Should regulators start to worry?
What may be a brash assessment of the state of the Philippine property market is a quick, simple conclusion based on available figures that indeed, there is a “bubble” forming, given the stirrings in the sector caused by brisk economic activity and the inflow of both hot money and overseas Filipino workers’ (OFW) remittances over recent years.
But things are not always what they seem, especially when it concerns this market.
More than a few analysts have raised concern about a possible overheating in the real estate sector in the country. One reason such perception persists among property market observers is that the focus of most analysis is from the perspective of capital investors, and is largely limited to observations of high-end markets in Metro Manila, specifically, the Makati central business district, Ortigas Center, and Bonifacio Global City.
Seen from a purely investment and regulatory perspective, the concerns about a property “bubble” cannot be entirely discounted; in any “hot market,” price and demand pressures can easily outrun the wider economy’s ability to absorb them. The possibility of the real estate market overheating and creating problems for the financial sector has been the focus of attention from the central bank in recent months, and is a serious concern from the point of view of a number of analysts (see Rigoberto Tiglao’s column on A1).
From a consumer perspective, though, the picture of the residential real estate market is much broader, and very much more attractive, though not without some potential risks, than conventional analysis might indicate.
In this first installment of this week’s special report, Columnist Ben Kritz examines the features of the local property market and presents an overview of the residential real estate segment. While this sort of examination necessarily involves reference to a sizable database of raw statistics, they do present an interesting picture, and a largely positive one for the prospective property buyer.
First of three parts
By the numbers
Construction activity, given its role as a key component of gross domestic product (GDP) under the category of “capital formation,” is carefully tracked and presented by the Philippine Statistics Authority (PSA) in a fairly detailed overview on a quarterly basis.
The data is based on the number of new construction permits issued during the period, and divided into residential construction, non-residential (i.e. commercial and industrial) construction, and “additions, alterations and repairs,” which include any construction to add on to or refurbish existing buildings.
As has been the case for many years, the number of residential construction projects during the second quarter of this year — the most recent period for which full data is available — was far greater than any other type of construction activity.
Residential property construction in the April to June period this year accounted for 72.8 percent of the total number of construction starts. The 23,817 residential projects started in the second quarter represented an 11.5 percent increase year-on-year, a slightly faster rate than growth in construction overall, which expanded by 11.2 percent from the second quarter of 2013.
In value terms, new residential construction projects rose by P1.89 billion to reach P34.52 billion in the second quarter of this year from P32.63 billion in the year-earlier period.
Residential building accounted for about 54 percent of the overall P3.51 billion increase in total construction value, which was otherwise driven by the sharp rise in the value of existing buildings’ additions, alterations and repairs.
Non-residential construction, while expanding slightly in the number of new projects started, actually declined in value by a little over P1 billion from a year ago, from P28.51 billion to P27.5 billion.
NCR not the hottest market
Despite the focus of market analysts on key areas within Metro Manila, the National Capital Region actually ranks a poor sixth-place among the 17 regions tracked by the PSA in terms of new construction starts. By this measure, the hottest market in the country right now is the Calabarzon Region (Region IV-A), comprising the provinces of Cavite, Laguna, Batangas, Rizal, and Quezon, with 5,920 new projects in the second quarter of 2014, nearly 25 percent of the national total.
Cavite is the most active province in terms of both residential and non-residential construction, accounting for about 10.3 percent of the total and 10.5 percent of residential projects nationwide in Q2, with 2,503 projects worth a total of P3.1 billion getting underway.
Other regions with strong markets include Region III (Central Luzon) with 3,131 projects; Region VII (Central Visayas) with 2,530 projects; and Region XI (Davao Region), with 2,033.
Overall, however, the pace of construction starts seems to be decelerating, if only slightly, from last year. Another measure of construction and real estate marketing activity is the number of “licenses to sell” issued by the Housing and Land Use Regulatory Board (HLURB); as a matter of practice, developers obtain these licenses early on in a project’s development, often before ground is broken, in order to give themselves flexibility in pre-selling residential units, which is an important source of construction funding.
According to HLURB data, which is only available for the first quarter of 2014 as of now, a total of 153 licenses to sell for projects comprising a total of 47,417 units were issued in the first quarter, a rate that is slightly slower than in the 2013 period, when 637 licenses for 225,051 individual units were issued by the agency.
