Q4 and 2024 GDP: Consumer and Capital Spending Stagnates as Bank-GDP Concentration Risks Deepen

  

The government pretends to be endowed with the mystical power to accord favors out of an inexhaustible horn of plenty. It is both omniscient and omnipotent. It can by a magic wand create happiness and abundance. The truth is the government cannot give if it does not take from somebody—Ludwig von Mises 

In this issue

Q4 and 2024 GDP: Consumer and Capital Spending Stagnates as Bank-GDP Concentration Risks Deepen

I. The GDP’s Critical Defects

II. The Mainstream Narrative is Failing

III. Philippine GDP Predicament: Full Employment and Record Credit, Yet Slowing Consumption?

IV. Malinvestments: Retail Expands While Consumer Spending Stagnates

V. Proposed Minimum Wage Hikes to Compound Consumer Woes

VI. Q4 GDP versus SWS’ Q4 Milestone Highs in Self-Poverty Ratings and Hunger; Critical Questions

VII. Q4 GDP Boosted by Government Spending, Services Exports and Private Sector Construction

VIII. Q4 GDP’s Industry Side: Boost from Public Administration and Defense and other Related Sectors

IX. Q4 2024 Boosted by Financialization Even as Manufacturing and Real Estate Sector Languish; Deepening Bank-GDP Concentration Risks

X. More Signs of Consumer Weakening: Material Slowing ‘Revenge Travel’ and Outside Dining GDP

XI. Summary and Conclusion

Q4 and 2024 GDP: Consumer and Capital Spending Stagnates as Bank-GDP Concentration Risks Deepen 

Q4 and 2024 GDP were another big miss for the establishment. Government spending played a pivotal role in boosting growth, while consumers were sidelined. There is little awareness that the former indirectly causes the latter 

I. The GDP’s Critical Defects 

Inquirer.net January 31, 2025: The Marcos administration missed its growth target for the second straight year in 2024, falling below consensus after the onslaught of destructive typhoons had muted the typical surge in economic activities during the holiday season. Gross domestic product (GDP), the sum of all products and services created within an economy, expanded at an average rate of 5.6 percent for the entire 2024, the Philippine Statistics Authority (PSA) reported on Thursday…At the same time, last year’s performance failed to meet market expectations after settling below the median estimate of 5.8 percent in an Inquirer poll of 12 economists…The statistics agency reported that GDP had expanded by 5.2 percent in the fourth quarter, unchanged from the preceding three months and lower than the year-ago print of 5.5 percent. That was also below the median forecast of 5.8 percent. 

Our preface: the BSP cut official rates in August, October, and December. It also reduced RRR rates in October, while the aggregate fiscal spending in 11-months reached all-time highs (ATHs), signaling massive stimulus or Marcos-nomics. 

Despite this, the Philippine GDP registered 5.2% in Q4 and 5.6% in 2024. 

Although GDP provides insight into how economic output is distributed across sectors—categorized by expenditure and industry—it does not present the equivalent allocation of spending by income class. 

Therefore, it is arguable that the headline figure makes a critically flawed assumption by suggesting that the statistical spending growth applies to the average. 

In other words, it assumes that the average citizen has experienced 5.2% growth in Q4 and 5.6% growth overall. The question, however, is how do you aggregate the spending of a few billionaires with that of those living in poverty? 

And this applies to the inflation deflator used to calculate the headline figure as well: How accurate is it to derive an average inflation rate from a mishmash of diverse spending items like a mobile gaming subscription, rice, and vehicle wheels? 

Apples and oranges, you say? Exactly.

If the nominal GDP and the deflator are flawed, why should we trust that the headline estimates reflect reality?

II. The Mainstream Narrative is Failing 

Every start of the year, mainstream experts proclaim at the top of their lungs that GDP will align with sanguine government targets. Some even tout the likelihood of the economy reaching "middle-income status."

Beyond abstract reasoning, they rarely explain the mechanics of how they arrive at their estimated figures.

Either they ignore the data provided by the Philippine Statistics Authority (PSA), or their forecasts are based on a 'pin-the-tail-on-the-donkey' approach—bluntly put, faith in magic.

What does the PSA data reveal?

Figure 1

It shows that since the post-pandemic recession, GDP has operated within a secondary trendline. This means that despite occasional growth spikes, GDP growth will be SLOWER than in the pre-pandemic era. (Figure 1, topmost pane)

Using the exponential trend as a gauge, we see that Q4 GDP consistently exceeds the trendline but eventually retraces to the secondary support in the following quarters.

The same dynamic applies to the 2024 GDP. (Figure 1, middle graph)

The point having been made, realize that for GDP to meet the mainstream's numbers, it would require a significant breakthrough not only to reclaim the pre-pandemic trend but also to sustain it.

From a statistical standpoint, none of this is happening. Even the PSA’s chart reinforces the notion of a slowing GDP. (Figure 1, lowest chart)

Figure 2 

As evidence, the government has struggled to wean itself off debt-financed pandemic deficits relative to GDP, which have served as a quasi-stimulus. Data reveals that they have become addicted to it. (Figure 2, topmost image) 

Why, then, do they yearn for pre-pandemic GDP figures? 

