Friday, January 9, 2009

Trump project in Panama downgraded

Posted by Kevin Brass

Fitch Ratings recently downgraded $220 million of debt on the bellwether Trump Ocean Club project in Panama City, warning price declines in the city “could lead to higher than expected default rates for existing buyers.”

At the very least, the Fitch assessment provides a glimpse into the way the financial community is reevaluating even well performing developments in the wake of the credit crunch.

To date, prices in the Trump project, where low-end units typically cost around $500,000 (€370,000), have remained “stable,” Fitch notes in its report on Newland International Properties, the developer. However, between August and October of 2008 the project “experienced a significant decrease in project absorption rates.”

Buyers at the Trump development usually put down a 30 percent deposit and pay the balance upon delivery of the unit. But Fitch warns that some buyers may walk away from their deposits.

“The incentive to pay the outstanding balance of a purchase agreement could decline, if global real estate values continue to be pressured,” the agency says in the report.

(Representatives of the Trump Ocean Club did not respond to repeated requests for comment.)

Projects around the world will likely face similar scrutiny from financial institutions in the next few months. Even pre-sales and signed contracts may not be enough to convince wary lenders of a project’s viability.

Long term the Trump development “appears strong,” Fitch says, noting that the project has posted “sales equaling approximately 80 percent of the total available units” and there is an escrow account in place to cover remaining construction costs. But “short term liquidity stress,” could lead to problems. Newland used the reserve account for two recent interest payments, Fitch reports.

“This risk is exacerbated by the target market of the project, which focuses on foreign buyers that do not intend to make the TOC their primary residence,” Fitch concludes in lowering the debt rating on Newland from a B+ to BB.

The report may be ominous news for Panama City, where luxury residential towers are springing up like weeds, driven in large part by foreign investors.

“Not long ago the name Trump meant a pretty sure thing but how things have changed,” developer Sam Taliaferro writes in his Panama Investor Blog. “This is a very telling tale of woe for Panama.”

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