“La Burbuja”

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Amelia H. C. Ylagan

Business World

4 March 2013

http://www.bworldonline.com/content.php?section=Opinion&title=La-Burbuja&id=66686

IT WAS 2008, the time of the US sub-prime credit bust, and the world was weakening towards pandemic recession. GDPs plunged. In the Philippines, inflation was a febrile double-digit, and prices fell in the weakened resistance to the contagion. The then raging real estate boom in the country was slowed by higher interest rates and a looming housing oversupply.

When the world financial crisis had blown over in 2011, the foretold debilitation of the Asian real estate markets (or even of its financial markets) had not really happened. The property market had seen “continued demand expansion and that has been met with a supply response,” said Jones Lang LaSalle (JLL), a real estate management and consulting company.

Colliers International (property brokers) rationalized that although markets across Southeast Asia can be very different, they have all been lifted in the recent years after the US credit bust by two factors: low interest rates, which have translated into cheap mortgages; and the influx of hot money from abroad as investors chose Asia in lieu of distrusted US and Europe. Indeed, in the Philippines, the $1.5-billion foreign direct investments (FDIs) as at 2012 had grown cumulatively by 15% per annum. The liquidity from $21 billion (to date) annual remittances of overseas foreign workers (OFWs) have kept interest rates low, as calibrated by the Bangko Sentral against inflation.

The Philippines is also the world’s largest center for business process outsourcing (BPO), which has grown 46% annually since 2006. As at end-2012 the Philippines had 600,000 employees at call centers, which activity had brought $13 billion in revenues, now accounting for 30% of the country’s total export earnings, including both goods and services.

Real estate developers have been counting on about 30% of OFW remittances to be poured into housing acquisition (including repairs and maintenance of older housing) and BPO revenues to go into office space development and rental. Rough arithmetic deriving 30% of these extraordinary inflows of about $34 billion would be about $10 billion (₱400 billion), which could be the greedy estimate of how much might be pouring into the real estate and construction industries in the country.

A greedy estimate, indeed, for there are high-rise residential and office condominiums shooting out like instant giant stalagmites in giant development enclaves, all for the much sought-after new rich OFWs and BPOs. CB Richard Ellis Philippines, property consultant, anticipates more than 850,000 square meters of office space and 14,000 residential units entering the market this year.

The accumulated supply of high- and mid-end residential condominiums from 1999 to 2011 was 118,230 units, according to a JLL research. The per unit price ranges from ₱1.5 million to ₱10 million per unit, with an average unit size of 150 sqm, at ₱50,000 to P110,000 per sqm. In current selling, pricing for ultra-high end condos go up to ₱200,000-₱300,000 per sqm., usually taken up by BPO high employees and expatriates. OFWs are buying the low-end to mid-range residential properties in regions near Metro Manila such as Cavite, Batangas, Laguna, Novaliches, Bulacan and Pampanga provinces.

Colliers said it expected total commercial office supply in Metro Manila to reach a total of 7 million sqm by end-2014 from 6.2 million sqm in end-2012. Average monthly rental rate for commercial office in Makati CBD in end-2012 was estimated at ₱915/sqm/month for premium grade office while rents for Grade A and B buildings is about ₱510/month.

Is there going to be a glut? The condominium developers and property managers have been avoiding this question, and might have been assuaging growing fears that there might soon be an oversupply and resultant crash of prices, as the foregoing rah-rah statistics from property consultants and developers indicate. On the other hand, economists and financial experts are becoming wary of coming glut and consequent defaults, pointing out that the Philippine property market is disadvantageously unique in that there is no real mortgage market to act as peer/partner regulator for pricing and demand-supply balancing. Few major banks offer housing loans, and those who do, give less than 60% loanable value, after deducting expensive transaction costs. The ratio of housing loans to GDP was a measly 2.3% in 2011.

The pre-selling modus of acquiring property, usually on cash basis or “near-cash” (one-year installments) and other financing agreements with the developer, stacks the cards for the developer, who has surely tucked in their cost of money on the selling price, and who simply automatically re-acquires and re-sells the property in case of default. The constructors would have been paid their money by the outsourcer/developer — what would they all care if there is a glut?

An indicator of the dreaded oversupply situation in the property market would be the occupancy percentages and rental rates for such properties. Even Colliers admits that the property vacancy rates in Makati rose to 11.7% in Q1 2012, compared with 9.7% the year earlier, perhaps unwittingly reinforcing the rising glut suspicions by saying that the reason for this is the increasing turnover rate of new units in the Metro Manila area. Add to this the peculiarity of the Filipino condo buyer: whether local or balikbayan (returning Filipino resident or visiting Filipino born foreign passport holder, estimated by Ayala Land to be 30% of their buyers), the condo is still mostly seen as a vanity acquisition, or on the more practical side, a midway home between office and home, or a ready vacation residence on annual visit from abroad. Condo property management statistics divide the occupancy of condos into roughly three more or less consistent actual groupings: 30%-40% live-in owners and tenants, 30% “week-enders” (irregular occupancy, like balikbayans) and 20%-30% vacant (unlived-in, or unsold) units. The Colliers estimate of 5% vacancy in residential condos in 2013 might be too glam than the actual glum.

The critical indicator for an investor to watch in a boom-going-bust industry situation would be the monthly rental rates as a ratio of acquisition price, called the housing price-to-rent ratio, derived from dividing the annual rental by the acquisition or current market price, like the price-earnings ratio in the stock market. For example, rental for a 150-sqm condo unit in the Makati CBD (commercial business district) in 2010 was at (gross) ₱2.16 million, and ₱18 million market price (new) divided by ₱2.16 million = 8.33. In 2012, purchase price for a 150-sqm unit rose to ₱27 million, which when divided by the lowered gross annual rental of ₱1.44 million gave a deteriorated ratio of 18.75, similar to the housing price-to-rental ratio in the US at the onset of the credit bust of 2008.

Falling rental rates along with rising prices for new property developments portend of a coming bubble burst from the undeniable glut of such a situation, or a faltering demand from the waning “wealth effect” from OFWs and BPOs. An IMF study points out that housing price busts are less frequent, but last nearly twice as long as equity price busts and lead to output losses that are twice as large. An economic study (Ikromov, Nuridding and Yavas, 2012) shows that, compared to financial markets, real estate markets involve longer boom and bust periods.

Tenemos una burbuja,” a Spanish national says of the Philippine property situation, after he happily re-negotiated his lease for a 200-sqm condo in the Ortigas area for ₱40,000 a month, from last year’s ₱55,000 a month. (Owner’s acquisition was at ₱12 million in 2001; current market price, ₱7.5 million.) He speaks from the experience of the protracted property bubble in Spain from 1995-2008, until the final burst to total financial failure in the crisis of 2010.

Alexander Mann Solutions

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