Incredible.

Statisticians-cum-economic experts often don't disclose that their perpetually optimistic forecasts might be about placating or bootlicking the government.

Why? For business and personal reasons. They might want to secure government contracts, underwrite debt issuance, intermediate stock trading, or gain accreditation as credit appraisers, among other things. On a personal level, they seek social desirability or good standing with officials for career advancement (revolving door politics), off-table deals, etc. In short: the principal-agent dilemma.

Essentially, overstating GDP or understating CPI numbers, or the mainstream's erroneous forecasts, come with no consequences for them—they have no "skin in the game."

However, for many in the investing public, consensus projections guide corporate strategies or investments in financial markets.

It’s unsurprising, then, that in addition to distortions in capital goods pricing due to stock market mispricing, overly optimistic guidance often leads to “build-and-they-will-come” debt-fueled malinvestments.

Many also invest their hard-earned savings in financial markets (stocks or fixed income) in the hope of achieving real or inflation-adjusted positive returns, without realizing that their investments are silently transferring wealth to politically connected economic elites, who are absorbing unsustainable amounts of debt.

And remember the inflation spike of 2022? NONE of these experts saw it coming.

In clear words, forecasts based on the principal-agent problem will likely keep the public blind to the escalating risks of a crisis.

Here's an example:

Businessworld, January 24: PROPERTY developers in the Philippine capital need to enhance their market research and consider lowering condominium prices to address the current “mismatch” between available units and buyer demand, according to property analysts. “These overpriced condos aren’t matching with the existing buyers…There are so many buyers, as in we’re talking millions of buyers, but the issue is they cannot afford [a condo in Metro Manila] anymore” (bold added) 

The mainstream’s narrative is failing: Expect more to come. 

III. Philippine GDP Predicament: Full Employment and Record Credit, Yet Slowing Consumption? 

Let's conduct a brief investigation into the PSA's GDP data. 

The government's statistics are riddled with paradoxical figures.

First, the government claims that the employment rate (as of November) has reached nearly its highest level. (Figure 2, middle chart)

Curiously, with low savings, how have entrepreneurs managed to fund investments in real businesses, leading to near-full employment?

FDI numbers hardly support this. Despite a spike in October, the 10-month FDI flow was up by only 6.6%, with 68% of those inflows coming from debt. Debt inflows are no guarantee of “investment.”

The likely source of funds might be from banking loans. Over an 11-month period, consumer credit captured the largest share of the net increase in Universal-Commercial Bank loans at 23%, followed by real estate at 18.74%, electricity at 9.72%, and retail trade at 9.52%.

However, retail and agriculture, which account for the largest shares of the working population at 21.3% and 20% respectively, suggest a different story.

Next, fueled by credit cards and salary loans, consumer credit continues to grow at a breakneck pace, setting nominal records consecutively. (Figure 2, lowest graph)

Ironically, despite full employment and unprecedented consumer credit growth, Q4 2024 saw real consumer spending in GDP terms increase by only 4.7%, similar to Q2 and marking the second lowest since Q2 2011, excluding the period of the pandemic recession.

Stagnating household consumption was a key factor in pulling down the period's GDP.

Moreover, household GDP mirrored the deceleration in Q4 2024, with consumer per capita GDP growth at just 3.8%—the lowest since Q3 2017.

Important questions arise: 

-Where did all that record bank credit expansion go?

-How much of the consumer credit growth has been about refinancing existing debt?

-If productivity has been driving the GDP, why would a nation with full employment experience a sustained slowdown in household consumption?

In this context, government data on employment appears questionable.

IV. Malinvestments: Retail Expands While Consumer Spending Stagnates

Figure 3

What’s more, households are struggling with consumption, mainly due to the inflation tax, which continues to erode their spending power. At the same time, they are using leverage to maintain their lifestyles. As this occurs, retail GDP continues to outgrow consumer spending. (Figure 3, topmost window)

Partly due to the mainstream’s constant cheerleading, retail entrepreneurs are hopeful that the consumption slump will reverse soon, and so have been aggressively expanding capacity. Retail GDP grew by 5.5% in Q4 and has outpaced consumer spending in 3 of the last 4 quarters. (Figure 3, second to the highest image)

Or, to put it simply, because of the mainstream belief in the 'build it and they will come' dogma, supply continues to outpace demand.

V. Proposed Minimum Wage Hikes to Compound Consumer Woes

In the meantime, news reports that "the House Committee on Labor and Employment has approved a bill for a P200 across-the-board legislated wage hike."

Would this not function as a form of redistribution or a protective moat in favor of elite companies, at the expense of micro, small, and medium enterprises (MSMEs)? How would this incentivize grassroots entrepreneurship when authorities are effectively raising the cost of doing business or barriers to entry?

How would minimum wage laws not negatively impact consumption and productivity while acting as a drain on savings?

