The main problem with the accumulation of debt at low rates is that it has the same effect as a real estate bubble. It disguises real liquidity and solvency risk, because borrowing costs are too good to be true. And they are not true—Daniel Lacalle
In this issue
Property Boom amidst a Recession? 2Q Property GDP, PSE Property Firms Revenues, Sales and Income Crash! BSP Bailouts Bank-Real Estate Sector
I. 2Q Property Price Index Surged as GDP Crashed 16.5%! Huh?
II. What Boom? 2Q Real Estate NGDP and 1Q Construction Permits Crash!
III. What Boom? Listed Property Firms Revenues, Real Estate Sales and Net Income Collapsed in 2Q 2020!
IV. As Revenue and Income Crashed, Property Sectors’ Debt Ballooned! Where will Demand for Real Estate Come From?
V. Why Did the BSP Extend a Bailout of the Banks and the Real Estate Sector?
VI. Summary
Property Boom amidst a Recession? 2Q Property GDP, PSE Property Firms Revenues, Sales and Income Crash! BSP Bailouts Bank-Real Estate Sector
I. 2Q Property Price Index Surged as GDP Crashed 16.5%! Huh?
We live in strange times.
Surveys say that despite the economic meltdown in the 2Q, property prices are still surging!
Figure 1
The growth rate of commercial land prices in Makati tumbled from 7.36% in 1Q 2020 to 1.56% in the 2Q 2020, according to the Bank for International Settlements. Meanwhile, prices of commercial and residential units decelerated from a historic frenzied pace of 29.22% in 1Q 2020 to a still blazing 17.56% in 2Q 2020.
The plunge in the headline GDP of 16.5% has barely dented the boom in the Makati’s condo prices!
Booming prices are supposed to represent a trend.
According to the IMF’s Global Housing Watch data, not only has the Philippines continued to lead in the world’s property boom in Q3 2019 in the face of a slowing economy, but the inflation rate of the 20% was almost double the rate of the nearest competitors Portugal (10.5%) and Latvia (10.4%)! Because credit growth has financed such sizzling property growth rates, the Philippines took the eight spot in the world’s property real credit growth in the same period! The 3Q 2019 headline GDP was only 6.3%; 2019’s GDP was 6.0%.
So while economic activities slowed, according to property price surveys, people turned to the property markets to speculate intensely. And financial and economic losses from the extended lockdowns since 2Q 2020 had little impact on the rampant speculations!
Are we supposed to presume that property prices are independent of the economic activities?
And are we also to believe that chasing property prices financed by extensive credit expansion, fomented by BSP policies, are without costs?
II. What Boom? 2Q Real Estate NGDP and 1Q Construction Permits Crash!
But the real estate conditions under the Philippine Statistics Authority’s 2Q 2020 national income data tells us of a different version.
Figure 2
While the sector’s nominal GDP plummeted 17.5% (real GDP 20.1%), the sharp decline has been brought about by the 36.7% crash in current priced real estate activities. In contrast, ownership of dwellings increased marginally by 6.4%.
Changes in buying, selling, and leasing of real estate properties account for the Real Estate category.
Meanwhile, changes in permits and real estate residential inventories constitute the ownership of dwellings account.
Construction permits are supposed to be leading indicators of real estate production. Oddly, from this perspective, all indicators (number of, value, and floor area) climaxed in the 4Q 2018 and has consistently headed south even before the pandemic. All indicators were in contraction for two consecutive quarters since 4Q 2019.
Differently put, booming property prices have diverged significantly from the supply-side activities. Why would the real estate markets fail to respond to the law of supply?
Though ownership of dwellings has a higher share of the Gross Value-added, particularly, 57.4% current, and 56.9% real in 2Q 2020, its marginal gains (6.4%) only partly cushioned the collapse in real estate transactions.
The divergent real estate GDP data shows that increases in inventories rather than speculations must have been the factor behind the gains of the ownership of dwellings.
The real estate GDP data disputes the numbers presented by the property price surveys conducted by some real estate private firms.
