In many Central American countries it can be very hard to obtain a loan from a local bank for real estate investing and, where it is possible, the interest rates are not competitive to the US and terms can be unfavorable. 

Panama stands out in this regard as competitive financing is comparatively easy to obtain.   In most countries you can normally find private lenders offering loans based on refinancing US assets and an ever increasing number of developers are offering owner/developer financing although this number is still small in absolute terms.

Tourism trends are useful predictors of real estate sales.  This is particularly the case where tourists and real estate investors are both traveling a long distance from their primary residence and staying for an extended period of time. Of course, a second home purchase is a larger discretionary payment than a vacation with many more factors needing to be taken into account.  But at a general level there is considerable overlap in the attributes that second home buyers and holiday makers are looking for.

You know how it goes.  You go on holiday.   You find a charming little fishing village and spend two glorious weeks relaxing and doing fun stuff.  On the last day you look at realtors window and then buy a property or at least start looking.  Real estate and tourism are inexorably linked.

We are seeing this phenomenon all over Central America.  Key tourism areas are also those generating the highest levels of real estate activity.  Examples are Granada and San Juan del Sur in Nicaragua; Ambergris Caye in Belize, Antigua in Guatemala, the Bay Islands in Honduras and Bocas del Toro, Panama City and Boquete in Panama.

Given this link, how Central America is positioned within wider international tourism trends provides a key indicator for the real estate market going forward.

The prospects look good:  According to the UNWTO, at 16% growth, Central America was the fastest growing sub region for tourism in the world in 2005.  2006 has also seen double digit increases for all Central American countries, with the exception of Belize.  The area is clearly growing in importance as a crowd-puller for holidaymakers.

It isn’t easy to find fractional real estate for sale in Central America.  Not right now.   But the market is steadily evolving and fractionals are destined to become a hot trend in future years particularly in the vacation home sector. 

For fractional buyers it is often not a matter of being unable to afford a vacation home, but a case of not wanting the hassle and expense of maintaining a home 52 weeks of the year when they are likely to occupy it only for two or three weeks each year.  It is simply a matter of cost-justifying the limited use of their home, especially if they have multiple second home/vacation properties. 

At the same time, buyers do not want to compromise on questions of value, equity and other benefits of second-home ownership.  That is why, unlike time share, the fractional real estate product has evolved to include fee simple deeded ownership complete with title insurance.  This ownership can be passed down through the generations in perpetuity or resold in the same way as general real estate.  

The key to the success of fractionals is their professional management. Most are operated by well-respected hospitality companies known worldwide. Among them are Ritz Carlton, Four Seasons, Starwood, Intrawest and Millennium, brands known for their five-star services and amenities. Part of the appeal of fractionals is that they are completely hassle free. To date there have been very few fractional resort developments in Central America positioned at the luxury end of the market (with the notable exception of the Four Seasons at Papagayo in Costa Rica).  

We are still at the beginning of it all in Central America.   And fractional real estate products are just one example of more sophisticated product offerings that are beginning to emerge in Central America.   Have a look at the Ground Floor for a broader discussion of fractionals alongside destination clubs and condo hotels.

Emerging real estate markets tend to follow an S shaped development curve. Knowing where on the curve a particular market is helps you to decide whether the risk/reward profile is right for you. At the top of the curve lie the more ‘mature’ markets with more speculative or ‘pioneer’ markets found at earlier stages.

Markets early in the curve tend to be good candidates for short term capital appreciation. But inherent risks are high and infrastructure quality tends to be low. More mature markets, located at later stages in the development curve, have a lower risk environment based typically on an established tourism (and retirement) market and strong sense of economic and political stability. Strong rental possibilities exist in property hot spots and luxury (often branded) offerings can be found on the market. Middle markets fall somewhere in between - not really emerging but also not quite fully developed.

We plan to plot counties in Central America on this graph and also dig deeper into individual regions. There may be instances that a property hot spot in a particular country has the characteristics of a ‘mature’ destination while the county as a whole appears to have ‘pioneer’ attributes. We have our ideas but would be interested in your thoughts on where you would place different counties and regions on a development curve such as this one. It is also possible to draw some general conclusions on the main types of buyers active at different stages on a development curve for Central America.

There has been a trend in recent years for many North American and European buyers to purchase real estate in what are seen as developing or emerging economies. In Europe much of the focus has been on the emerging economies of the former Soviet Union as well as Morocco and southern Europe. In North America the focus has been very strongly on the Caribbean, Central and Latin America. The US State Department estimates that about 380,000 Social Security cheques are delivered to beneficiaries outside the US each month. Almost four million Americans, not including embassy officials and the military, are now living overseas.

Many Central American countries offer impressive incentive packages for retirees. Coley Huggins describes the economic benefit of a retiree migration to Central America as a two way street. “Retirees get a lower cost of living, warm weather and cheap[er] housing and create a virtuous cycle in return: more retirees equals more local jobs, resulting in more economic stability and less political stability, resulting in more retirees”

A buyer typology prepared by Coldwell Banker Nicaragua Real Estate

Speculators / investors - a buyer group interested in making the most money on a minimum investment. They tend to buy lots/raw land early on in the real estate growth cycle of a developing country before prices rise as amenities are built, buying community grows and turnkey products begin to be offered. Many never build and most are interested in future, short to medium term resale of investment for a substantial profit to offset the risk of early investment.

Second home investors - a buyer group interested mainly in the rental income return of turnkey or built properties. They need to be convinced of the potential for rental income and so are focused on issues such as tourism growth, rate of sale of surrounding properties, access to amenities for potential renters, security and safety aspects. Condominiums, townhouses, house/land packages are popular with this grouping. The setting in which the home exists (ie its surroundings) is also a primary consideration. Many young professionals or entrepreneurs fall into this buying type.

Second home users - a buyer group focused mainly on personal use of the property they purchase. They are usually already affluent and own more than one home, often in different parts of the world. They are interested in escaping harsh climates for all or part of the year and want seasonal/vacation homes where the lifestyle and amenities/activities contrast with their primary residence. They generally do not rent their property and purchase lots/land in anticipation of future building or condominiums where available. A lifestyle, a sense of community and feeling of belonging, privacy and security are important to this group.

Retirement and pre-retirement buyers - These buyers are typically 5-6 years from retirement and are quite similar in overall characteristics to the second home user category. They do however, have more of an emphasis on the issues of security, availability of health facilities, access and proximity to urban centres. Privacy is less of a concern as many are interested in building new relationships and being part of a community. Typically have purchased lots but with the growth in turnkey product this profile is changing. They are often downsizing from larger family homes in country of origin and cost is a key consideration in any purchase.

Not for Uncle Sam buyers - this buying group cross-cuts the other groups and is characterised by a desire to ensure that they profit from investments outside their home country and these profits are not always repatriated to their home country. They are often interested in the freedom from restrictions (financial and otherwise) offered by many developing countries. As such their key focus is on price point and resale opportunities whilst buying something they can enjoy in the here and now.

Commercial investors - This final group is motivated by the return on capital invested and invests at a larger scale than the above groups and, generally, for the longer term. The type of commercial investor entering the market will vary greatly depending on the perceived maturity and stability of the real estate market in general and the wider legal, political and economic investment environment.

Changes in buyer profile for markets at different positions on a development curve

An understanding of the changes in buyer profiles over time can give an indication as to where buyers for different markets in Central America will come from in the future. The graph below considers the buyer characteristics at different stages in a development curve. Speculators make up the bulk of investors in markets at earlier stages with second home and retirement buyers representing a second and third wave of investing as markets develop and mature.