Bayano that flows from the Lake where you can fly fish for a number of species, including Pacific Tarpon up to 250 pounds in weight, plus White Snook, Black Snook, Grouper, and others. And lest we forget, it is simply beautiful, home to hundreds of bird species, howler monkeys, white-faced monkeys, ocelots, jaguarondis, margays, and a host of other species.
Above all, wholly located in the province of Panama, the Lake Bayano area open to purchase and development is one of the most tranquil areas of all Panama. You can stand on the lake's edge and hear nothing but bird calls, the wind, and the occasional passing piragua (native canoe).
In summary, there is no waterfront available in Panama that is so conveniently located to the nation's most important metropolitan area, so beautiful, and for now, so cheap. And unlike Lake Gatun, the Lake's waters are not used for the Panama Canal, thus the Canal's expansion has no impact on titling lakefront. The Lake does provide water to the AES hydroelectric dam, but that has no effect on titling and is completely silent and unobtrusive.
Enough said. After three years of study and work in the area, we are completely comfortable with our choice of the western shores of Lake Bayano for the initiation of our efforts toward opening Panama East to economic development, while respecting the environment that makes it as special as it is.
People occasionally ask us if we are interested in investing outside Panama, given that our proprietary research is global, not simply Panama-focused. Although we may differ on details, we understand what Albert Edwards at Société Général in London means when he said, as reported by Prieur de Plessis at Investment Postcards,
Albert is never short of drawing analogies: Investors’ continued optimism “as the equity bloodbath of the last decade enters its final, even bloodier phase” reminded him of the Black Knight in Monty Python & the Holy Grail. “Despite being grievously wounded by King Arthur, the Black Knight makes light of his injuries which he dismisses as a flesh wound. The vast bulk of the investment industry fails to appreciate that we are locked in a structural bear market and about to enter Act III,” he concluded.
We find no compelling reason to invest outside of Panama at this juncture, certainly not in North America or Europe, and no compelling reason to invest in Panama's over-valued areas, outside of Panama East where the valuations are well below-average.
We are reminded of Warren Buffett's comment in the Berkshire Hathaway Annual Report (his "Letter to Shareholders") of 2005, page 19.
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, "I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
There has been a great deal of "motion" in most, but not all, of Panama for several years. In some areas today that motion may consist of pacing back and forth, waiting for the market to "recover", but it is motion nonetheless. Associated with this motion are high expectations and high prices.
To the east of Panama City, particularly that 20% of Lago Bayano's lakefront that is not part of a comarca and thus is available for sale, the "motion" is in its early stages, but it has begun.
We agree with Mr. Buffett, returns will decrease as motion increases. The obvious strategy is to get involved before the motion accelerates. We intend to be fully involved and fully focused now to take advantage of future rewards as Lago Bayano's "motion" accelerates. It will not stop there, all of eastern Panama (yes, even the Darién) will have its day in the future.
We are investing our resources where the "motion" has begun and where the arguments for its continued acceleration are the most convincing. If you are seriously interested in investment opportunities on or around Lago Bayano, let us know.
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