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Real Estate
Panama’s REIT Industry Aims for Takeoff
From the Wall Street Journal of Tue, 02 Dec 2014 13:47:00 EST
Juan Manuel Martans, superintendent of Panama's securities regulator
Juan Manuel Martans, superintendent of Panama's securities regulator Kris Hudson/The Wall Street Journal

PANAMA CITY, Panama—Panamanian authorities want to open the country’s small but burgeoning commercial real-estate industry to more outside investors, and they are banking on real-estate investment trusts as the way to do it.

Panama anticipates welcoming its first publicly traded REITs next year. The government has been putting the necessary legislation and regulations in place over the past two years to provide much-needed liquidity to the Panamanian real-estate market.

“We have a very dynamic real-estate market, but unfortunately it is in the hands of a few investors,” said Marielena Garcia Maritano, a senior vice president of investment banking at Panama’s MMG Bank Corp. and president of the Panamanian Chamber of Managers of Mutual Funds and Pension Funds who helped guide the REIT legislation.

But the small country of roughly 3.9 million people will face challenges as it gets its REIT industry off the ground. Panama might struggle to attract anything larger than regional investors to its REITs because of its small size, as has been the case with real-estate investment funds in neighboring Costa Rica and in other emerging markets for REITs. While Panama has a strong economy, its real-estate market has seen a building boom in recent years that could depress values.

Also, some Latin American countries, such as Mexico, have struggled in the formative years of their REIT industry to provide the disclosure and strong governance that international investors want to see before investing in foreign REITs.

Panama’s primary commercial property owners—wealthy families including the Berns, Vallarinos and Mottas—have mixed reactions to the REIT structure. The Berns, whose Empresas Bern has developed more than 130 commercial and residential projects in Panama, are intrigued.

“Right now, if you want to invest in Panama, it’s a very thin market, both in terms of real estate and stocks,” said Jose Bern, executive vice president at Empresas Bern and a son of founder Herman Bern Sr.

Others, however, aren’t sure they’re ready to sell some of their properties to public investors. “What I find here is that people are wealthy enough that they don’t want to get their money back by selling to a REIT,” said Octavio Vallarino Sr. , a partner in Desarrollo Bahia, one of Panama’s largest developers and property owners. “They’d rather keep the cash flow. That’s the case with us.”

Panamanian regulators and lawmakers are betting that many owners will opt for the increased flexibility of selling some of their portfolio to the public, and that domestic and international investors will flood into the REITs. They have spent several years studying other countries’ REIT systems and preparing Panama’s for its debut.

Panamanian lawmakers passed legislation in 2010 to establish a REIT industry, but investors balked at the 20% tax rate on REIT dividends, Ms. Maritano said. Thus, lawmakers passed new legislation last year with a 5% tax rate more in line with those in Costa Rica and other countries with established REIT industries.

More than 30 countries have introduced REITs that typically can forego paying certain income taxes if they distribute a certain percentage, often at least 90%, of their income to shareholders in dividends. Costa Rica is a bit different in that its vehicles, called real-estate investment funds, must distribute some of their income to shareholders but they can distribute less than the 90% required in other countries.

Panama has set REIT guidelines that don’t place many restrictions on what its REITs can do. For example, Panama doesn’t limit how much debt its REITs can take on or require them to choose between being internally managed by their own executives or externally managed by outside advisers. Neither does the country limit the fees its REITs charge their investors.

Rather, Panama has opted to require its REITs to regularly disclose nearly everything about their operations and strategy so that investors can decide for themselves whether the risk is acceptable to them.

Experts say it likely will take several years for Panama’s REITs to become anything more than a regional draw. Costa Rica’s real-estate investment fund industry, started in 1999, now has roughly 16 funds with a cumulative asset value of $1.1 billion, according to Diego Soto, a partner and director in Costa Rica’s Acobo Financial Group, which owns a brokerage firm and mutual-fund manager. Most foreign investors in Costa Rican funds are from other Central American countries, he said.

Another challenge will come in that Panamanians are far more accustomed to dealing with banks rather than securities. Panama is laden with banks such as Banco Nacional of Panama, Banistmo SA and Citigroup Inc. Its securities industry faces the constant challenge of convincing people and companies that securities are as safe and effective as banks. Thus, Panama’s disclosure requirements for REITs are paramount.

“The problem with countries like Panama is that the banking system is too big [in relation] to the securities industry,” said Juan Manuel Martans, the superintendent of Panama’s securities regulator. “The people and companies always get financing from the banks. We’re trying to bring the possibilities that companies get financing from the securities market.”

Panamanian REITs likely will merit a look from global REIT investors like Cohen & Steers Inc., but the market’s small size will be a deterrent. Thus, the extent of Panamanian REITs’ disclosure of their structures, strategies and fees will strongly influence global investors.

“You still have to have enough scale for it really to matter,” said Jason Yablon, a portfolio manager specializing in global real-estate securities for Cohen & Steers, including investments in Brazil, Chile and Mexico. “When investing in an emerging-market country where fundamentals and the macro policy can be volatile, greater liquidity and transparency are an important part to the investment thesis.”

Write to Kris Hudson at

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