Prices rising, but at slower pace
In terms of prices, variances across the entire country make a “national average” virtually meaningless; according to property monitor Collier’s International, the average per-square-meter price during the first quarter was $3,043, or approximately P132,498 per square meter at the current peso-dollar conversion. This figure, however, is an average of prices in Makati, Bonifacio Global City, and Ortigas – the default area monitored by most analysts – and is in all likelihood significantly higher than most other areas of the country.
Nevertheless, the trends in prices seem to be consistent across the whole country, despite differences in the actual values. After experiencing a decline in 2008-2009 in the wake of the global financial crisis, residential real estate prices have increased steadily.
Collier’s notes, however, that the pace of the increase has slowed considerably this year; after rising by an average of about 3.44 percent through 2013, Q1 2014 saw residential real estate prices advance by only 1.2 percent, the slowest increase in two years. Despite this, Philippine property prices are still advancing at the fifth-fastest rate in the entire world, according to the Global Property Guide.
There are two key reasons for the moderation of price increases despite high demand. The biggest reason, in Collier’s view, is the recent action by the Bangko Sentral ng Pilipinas (BSP) to tighten real estate lending by banks; for example, the central bank has recently implemented a credit “stress test” for lenders to ensure adequate capitalization and provisions for bad loans.
This and other moves, such as increasing banks’ reserve requirements, have slowed the pace of real estate lending. Real estate lending is still expanding at an impressive rate, having expanded by 25 percent to P843 billion in 2013, but this was markedly slower than the 34 percent expansion the sector experienced in 2012.
The net effect of tightening lending is to boost the supply by eliminating some customers, and as a result, developers have had to moderate the increases in property prices while banks have been encouraged to offer more flexible financing.
The majority of real estate loans are still relatively short-term (high down payment followed by 5- to 7-year loan periods), high interest loans. However, Global Property Guide notes that more ‘conventional’ terms, such as 15- and 30-year tenors on loans up to 90 percent of value, are being offered by some banks, although these are not yet common.
The second reason price increases have decelerated is the noticeable shift in the market. Property consultancy KMC MAG Group in its Midyear Review of the Philippine property market points out that growth in the high-end market (i.e., the market in Makati and other upscale areas typically monitored by analysts) has slowed considerably, but that demand has grown in the middle-income segment.
This is a rare case in which the usual function of demand and prices does not work as it normally does; while developers, who are behind the demand curve (although this is also area-dependent), can command higher prices, the boundary between having a development which is fully subscribed and one that is mostly empty is exceedingly narrow, thanks to intense competition.
Developers also have to be flexible to some degree in matching the income and credit-worthiness of their prospective buyers; even if raw economic math indicates much higher prices could be charged, the realities of the marketplace serve as a damper on price increases.
A big part of the reason for the “power of the buyers” in the Philippines, as KMC MAG points out, is that unlike other hot real estate markets (such as in China, and to some degree in Malaysia in the past couple years), the market is mainly made up of OFWs and relatively financially stable middle-income domestic buyers who are seeking homes for themselves, rather than buying property as a speculative investment.
While the continuing increase in prices, even though retarded somewhat by market conditions, may push some buyers out of the market eventually if the larger economy does not keep pace, one fortunate sign for buyers is that prices are not increasing nearly as fast as property values.
According to estimates by the Global Property Guide, residential property values in the Philippines are growing by about 10 percent over a one-year period, about 32 percent over five years, and about 75 percent over 10 years (the increase in property values typically decelerates over time). Thus, the typical Filipino homebuyer can, at least at this point, count on a stable investment for his or her hard-earned income.
A buyer’s market, but not without risk
Even though the prospects for property buyers in the Philippines are generally very positive, price and demand pressures being exerted on a supply side that appears to have been a little late in recognizing the shift to a more middle-income market means there are risks for consumers.
Developers have only a narrow window of flexibility in pricing their offerings, and are under added pressure to keep expanding not only because of high demand, but because of intense competition in the real estate sector as well.
That has, unfortunately led to a number of issues that have left some homebuyers facing a nightmare instead of the dream home they thought they were buying – high transaction costs, problems with land titling and registration, construction quality issues, and lack of infrastructure and amenities in some developments.
In the second part of this special report on Wednesday, we will examine some of these issues, and investigate what is being done – or not done – to protect consumers and the wider property market from the negative financial impact.