Quoting economist Thomas Sowell, "Minimum wage laws play Russian roulette with people who need jobs and the work experience that will enable them to rise to higher pay levels." (Sowell, 2006)

VI. Q4 GDP versus SWS’ Q4 Milestone Highs in Self-Poverty Ratings and Hunger; Critical Questions

And there’s more. How does the 5.2% GDP square with polls showing record highs in consumer stress: "Self-Rated Poverty at 63%, highest in 21 years" and "December 2024 hunger was… at the highest level since the record high 30.7% during the COVID-19 lockdowns in September 2020"? (Figure 3, second to the lowest and lowest charts)

While the government touts the 5.2% GDP, SWS found that 63% of Filipino families rated themselves as "Poor," while "25.9% of Filipino families experienced involuntary hunger."

Simply put, this reflects popular sentiment about inflation: a vast majority of the population feels harried by the peso’s loss of purchasing power, and a quarter of them have actually experienced hunger.

Incredible.

So, who is overstating their data—SWS or the government?

Here’s the thing: If the GDP growth is based on unsustainable leveraging, what would the ramifications be?

Or if consumer balance sheets have been burdened by excessive gearing (spend-now, pay-later) to cope with inflation, how would this affect the economy?

When consumers reach the proverbial tipping point of leveraging and begin to scale down, wouldn't this slow the GDP? Wouldn't credit delinquencies rise, affecting the banks' already strained liquidity?

Or, wouldn’t this reduce lending, exacerbating liquidity pressures in the banking system and increasing defaults?

Could this not lead to rising unemployment, creating a feedback loop that slows GDP, decelerates bank lending, and drives up credit delinquencies?

By the same token, what happens to the supply side’s debt-financed overcapacity? Wouldn’t this worsen pressures on unemployment, output, consumer spending, and negatively affect the health of the banking industry?

Wouldn't increasing sentiments of hunger and perceptions of poverty not lead to higher risks of social disorder? 

VII. Q4 GDP Boosted by Government Spending, Services Exports and Private Sector Construction 

If household consumption weighed down the GDP, which sectors propelled it upwards?

Figure 4

From the expenditure side of the data, the answer is the government, construction, and export services. 

Government GDP rose from 5% in Q3 to 9.7% in Q4. While construction GDP dipped from 8.8% to 7.8%, it still exceeded the 5.2% threshold. Private sector construction, driven by households (12.8%) and corporations (5.7%), powered the sector’s GDP, while government construction GDP stagnated at 4.7%. (Figure 4 topmost diagram)

Interestingly, while exports of goods entered a recession, declining by -0.37% in Q3 and -4.6% in Q4, services exports GDP surged from 2.3% to 13.5%, elevating the sector's performance from -1.4% in Q3 to 3.2% in Q4. (Figure 4 middle image) 

Curiously, real estate services firm CBRE reported in 2024 that "32 percent of vacated (office) spaces are from the IT-BPM sector." Why have service export firms like BPOs been downsizing if their businesses were reportedly booming, as suggested by the GDP figures? 

Meanwhile, gross capital formation fell sharply from 13.7% in Q3 to 4.1% in Q4, while durable goods GDP also plunged from 7.9% to just 0.1%. Unfortunately, this indicates a sluggish state of investments, which contrasts with the employment data. 

The expenditure side of the GDP shows that government spending was primarily responsible for the Q4 GDP boost, supported by services exports and private sector construction. However, it also reveals that while consumer spending has stagnated, capital spending has languished. 

VIII. Q4 GDP’s Industry Side: Boost from Public Administration and Defense and other Related Sectors 

On the industry side, sectors like transport (9.5%), financial and insurance (8.5%), professional and business services (8.3%), public administration and defense (7%), education (6.2%), and health (12.1%) all grew above the GDP rate. 

Or, to put it another way, outperforming government and related sectors contributed about 10% of the industry's GDP. 

After the 2020 spike, the share of public administration and defense in GDP remains elevated compared to pre-pandemic levels. This should come as no surprise, as the government is focused on centralization, partly driven by a subtle shift toward a war economy. (Figure 4 lowest graph)

IX. Q4 2024 Boosted by Financialization Even as Manufacturing and Real Estate Sector Languish; Deepening Bank-GDP Concentration Risks

Figure 5

On the other hand, despite showing signs of a slight slowdown in Q4 2024, the financial and insurance sector's contribution to national GDP continues to expand. (Figure 5, upper chart) 

It's not coincidental that the sector's improvements coincided with the BSP's unprecedented sector rescue in 2020. Since then, the sector's growth has not looked back, even as the BSP raised interest rates. That is, the sector’s GDP suggests that there was no tightening at all. 

In Q4, banks accounted for 49% of the sector's GDP, while non-banks and insurance had respective shares of 32% and 13.33%. These sectors posted GDP growth rates of 8%, 8.4%, and 8.2%, respectively. 

Yet the paradox lies in the sector's dependence on the real economy, as it lends and invests to generate profits and contribute value to GDP. 

Real estate, trade (primarily retail), and manufacturing are among their largest borrowers, accounting for 40% of total bank lending as of last November. 