III. What Boom? Listed Property Firms Revenues, Real Estate Sales and Net Income Collapsed in 2Q 2020!
The financial performance of the composite members of the property sector index and the PSEi tells us the third version.
Sales of new projects, as well as other real estate-related revenues of listed property firms, crashed in the 2Q 2020!
The four property firms, which are members of the headline benchmark, suffered a horrifying collapse in aggregate revenues and real estate sales of 56.26%, and 57.17%, respectively, that crushed income growth by a staggering 81%!
By some miracle, SMPH managed to increase real estate sales by an amazing 2.19%! Accounting gains, perhaps?
Meanwhile, cumulative revenues and real estate sales of firms belonging to the property index have likewise plummeted by 49.5% and 54.4%, accordingly, that impelled aggregate net income to cascade by a harrowing 64%!
Using the property index as a proxy to actual real estate performance in 2Q 2020: the National Income Account’s real estate current priced value-added crash of 36.7% substantially UNDERSTATES the revenue and or real estate sales collapse of 49.5% and 54.4%!
Losses of the 2Q pulled lower the 1H performance.
Real estate firms of the PSEi suffered aggregate revenue, real estate sales, and net income losses of 33.64%, 37.14%, and 48.99%, respectively.
Firms of the property index likewise endured aggregate revenue, real estate sales, and net income plunge of 29.77%, 34.52%, and 39.65%, correspondingly.
That said, instead of a boom, the property firms endured an excruciating debacle, based on the financial performance of the listed property firms!
The previous boom has morphed into an earsplitting bust!
IV. As Revenue and Income Crashed, Property Sectors’ Debt Ballooned! Where will Demand for Real Estate Come From?
Stunningly, while the top and bottom line suffered immensely, property firms went into a borrowing binge!
Borrowings by the property of firms of the PSEi and the sector’s index increased by a staggering 10.7% and 11.06% or by Php 57.36 billion and Php 94.9 billion, respectively. (figure 3)
And despite the heavy borrowings, cash reserves of firms of the PSEi property and the sector’s index tumbled 33.13% to Php 64.4 billion and 20.37% to Php 102.8 billion, accordingly.
To plug liquidity shortfalls from revenues and incomes drought, property firms escalated on the leveraging of their balance sheets!
Yet how will the sector’s demand be supported when discretionary income required to sustain payment of mortgages, and savings are consumed as a result of massive closures of businesses, which subsequently translates to the shedding of jobs?
Such intensive displacement would lead to an increasing number of residential and commercial vacancies, which would magnify the unsustainable surpluses acquired from the race-to-build supply malinvestments.
That's not all.
The revenue famine will not only accelerate cash flow or liquidity problems but also challenges in servicing debt and other liabilities.
Even POGOs, which accounted for a key source of demand, reportedly joined the closing spree during the period.
Yes, remuneration or pays from the recent job layoffs and retrenchment, the savings depletion, and credit fees, rents, and mortgages forbearance mandated by the Bayanihan legislation have tidied over or supported household consumption for the past few months.
But if the current anti-business conditions persist that should impede investments, these temporal surpluses will eventually corrode. And the same economic factors will continue to haunt the banking system’s loan portfolio that should pressure delinquent loans higher over time.
Have we forgotten this warning issued by the BSP insiders from their 2018 Financial Stability Report? [P.15, bold mine]
On the retail side of bank credit, the rise in consumer loans (CL) has also been accompanied by an increasing level of non-performing loans (Figure 2.10). Since residential RE loans which comprise 40.5 percent of the CL portfolio of the banking system as of end-March 2019 have a direct impact on consumers, developments in the RE sector need to be monitored.
And there is the radical change in consumer preference brought about by Covid-19 and the political response to it. The shift from in-person workplace to remote or work from home settings or telecommutation will likewise see a significant alteration in the demand for properties.
And the same applies to the implementation of health protocols that should reduce pedestrian traffic in the retail sphere.
