IT is repeated so often and those who believe it have almost succeeded in turning it into conventional wisdom: There is no real estate bubble in the Philippines, and there is not likely to be, because this market works differ-ently from all the rest.
It is conventional wisdom, or nearly so, because in conventional terms the Philippines is not experiencing a housing bubble. According to the more or less standard definition, a housing bubble is a relatively rapid increase in property prices driven primarily by speculative demand, where that speculation is based on an assumption that the price trend of the recent past will continue.
The Philippines’ real estate market does not exactly fit that definition, because property prices, both in terms of outright retail prices or rental rates, are not increasing at particularly rapid pace, nor are they increasing consistently. Just this past week, for instance, two separate stories, both accurate, related how office rental prices are declining in Bonifacio Global City but increasing in Ortigas, due to excessive supply in the former and tight supply in the latter.
The demand that is perceived to be driving the production of new property supply (to avoid confusion, note that “property” or “real estate” used throughout this analysis refers to built property, not land) is not speculative. The only area that is seeing any investment buying of any consequence is Makati, and even there, buyers who are looking for their own homes far outnumber those who are buying property as an investment, i.e., either for leasing or for resale.
And of course, because neither of the first two conditions—steady price increases and speculative buying—of a standard-definition bubble exist, demand is not driven by retrospective price trends. That is key to the assessment that the Philippines does not really have a real estate bubble, because it is the trend-based assumption that actually ‘inflates’ the bubble—buying increases because it is assumed prices will go higher, and the increased demand turns the assumption into a self-fulfilling prophecy.
A rose and a dandelion are still both flowers
Just because the Philippines is not experiencing the conventional sort of real estate bubble, it does not, however, automatically mean it is not experiencing any sort of bubble at all. For when one looks beyond the relatively narrow standard definition signs of what might be serious trouble become obvious. In the past week, there have been revelations from the three major segments of the real estate market—residential, office, and retail (industrial/other commercial property is assessed in a somewhat different context)—as well as the banking sector that, though not necessarily indicating an imminent crisis, were alarming enough to warrant close monitoring of developments in the real estate market.
In the office space segment, which is critical because it encompasses the fastest-growing business sector in the country—business process outsourcing—rental rates have virtually gone flat from the fourth quarter of last year, increasing by a mere half a percent from an average of P765/sqm to P769/sqm, and may even begin to decline by year end, as vacancy rates in many areas may push above 10 percent, according to several property sector monitors. Rental rates for retail space are likewise expected to see flatter growth verging on stagnation by year-end, as retail property supply will increase by at least 5.29 percent, or an addition of 324,000 square meters. In the residential segment, there are signs that increasing vacancy rates—expected to rise by a little more than 10 percent across Metro Manila in the next 12 months—coupled with prices that, while not growing at a rapid rate, are still too high for the majority of buyers, are driving the rental market much faster than the buying market as developers opt for Plan B to fill newly-built but not yet occupied units.
That development in the residential segment is worrisome because of the steady, significant increase in bank lending to real estate. Earlier this week, the BSP reported that banks’ exposure to real estate had increased by 22 percent in March, an acceleration from a 20 percent growth rate the previous month, and the bulk of it—at least anecdotally, according to a few banks—being lent to developers of residential projects.
While renting out properties originally intended for sale does not necessarily result in a loss for the developers, what it does do is slow down their rate of return. That in turn puts the same kind of pressure on the banks, an indication of which might have been the data on bank capital adequacy ratios released this week: While still safely above the Basel III and even stricter BSP minimums, big banks’ CAR has slipped a bit.
If followed to their logical conclusion—which, to be fair, might take several years of unchanging conditions in the real estate market, a situation that is by no means certain—the result of all of this is, if not a bubble in the conventional sense, something that has exactly the same outcome: A rapid fall in prices for a commodity priced too high while it is in a state of oversupply. The Philippine real estate sector may not be in a bubble right now, but it’s starting to look a little foamy. The industry ought to consider ways to alter its approach while it still has the benefit of benign conditions.