Lending to the financial sector itself accounted for a 7.7% share, which together with the aforementioned sectors, totals 48.5% of all bank loans (from universal commercial, thrift, and rural banks). 

Incidentally, these sectors are also significant contributors to the GDP, making up a 42.7% share of the national GDP. Including the financial sector, the aggregate GDP increases to 52.5%. 

Aside from retail, the manufacturing sector posted a real GDP growth of 3.1%, while real estate GDP materially slowed to 3.0%, pulling its share of the national GDP to an all-time low! (Figure 5, lower diagram) 

We previously discussed the sector's deflationary spiral, and the Q4 decline could signal further price drops in the sector. 

To illustrate the struggles of the manufacturing sector, JG Summit announced the shutdown of its Petrochem business last week, in addition to the goods export recession in Q4. 

To summarize, the Philippine GDP and bank lending exposure reveal an increasingly fragile economy heavily dependent on a few sectors, which have been buoyed by bank credit. This means that the higher the concentration risks, the greater the potential impact of an economic downturn. 

X. More Signs of Consumer Weakening: Material Slowing ‘Revenge Travel’ and Outside Dining GDP 

Another piece of evidence that consumer spending has been slowing can be found in the food and accommodation sectors' GDP. 

The authorities' response to the pandemic with economy-wide shutdowns initially pushed Food GDP into an upward spiral, while the reopening triggered a "revenge travel" GDP surge in the accommodation sector. 

However, the massive distortions caused by these radical political policies have started to unwind.

Figure 6

Accommodation GDP slowed from 12.2% in Q3 to 8.7% in Q4, while food GDP dropped from 10.1% to 4.9%. Since food accounts for a large portion (68%) of the sector, the overall GDP for the sector moderated from 10.7% to 6.1%. (Figure 6, topmost and middle charts) 

The distortions caused by pandemic policies have led many investors to believe that the 'revenge travel' trend, or the recovery streak in tourism, will continue, fueling massive investments in the sector. 

In our humble opinion, they have critically misread the market, as the growth rate of foreign tourist arrivals has substantially slowed in 2024. (Figure 6, lowest image) 

Moreover, the sector's declining GDP further highlights the weakening of domestic tourism. 

XI. Summary and Conclusion 

1 Q4 and 2024 have reinforced the secondary trendline in GDP, continuing to show a slowdown in GDP growth.

2 Dwindling consumer spending has been a critical factor driving this slowdown.

3 Importantly, capital spending growth has also been lackluster.

4 Conversely, government spending has provided crucial support to GDP, along with contributions from other ancillary sectors.

Yet, these dynamics reveal that the Philippines operates under the flawed assumption of political "free lunches" — where government spending is seen as having only a positive impact, while ignoring the negative effects of the crowding out syndrome. 

They also highlight the pitfalls of the BSP's 'trickle-down' policies, which have deepened concentration risks due to the bank-dependent financing of a few sectors. 

It’s no surprise, then, that after the initial easing by the BSP in the second half of the year — which contributed to the dismal Q4 GDP, the January 2025 PSEi 30 crash and rising bond yields, the BSP proposes to continue the same strategy, slashing rates by 50 basis points and reducing reserve requirements by 200 basis points. 

Succinctly, they are "doing the same thing and expecting different results."

____

references 

Thomas Sowell, A Glimmer of Hope August 08, 2006, realclearpolitics.com 

Global Real Estate Services Cautions on Rising Office Vacancies, Top 5 Philippine Property Developers: Mounting Signs of Liquidity Crunch

Causa remota of any crisis is the expansion of credit and speculation while causa proxima is some incident that saps the confidence of the system and induces investors to sell commodities, stocks, real estate, bills of exchange, or promissory notes and increase their money holdings. The causa proxima may be trivial: a bankruptcy, a suicide, a flight, a revelation of fraud, a refusal of credit to some borrowers, or some change of view that leads a market participant with a large position to sell. Prices fall. Expectations are reversed. The downward price movement accelerates. To the extent that investors have used borrowed money to finance their purchases of stocks and real estate the decline in prices is likely to lead to calls for more margin or cash and to further liquidation of stocks or real estate. As prices fall further, bank loan losses increase and one or more mercantile houses, banks, discount houses, or brokerages fail. The credit system appears shaky, and there is a race for liquidity—Charles P. Kindleberger and Robert Z. Aliber 

 

In this issue 

Global Real Estate Services Cautions on Rising Office Vacancies, Top 5 Philippine Property Developers: Mounting Signs of Liquidity Crunch   

I. Global Real Estate Services Cautions on Rising Office Vacancies and Depressed Rents: Blames Hybrid Remote Work and Global Markets 

II. Q3 Real Estate GDP Buoyed by Sales Transactions as Rents Stagnated 

III. Update on Real Estate Malinvestments: Rising Leverage Amidst a Downtrend in the Sector’s Share of GDP  

IV. The Seen: Top 5 Property Developers: Tepid Revenue Growth, Margin Fueled Net Income BOOM! 

V. The UNSEEN: Top 5 Property Firms: 9M Cash Reserves Plunged, Debt and Interest Expense Zoom to Historic Highs! 

VI. Property Industry’s Demand for Rent: Follow the Money and the Slowing Revenue Growth of Retail and Food Chains  

VII. Q3 & 9Ms Financial Performance of the Property Index; REIT Did Better than their Parents 

VIII. Mainstream’s Addiction to Inflationism, Real Estate Bubble Equals the "Fictitious Wealth." 

 

Global Real Estate Services Cautions on Rising Office Vacancies, Top 5 Philippine Property Developers: Mounting Signs of Liquidity Crunch   

The weakest link of the Philippine real estate bubble has been office spaces.  However, the financial performance of the top 5 developers showed that this has spread. 

