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‘Real-estate sector to sustain growth’

The prevailing low-interest environment caused by the robust expansion of the Philippine economy and increasing consumer confidence are supporting further growth in the real-estate sector, the World Bank said.

The bank, in its latest Philippine Economic Update report, said the robust growth of the Philippine economy in recent years gave way to lower interest rates and increased the confidence of many Filipinos to buy residential properties.

This, the bank said, has spurred a real-estate boom in the country.

“Low interest rates are driving real-estate lending but leverage is still low relative to 1997. In 2012 real-estate loans [RELs] grew by around 30 percent and were equivalent to 4 percent of GDP [gross domestic product], lower than 1997’s 60-percent growth and RELs’ being equivalent to 6 percent of GDP at the time.”

“Thus far, the balance sheets of top real-estate companies remain healthy. The average debt-to-equity ratio of the top six Philippine real-estate companies weighted by market capitalization was around 53 percent in 2012, lower than the debt-to-equity ratios seen at the height of the Asian financial crisis [i.e., 66 percent for the top real estate companies and 170 percent for the Philippines’s top 1,000 non-financial corporations],” World Bank said.

It said real properties that were selling did not only include mid-level units. The luxury residential segment, focused on catering to expatriates, was also seeing some pick up. 

The World Bank said this segment expects to see an additional 10,600 units in 2013 from an annual average of 3,500 units in the last five years.

The Makati Central Business District (CBD), on the other hand, expects to see an additional 336,000 square meters (sq m) of office spaces in 2013 from an annual average of about 178,000 sq m in the last five years.

But the bank also warned that observers are beginning to see signs of a possible repeat of the real-estate bubble burst that happened in the latter part of the 1990s.

“Some observers argue that the current economic landscape exhibits some similarities to the two years preceding the 1997 financial sector crisis. In the light of these trends, a concern for the possible emergence of asset price bubbles is understandable,” the World Bank said.

It said while many overseas Filipino workers (OFWs) and business-process outsourcing (BPO) firms are buying real property, they are exposed to external risks such as slowing global growth, which could impact on real-estate sales in the country. 

The World Bank also explained that a low interest-rate environment could also lead to relaxed “credit standards and documentary requirements for household real estate loans” and threaten the sector with defaults. 

The bank also said there are findings that the demand for mid- and high-end condominiums “may be overstated” since only 10 percent of the country’s population belong to the middle and high income brackets.

This could lead to an oversupply in condominiums and falling real-estate prices.

The World Bank said growth prospects in OFW host-countries and the global economy would slow significantly, also affecting BPOs. This could cause a lot of defaults in payments. It added that since 2009, there has been anecdotal evidence of OFWs who were unable to pay their mortgages. 

The risk escalates under a low-interest rate regime. The World Bank said some local banks have raised their loan-to-value ratio to 80 percent or higher to 90 percent as well as waived requirements such as proof of income to generate sales.

The World Bank said the loan-to-value ratio refers to the portion of the total contract price of the property that can be financed by the bank. A very high loan-to-value ratio could reduce buffers against declines in property prices in the event of defaults.

It added that there was also anecdotal evidence that some developers used their balance sheets to offer in-house financing or “shadow banking,” which could also become significant sources of risk.   

“This latter practice [of waiving proofs of income] appears to be more prominent among OFWs who are unable to show proof of income, but are nevertheless granted loans if they are able to pay the 20-percent down payment,” the World Bank said. 

“The sources of growth can also become the sources of risk. A real-estate sector driven by OFW sales and BPO leasing is vulnerable to shocks in the global economy. The low-interest rate regime is also a source of risk. As lenders and developers compete, lending requirements may be relaxed beyond prudent levels,” it added. 

Further, the World Bank said with many real-estate companies starting construction of buildings after reaching only 60 percent in pre-sales, there is a risk of oversupply. The bank added that pre-commitment requirements in office buildings have also gone down to 30 percent to meet the demands of expanding BPOs. 

The 2009 Family Income and Expenditure Survey data showed that only 10 percent of households have non-passive disposable income, excluding remittances and other interest earnings, of at least P30,000 a month. 

The World Bank said these households are considered middle class and up. In Metro Manila, around 20 percent of households are considered to be middle class.

“If 10 percent of these households are prospective end-user buyers, this leads to a projected demand of around 50,000 units, which is much less than the current and pipeline supply,” the bank said.

The World Bank supported the measure implemented by the Bangko Sentral ng Pilipinas (BSP). The Central Bank has lifted all exemptions in the computation of bank exposure to real-estate firms. 

The new BSP guidelines also provided a more comprehensive measure of banks 20-percent cap on real-estate exposure. Previously excluded items which are now included in the computation are mortgage loans, socialized and low cost housing loans, loans guaranteed by the Home Guarantee Corp. (HGC), and investments in debt and equity securities issued by real-estate companies. 

Further, the BSP now requires banks to provide additional details on their exposure to the real-estate sector, such as investments in debt and equity securities that will be used to fund property developments as well as loans extended to property developers, and ancillary services relating to the construction and development of real-estate projects such as buying, selling, renting, and managing real-estate property.

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