Business paradigms that relied on scale (incurring high fixed costs and catering to the retail market in mass) will have to rethink how they can operate in the post-COVID-19 world. Air transport (planes that cost from USD77 million to USD450 million depending on the model, ferrying hundreds of passengers per trip) and big shopping malls, for example, may not be as viable under reduced floor and foot traffic.
That is, properties built on the previous pre-COVID-19 business models are most likely to suffer from a significant reduction in demand.
And the supply glut from the previous malinvestments should lead to substantial financial losses, capital depletion, as well as, idle resources that should spur a dash for cash for the property and financial system prompting for mass liquidations through fire-sales.
Using the recent developments in the transport sector, Hyundai’s latest buy-one take-one promo should serve as a ‘writing on the wall’ on the deflationary impulses for big-ticket items.
V. Why Did the BSP Extend a Bailout of the Banks and the Real Estate Sector?
The BSP extended a bailout to both the banks and the property sector by relaxing the former’s lending limits to the latter from 20 percent of their total loan portfolio, net of interbank loans to 25%.
Why so?
1. The BSP has warned about rising NPLs from consumer exposure against real estate, as such, expanding credit limits to the property sector is less likely about supporting demand.
Figure 4
2. PSE data showed that the listed property firms borrowed extensively to shore up their liquidity.
With demand expected to go downhill, as the current environment will likely continue to burn cash and liquidity, expect listed and unlisted property firms to intensify the leveraging of their balance sheet for survival.
3. As of June, while the bank lending to the property sector decelerated for three straight months or in the 2Q, the share of bank lending to the sector continues to scale higher, reaching 19.18% (net of Reverse Repos) or 18.8% (gross of RRPs). (figure 4, middle and upper pane)
Considering that the BSP has extended regulatory and operational relief to the banks, the data likely understates their true exposure.
The increase in the share of total lending exposes the disproportionate distribution of bank lending favoring the sector. Banks have continually been digging a bigger hole.
Even when the firms of the PSE property index borrowed 11.05% higher or by Php 94.55 billion in the 1H 2020, bank loans to the sector expanded by 2.5% or by Php 41.642 billion. If the data is accurate, then PSE property index firms borrowed from elsewhere to fill their requirements in the 2Q or unlisted firms suffered bank credit contraction to offset borrowings made by the former or a combo of the two.
The bailout, in the BSP’s perspective, provides room for the real estate sector to breathe.
4. Lastly, even as the real estate sector’s share of the bank loan portfolio has been growing, its share of GDP has been dwindling! Stated differently, as more and more resources are being funneled, the sector has been contributing less and less to the output of the statistical economy. (figure 4, lowest pane)
Such dynamic reveals not only the sector’s trend of declining productivity, but more importantly, the growing risks of the banking system’s credit portfolio.
The BSP’s lifeline to the property sector shows how the real estate industry has become "too big to fail" or a systemically important industry.
VI. Summary
We started this outlook questioning the accuracy and consistency of claims built upon price surveys that suggested of a property boom in Makati even as the GDP suffered a record meltdown.
But the real estate 2Q GDP, the financial performance of the property sector, and the BSP’s bailout of the banks and real estate sector suggest that a boom was a charade.
Perhaps, the speculative fervor was limited to some segments of Makati, particularly secondary markets or resale units. But even then, such statistics mislead.
Or, shills may have wanted to paint their industry as immune to economic contraction.
Here is a contradictory anecdote from mainstream media, Philstar (August 24): Property seekers have recently avoided spaces in central business districts (CBD) as movement restrictions meant to arrest coronavirus spread and contagion fears prompted buyers to consider locations closer to their present homes when making decisions. In a report released Monday, Lamudi, an online property marketplace, said it saw a “switch” in locational preferences of property hunters from financial districts to non-CBD properties during the enhanced community quarantine (ECQ) in Luzon. The lack of public transportation during the lockdown period is to blame.
Neither has there been a boom in Makati nor a switch to non-CBD properties. There was only a pullback.
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