I. Global Real Estate Services Cautions on Rising Office Vacancies and Depressed Rents: Blames Hybrid Remote Work and Global Markets 

 

Different surveys generate different results. 

 

First, elevated office vacancy rates have capped rent increases, a global real estate services firm recently reported. (all bold mine) 

 

Businessworld, November 16: In a statement on Wednesday, Cushman & Wakefield said office vacancies in Metro Manila rose by 72 basis points (bps) to 16.83% by the end of the July-to-September period from 16.12% in third quarter a year ago. It noted the office market is in a “slow recovery” as remote work schemes remain prevalent among local information technology and business process management (IT-BPM) companies. Quarter on quarter, the Metro Manila office vacancy rate was down 6 bps from 16.9% in the second quarter…Amid the high vacancy rates, landlords have delayed rent increases. Ms. Castro noted average asking rents to have only gone up by 0.15% year on year to P1,042.17 per sq.m. per month as of the end of the third quarter…Claro dG. Cordero, Jr., Cushman and Wakefield director and head of research said, vacancy rates are expected to remain high. “The current structural shift in office space occupation sweeping the global market has also been manifested (despite the relatively higher return-to-office ratio) in the local market, particularly in major CBDs (central business districts). Elevated vacancy rates are likely to persist, as global corporate occupiers brace for hybrid work arrangements and a new legislation is underway that will allow local IT-BPM companies to implement remote work schemes,” he said. 

 

For them, these vacancies were about shifting work preferences (hybrid/remote).   Embedded in it was an appeal to popularity: it's a global trend! 

 

But there's more.  Other factors may be behind these, too. 

 

Mr. Cordero noted that elevated inflation and high interest, along with geopolitical conflicts, may create more market jitters and dampen the market’s recovery. “Lingering prospects of slower economic growth and the high-interest rate environment challenge the expansion of the Philippine REIT (real estate investment trust) market. The onset of a hybrid work scheme, early exit of POGO companies, and ongoing office space rationalization of corporate occupiers generally weigh on expectations of the future growth of office space demand,” he added. 

 

In a nutshell, aside from hybrid work, inflation, high rates, lower economic growth, the exit of POGOs, and cost-cutting measures were also factors.  

Figure 1 

 

Sure, elevated office vacancies signify a worldwide phenomenon post-pandemic. (Figure 1, topmost chart) 

 

But office and commercial real estate vacancies existed before this material shift in consumer demand.  

 

The changing consumer preferences only exposed the unstated portion of the commentary: oversupply or malinvestments. 

 

Put differently, vacancies represent excess inventories.  Such excesses wouldn't have emerged had supplies been controlled or limited.   

 

Importantly, it is a domestic dilemma. Global dynamics only reveal that local developers embraced the perspective that the demand for office spaces was linear. 

 

That's right.   Such excesses represent an error in their business models.  

 

Yet, why have developer-entrepreneurs not forecasted and acted on this?  Why the cluster of entrepreneurial errors that have led to such excesses? And why have incumbent developers been adamantly asserting that demand will recover in the face of the critical shifts in consumer preferences? 

 

II. Q3 Real Estate GDP Buoyed by Sales Transactions as Rents Stagnated 

 

Before continuing, let us shift to the other survey, the Q3 GDP.  

 

According to the Q3 government national account data, real estate was one of the few industries that resisted the general downturn, which had deficit spending as its engine, as earlier explained.  

 

But the sector's activities diverged.  Real estate and ownership of dwellings are its two components.   

 

"Real" real estate GDP jumped from 3.7% to 6.2%, the highest since Q4 2022, while "real" "ownership of dwelling" GDP remained stagnant for four straight quarters with a 2.1% GDP.  The data extrapolates to activities related to buying and selling properties that boosted its GDP, while rental activities had been static for several quarters. (Figure 1, middle graph) 

 

Yet, the industry posted a 4.2% GDP, the highest quarterly growth this year.  

 

As it is, because the property sector outperformed the others, its share of the national pie rebounded to 5.9%, the highest since Q3 2022 of 6%.  

 

In any event, its "outperformance" came amidst a stalling private sector economy, which hardly qualifies as creating more "value added." 

