Tighter lending, growing rental demand hint at move toward lower-cost development
SIGNS of tightening credit in real estate lending and growing calls for greater focus on lower-cost development may indicate that the industry is shifting toward more middle-income and rental housing, an analysis of recent trends and the views of several experts suggests.
As indicated by the results of a bank survey released last week by the Bangko Sentral ng Pilipinas (BSP), overall real estate lending tightened to some extent in the second quarter of the year for both commercial (developers) and individual borrowers. Specific areas in which banks imposed stricter conditions on loans to would-be homeowners were in collateral requirements and loan covenants, while the overall size of credit lines approved increased slightly. For commercial borrowers, noteworthy changes included an increase in the use of interest rate floors and a reduction in the size of credit lines.
Factors cited by banks for the change in their outlook on lending to commercial real estate borrowers were tighter financial system regulations, a reduced tolerance for risk, and a deterioration of borrowers’ profiles in terms of creditworthiness. For both commercial and individual real estate borrowers, about 10 percent of banks expect to tighten credit standards further in the next quarter, with the percentage slightly higher for individuals; none of the remaining banks surveyed expect to ease their credit standards going forward.
The survey of bank lending conditions followed a report at the beginning of the month that bank loans for real estate topped P1.55 trillion as of the first quarter of 2016, a 22 percent increase year-on-year. As a comparison, overall loan growth (excluding real estate) advanced by about 12 percent. Real estate loans now make up 20.7 percent of banks’ total loan portfolio, compared with 19.4 percent a year ago; loans to residential customers account for slightly less than 35 percent of the total, with the remainder being held by commercial borrowers.
Since the end of 2011, the total of commercial real estate loans has been consistently larger than the total of residential loans. In addition, commercial real estate lending has expanded at a faster pace than residential lending in all but four quarters (in the second half of 2012 and 2014, respectively) during the same time period.
Indication of oversupply?
Taken at face value, the faster pace of commercial real estate lending could indicate that more supply has been created in the past five years than is warranted by demand, although experts have until lately consistently denied this is the case. As recently as June debt-watcher Fitch Ratings concluded, “Rising incomes amid sustained economic growth should continue to drive robust real estate activity and loan growth for the Philippines banking sector through the medium term.”
Similarly, BSP Deputy Governor Diwa Guinigundo, commenting on an increase of 9.2 percent (versus 5.1 percent growth a quarter earlier) in the Residential Real Estate Price Index (RREPI) at about the same time the latest banks’ real estate exposure data was released, asserted that the price movement “represented a vibrant housing industry in the Philippines,” one that is being “driven by demand, not supply.”
Growing rental demand
Circumstances on the ground, however, paint a somewhat different picture. The same day the latest real estate exposure data was released by the BSP, online property portal Lamudi Group revealed that searches for residential rental property on the two sites it manages, Lamudi Philippines and Myproperty.ph, are increasing at a faster rate than searches for property for sale.
Lamudi Philippines managing director Jacqueline Van den Ende attributed the shift in consumer interest towards renting instead of buying to two causes. First, the rapid growth of vacancies due to more new properties being completed, and second, the relatively lower income of the biggest part of the potential property-buying market, mainly consisting of business process outsourcing (BPO) workers.
“I think one of the key drivers here is the big inventory of unsold units. There’s a lot of inventory coming into the market, and that inventory is increasing vacancy rates,” Van den Ende said. With more than 11,000 more residential units, primarily condominiums, expected to become available by the end of the year, developers are under some pressure to find residents for their new properties.
The second issue is that the fastest-growing segment of the market, while enjoying growing incomes from the booming BPO and services sectors, are still not earning enough to afford homes in the price range of most of the available new properties.
Van den Ende explained that, “Most BPO workers are renting. The average salary is P23,000. You can’t really spend P7,000 to P8,000 [a month]on amortization so you can’t really buy a house. So people rent.”
DMCI Holdings Chairman and President Isidro Consunji made the same observation in calling on the government to reconsider its calls for mass housing and instead look at concepts like moderately-priced rented shelter housing. Since many Filipino families earn P30,000 per month or less, they could not afford a typical monthly amortization of P10,000 to P15,000 a month, but instead “could actually pay only P5,000 to P6,000 as shelter fee… What we need is not necessarily ownership of real property, but something that is useable,” Consunji said.
For its part, the government-owned Pag-IBIG Fund, which specializes in financing for low- to mid-cost housing, seems to see an opportunity in the demand shift towards lower-priced real estate. The fund, which aims to finance at least 76,000 homes this year with at least P60 billion in affordable loans, recently cut its base loan rate by one percent to 5.5 percent, shaving nearly P1,300 per month off the amortization on a typical P2-million home loan.