 

III. Update on Real Estate Malinvestments: Rising Leverage Amidst a Downtrend in the Sector’s Share of GDP  

 

Of course, as repeatedly stated here, despite its falling share of the GDP, the property sector's share of banking loans remains in an uptrend.   (Figure 1, lowest chart) 

 

More than anything else, there is a disproportionate distribution in bank financing and the GDP: the sector's share of universal commercial bank loans represented 20% even as its GDP share was only 5.9% (Q3).  

 

Further, the downtrend in the GDP share and the uptrend in the bank loans reveal the impact of diminishing returns of the sector’s leveraged-driven GDP. 

 

A back-of-the-napkin calculation shows that the sector uses a 3.39% share of bank (lending) resources to generate 1 GDP.   Or, to produce more GDP requires even more leveraging! 

 

To cut a long story short, the divergence view of the private sector survey could imply that the real estate GDP may have puffed up the actual contributions of the sector. 

 

What's more.  The public has turned the real estate sector into a casino backed by rapid trade churning in the hope of making a quick buck.  This dynamic comes as vacancy rates in the commercial sector remain elevated. 

 

So many gambled as risks continued to escalate. 

 

But the real estate sector is interconnected. 

 

There has been little realization that the industry has invested primarily in the foundation of the so-called "integrated community structure," anchored on urbanization and its extension of "satellite communities." 

 

Yet, the dynamic preference of consumers became one of the challenges of this model. 

 

And so, influenced by digitalization and pandemic policies, the transformation to hybrid/remote work has rendered a massive "sunk cost" or capital decumulation—signified by oversupply.   

 

Of course, the predicament of the expert assumes a perspective based on the present rates of GDP. 

 

The thing is, though office spaces are the concern here, all other segments of the property sector constitute part of such "integrated communities," which therefore extrapolates to interconnection.    

 

By extension, it also means that the paradigm of "integrated community" is codependent not only on the vibrancy of the office properties but also residential, shopping malls, hotels, logistics and commercial hubs, and other related structures. (Prudent Investor, May 2023)  

 

IV. The Seen: Top 5 Property Developers: Tepid Revenue Growth, Margin Fueled Net Income BOOM! 

 

The florid 3Q news headlines may have overstated the financial performance of the listed top 5 developers.  Sure, net income supposedly boomed, but it came amidst a mixed performance of their revenues and other financial aspects. 

 

That is to say, reading between the lines is a sine qua non for any prudent investors. 

 

After all, revenues, a component of aggregate spending, should resonate with the current or nominal GDP. 

 

We shall harmonize the macro picture with the micro developments using the financial performance of the nation's listed top 5 (TOP 5) property developers.   

 

Figure 2 

 

The aggregate revenues of the top 5 (TOP 5) listed developers (SMPH, ALI, MEG, RLC, and VLL) jumped from 8.42% in Q2 to 14.03% in Q3 as real estate revenues grew from -2.5% to 10.7% over the same period.  (Figure 2, topmost graph) 

 

However, the total and real estate nominal revenues remain distant, -12.9% and -24.6%, from the pre-pandemic Q4 2019 record levels, respectively.  

 

Nota Bene: Since Ayala Land's topline bundled sales and rent revenues, we incorporated it with real estate revenues—likely overstating the total.  

 

Nevertheless, despite the aberrant pop in Q4 2020, the corroding share of real estate to total revenues reached its 2nd lowest level in Q3 2023, which indicates that property firms have become dependent on rent for their core revenues. (Figure 2, middle graph) 

 

From here, retail conditions become a principal factor in establishing rent and total revenues. 

 

A second important point: the share of the top 5's aggregate revenues to the sector's NGDP in 2020-2021 has barely recovered from the plunge in 2020-2021.   The sector seems to be an outlier in the context of the deepening concentration trend in the economy.  That is conditional on the accuracy of the estimated data.  

 

The revenue-to-NGDP share declined from 30.9 to 28.8. However, NGDP has outsprinted the total revenues in Q3 of the top 5 developers. (Figure 2, lowest chart) 

 

It reveals a wide dispersion in the supply component as mom-and-pop entities may have joined the speculative leveraged shindig of the build, sell, or rent model. Developments in my neighborhood could be a testament to this dynamic.  

 

Figure 3 

 

Circumstantial evidence shows that the sharp contraction of construction permits for single houses and apartments by 19.6% and 42.2% in Q3 2023 may be in response to rising vacancies amidst higher rates and a slowing economy. (Figure 3, topmost chart) 

 

Since the Q3 2022 peak, construction permits for these sectors have declined.   

 

Construction activities (via permits) of single houses and apartments could be the best representation of the participation of the mom-and-pop segment in the real estate bash. 

 

In any case, widening margins of the TOP 5 have delivered the headline net income boom.  Gyrations of the core inflation have correlated with margins.   

 

The average total margins raced to an unparalleled height of 42% in Q3.   As such, net income ballooned by 37.4% to Php 29.27 billion, 9.7% shy of the Q4 2019 record Php 32.41 billion. (Figure 3, middle and lowest window) 

 

These represent the "seen" part as published in social media headlines. 

 

V. The UNSEEN: Top 5 Property Firms: 9M Cash Reserves Plunged, Debt and Interest Expense Zoom to Historic Highs! 

 

But here is the "unseen."  

  

First, if the property firms have been raking a fortune from margins—which oddly benefited from inflation—why have their cash positions plunged? 

Figure 4 

TOP 5 cash reserves plummeted 34.8% in Q3 2023 YoY and have contracted during the last four quarters. (Figure 4, topmost chart) 

 

Cash reserves hit an all-time high in Q1 2021, but the ensuing downtrend has led it to erase its recent gains.  In Q3 2023, it plumbed to Q2 2020 lows! 

 

Next, why have the same firms been on a borrowing spree?  In Q3, aggregate borrowings of Php 952 billion and interest expenses of Php 11.04 billion have reached historic highs! (Figure 4, middle window) 

 

Here is the thing.   In Q3, net debt increased by Php 35.97 billion.  On the other hand, the total Net income was Php 29.267 billion.  Or, marginal income was higher by Php 7.927 billion YoY from last year's Php 21.295 billion.  (Figure 4, lowest diagram0 

 

No matter how one twists the angle, debt grew faster than income.  From a net margin perspective, the top 5 RE firms borrowed 4.51 pesos for every peso income they generated.  Incredible.  That's if the reported income is accurate at all.   

 

That's not all.   

 

Despite the BSP rate hikes, interest expenses—though at unprecedented levels—remain subdued, which most likely represents debt contracted before the rate increases.   

 

If rates remain elevated for longer, rolling over these liabilities should translate to substantial increases in refinancing costs. 

 

This mounting mismatch—debt growing faster than net income—explains the deterioration of liquidity.  Aside from increasing debt levels, RE firms drew from their cash reserves to finance internal spending and debt repayments. 

 

The data and its extrapolation corroborate the cautious outlook of the global real estate services firm quoted above. 

 

VI. Property Industry’s Demand for Rent: Follow the Money and the Slowing Revenue Growth of Retail and Food Chains  

 

As noted above, because rent has transformed into the anchor of the revenues of the TOP 5 property firms, aside from financing, the health of the retail sector becomes the most crucial factor in forecasting the property sector's prospects and risks. 

Figure 5 

 

First, there is a close correlation between rent revenues and universal commercial bank lending conditions.  Since peaking in Q3 2022 at 13.54%, bank lending growth has halved to 6.65% in Q3 2023.   Rental growth of the top 4 (excluding ALI) culminated in Q3 2022 at 67.34% and has slowed to 14.8% in Q3 2023.  (Figure 5, upper graph) 

 

Second, the frenzied increase in household borrowings coincided with nominal rent revenue growth. (Figure 5, lower chart) 

 

In short, bank lending has financed demand for rent.  

 

Third, the credit boom has created the illusion of "sustainable" consumer spending, which prompted the "race to build supply" response.  

 

Figure 6 

 

However, the moderating bank lending growth has led to slowing revenue for the six biggest (non-construction) retail chains: namely, SM Retail, Puregold, Robinsons Retail, Metro Retail, SSI Groups, and Philippine Seven.  (Figure 6, upper graph) 

 

Since the Q2 2022 pinnacle of 28.6%, revenue growth has slid to 8.27% in Q3 2023 but was up from 6.5% in Q2. 

 

It isn't a coincidence that the oscillation of percentage change has been synchronous. 

 

There has also been a tight correlation between revenues of the four biggest food chains—Jollibee, McDonald's, Shakeys, and Max's—and the TOP 5's rent revenues. (Figure 6, lower chart)  

 

However, growth YoY trends appear symmetrical with TOP 5's rent, as the aggregate revenue growth of Food chains culminated in Q3 2022 at 50.9%, then slowed to 12.9% in Q3 2023. 

 

As a caveat, much of the splendid % growth represents a function of base effects—or comparing a normalized economy with the transition from partially opened post-pandemic conditions.  

 

Human activities are interconnected.  Feedback loops constitute a process and diffuse into a broader segment of the economy over time. 

 

For instance, slowing consumer spending (due to inflation, too much leverage, decreases in passive income, etc.) leads to lower retail revenues (eventually income), which reduces demand for commercial rent.  Stagnant investments or cost rationalizations could lead to reduced profits (or even losses) that could diminish demand for other real estate products, such as office, retail, factory, storage, logistics, and warehouse spaces. 

 

This pressure build-up may also spread to other business edifices such as the MICE (meetings, incentives, conferences, and exhibitions) as well as luxury establishments like accommodations (hotels, resorts, etc.), sports clubs, galleries, and more.  Adjustment to structural malinvestments (sunk costs) will also lead to disemployment, which should expose the surpluses among residential spaces and other institutional structures (schools, health clinics, hospitals, etc.)  

 

Office vacancies represent the weakest industry link.   However, as demonstrated above, stress has been building throughout the industry.  Thus, fragility should spread from "satellite enclaves" to the "integrated structural communities" or from the periphery to the core.  

For want of doubt, unless credit conditions improve or unless productivity gains take over (ideally), the financial and liquidity challenges of the industry, as showcased by the TOP 5, will likely see further corrosion. 

 

To this end, solvency issues among many heavily leveraged property firms should emerge, affecting the balance sheets of banks, which should escalate strains on systemic liquidity.  The ensuing feedback loops raise the risks of economic recession, and worst, a financial crisis. 

 

VII. Q3 & 9Ms Financial Performance of the Property Index; REIT Did Better than their Parents 

Figure 7 

 

Since the top 5 issues comprise over 80% of the PSE's property index, 9M and Q3 revenue, net income, cash, and debt conditions resonate with our earlier discussions. 

 

Anyway, a short note on the REITs included in the PSEi's property index.  

 

In the three quarters of 2023, the Property Index's REITs, which had little leverage, posted net income and cash growth of 8.3% and 11%, respectively.  Supporting the 9M performance was Q3 revenue and net income growth of 15.7% and 10.6%, respectively.  

 

REITs accounted for 5% of the index revenues for both periods.  It also had an 11.4% (9M) and 11.14% (Q3) pie of the net income of the property index. 

 

As a byproduct of the BSP's EZ money regime, REITs are unlikely to elude the coming market clearing process on malinvestments. 

 

VIII. Mainstream’s Addiction to Inflationism, Real Estate Bubble Equals the "Fictitious Wealth." 

 

Finally, in a recent forum, a top official of one of the nation's leading property firms admitted to the industry's addiction to inflationism. 

 

While inflation poses a threat, it also can serve as a boon to the industry because we know that real estate investment still remains to be a very good hedge against inflation. On one hand, there is the threat posed by inflation as a deterrent to the impulse to invest but on the other hand, it can be the same impulse that will generate more interest in the industry,” Mr. Hernandez said. (Businessworld, November 2023) 

 

Because of duration risk, credit-financed real estate can hardly be a hedge against inflation.   

The collateral function of real estate is the anchor of the present bank credit cycle. 

 

Moreover, the performance of RE sales disputes such claims. 

 

Though popular, credit-driven asset bubbles are unsustainable, as the great Austrian Economist Ludwig von Mises warned. 

 

The point of view prevails generally among politicians, business people, the press and public opinion that reducing the interest rates below those developed by market conditions is a worthy goal for economic policy, and that the simplest way to reach this goal is through expanding bank credit. Under the influence of this view, the attempt is undertaken, again and again, to spark an economic upswing through granting additional loans. At first, to be sure, the result of such credit expansion comes up to expectations. Business is revived. An upswing develops. However, the stimulating effect emanating from the credit expansion cannot continue forever. Sooner or later, a business boom created in this way must collapse. (Ludwig von Mises, 1978) 

 

Circling back to the original thesis on the mounting vacancies: Why the cluster of errors? 

 

Central banks (BSP) tampering with interest rates induced false signals that misled entrepreneurs to deploy capital into speculative activities rather than productive investments, resulting in capital consumption. 

 

As the dean of the Austrian School of Economics, Murray N. Rothbard explained: 

 

The cluster of error suddenly revealed by entrepreneurs is due to the interventionary distortion of a key market signal—the interest rate. The concentration of disturbance in the capital goods industries is explained by the spur to unprofitable higher order investments in the boom period. (Rothbard, 2004) 

 

Therefore, because the industry embraced the contortions of Say's Law, "supply creates its own demand," through "build and they will come," their excesses were exposed by the shift to hybrid work and all other factors cited by the global real estate services firm: inflation, high rates, lower economic growth, the exit of POGOs, and cost-cutting measures—most of which are symptoms of malinvestments.   

 

In a recent tweet, economist Michael Pettis described China’s bursting real estate bubble as the unraveling of "fictitious wealth." 

 

Over the past 2-3 decades a huge amount of fictitious wealth was created, with most bank, business, household and government balance sheets, and a great deal of economic activity, being organized around this "wealth" creation. 

 

Rings a bell? 

 

Sadly, the employment of inflationism to generate "wealth," representing a form of redistribution (reverse Robin Hood), would lead to unexpected outcomes for the mainstream. 

 

Yet, this cycle requires the washing out of "fictitious wealth" before a new beginning. 

 

___ 

References  

 

Charles P. Kindleberger and Robert Z. Aliber; Manias, Panics, and Crashes A History of Financial Crises, 5th edition, 2005, p.104  

 

Prudent Investor, Philippine Real Estate: Mainstream Expert Worried Over Increasing Demand-Supply Gap; Q1 2023 Data of Top 5 Listed RE Firms and the Property Index May 28, 2023 

 

Businessworld, Real estate’s return to pre-pandemic levels seen November 24, 2023 

 

Ludwig von Mises, THE NATURE AND ROLE OF THE MARKET, THE CAUSES OF THE ECONOMIC CRISIS: AN ADDRESS (1931) p 161 The Ludwig von Mises Institute, 1978  

 

Murray N. Rothbard, MAN, ECONOMY, AND STATE A TREATISE ON ECONOMIC PRINCIPLES, The Ludwig von Mises Institute P 1000, 2004 

 

Michael Pettis Tweet on China’s "fictitious wealth," November 24, 2024