The Philippines’ Top 5 Property Developers: 2023 and Q4 Performance: The Seen and Unseen

  

Like all bubbles, it ends when the money runs out—Andy Kessler

 

In this issue:

 

The Philippines’ Top 5 Property Developers: 2023 and Q4 Performance: The Seen and Unseen

I. Top 5 Property Developers: Remarkable Headline Performance in 2023

II. 2023 Top 5 Property Developers:  Beneath the Headlines, Soaring Debt, Interest Expense and Decaying Liquidity

III. Big Boys’ Club: Q4 2023’s Incredible Spike in Real Estate Sales!

IV. The Real Estate Sector’s Predicament: More Signs of Escalating Concentration and Other Risks

V. Slowing Consumers, Rising Risks of a Material Slowdown in Rental Revenues

VI. Rising Imbalances from Credit-Funded Real Estate Demand Amidst Rising Debt-Financed Supply

VII. How Inflation Benefited the Top 5 Developers and Why this is Unsustainable

VIII. The BSP’s Path Dependence: The Rescuing of Banks and the Property Sector

 

The Philippines’ Top 5 Property Developers: 2023 and Q4 Performance: The Seen and Unseen

 

The Philippines' top 5 real estate developers showed an impressive headline performance in 2023 and Q4. Beyond that, there are rising risks from multiple fronts.

 

I. Top 5 Property Developers: Remarkable Headline Performance in 2023

 

Here's a summary of the aggregate financial performance of the top 5 PSE-listed property developers—or the 'Big Boys Club' (BBC)—in 2023. The firms included are SM Prime Holdings [PSE: SMPH], Ayala Land [PSE: ALI], Megaworld [PSE: MEG], Robinsons Land [PSE: RLC] and Vista Land & Lifescape [PSE: VLL].

 

The headlines looked great!

Figure 1

 

First. Despite a 15.4% increase to Php 422.7 billion, revenues remained lower than the 2019 record of Php 431.2 billion. (Figure 1 topmost pane)

 

Moreover, the pace of growth moderated from 19.9% in 2022 to 15.4% last year. SM Prime led the pack with a 21.09% growth rate, while RLC's 7.7% contraction pulled revenues lower.

 

Second.  Real estate (RE) sales surged from 7.8% to 11.03% in 2023, driven by ALI and VLL's growth of 20.44% and 19.07%, respectively. It's important to note that ALI's RE sales included rental revenues. However, RE sales in pesos remained 12.8% below the 2019 peak. (Figure 1, second to the highest image)

 

But here’s the thing: since peaking in 2021, the share of RE revenues to the total plummeted to its lowest level in 2023, indicating that the bulk of the BBC’s revenues emanate from rent. (Figure 1, second to the lowest graph)

 

Third. While rental revenues represented the core, growth slowed from 51.5% to 20.7%.   In pesos, rental revenues in 2023 reached an all-time high of Php 157.6 billion, surpassing the previous milestone of Php 133.43 billion set in 2019. (Figure 1, lowest chart)

Figure 2

 

Fourth. Net income reached a record of Php 112.9 billion, marking a brisk increase of 29.6% or a net gain of Php 25.8 billion. This marks the second consecutive year of 29% growth in 2023. VLL and SMPH posted the fastest growth, with increases of 39.2% and 32.92%, respectively. (Figure 2, topmost visual)

 

II. 2023 Top 5 Property Developers:  Beneath the Headlines, Soaring Debt, Interest Expense and Decaying Liquidity

 

Fifth.  The cumulative debt level surged to a record Php 950.5 billion, marking a 5.8% increase and reaching back-to-back record highs in pesos. (Figure 2, second to the highest window)

 

While the pace of increase was slower than income or revenue growth, it still grew by Php 52.31 billion, more than DOUBLE the income growth.

 

Ayala Land and SMPH, the two largest developers, saw the most significant peso gains of Php 22.215 billion and Php 14.3 billion, respectively.

 

Sixth. High-debt loans and elevated interest rates pushed financing costs higher. Interest expenses surged by 14.6%—the second-highest growth rate since 2018—to a historic Php 5.121 billion in 2023, representing the highest-level share of revenues at 1.21%. (Figure 2, second to the lowest graph)

 

Seventh and last.

 

The cash reserves of the Big Boys Club fell for a second consecutive year to their lowest level since 2018, dwindling to Php 90.4 billion. This represents the lowest level in the context of cash-to-debt and cash-to-interest payments since 2018. (Figure 2, lowest image)

 

With record net income and debt increases, why the plunge in the BBC’s liquidity conditions?

 

Are these companies overstating the headlines or understating the delinquencies?

 

That's the unseen segment behind the good news.

 

III. Big Boys’ Club: Q4 2023’s Incredible Spike in Real Estate Sales!

 

More to the point.

 

Another perspective is the performance on a quarterly basis. After all, the annual report signifies an accumulation of the four quarters. From here, we observe changes that led to the annual outcome.

 

Surprisingly, after slightly picking up in Q2 and Q3 compared to last year and Q1's slack, real estate sales spiked in Q4, both in peso (Php 78.8 billion) and in percentage (25.8% YoY).

 

However, it's important to note that ALI includes rent in its real estate revenues.

Figure 3

The record surge in RE sales (in pesos) powered total revenue growth (20.3% YoY) to a fresh record of Php 126.4 billion. (Figure 3, topmost chart)

 

Stunningly, the Q4 spike elevated the sales level of the Big Boys' Club, resulting in its higher share of Q4 (nominal) NGDP. (Figure 3, second to the highest image)

 

IV. The Real Estate Sector’s Predicament: More Signs of Escalating Concentration and Other Risks

 

Alternatively, if the Real Estate GDP estimates are accurate, the BBC accounted for 35.35%, which means that even with numerous competitors, the group continues to corner a larger share of the industry!  Talk about the Big Boys getting Bigger! (Figure 3, second to the lowest diagram)

 

The Real Estate NGDP and Real Estate revenues seem to have parted in direction in Q4.  (Figure 3, second to the lowest window)

 

With the spike in RE revenue growth and a 35% share, it's curious that the industry reported only an 8.7% growth rate (NGDP)—which likely indicates that the rest of the playing field experienced significantly below-average growth in Q4!

 

Or, has the BBCs cannibalized the markets of their lesser competitors, including the SMEs?

 

Importantly, it reveals the industry’s mounting concentration risks.

Figure 4

After all, the sector's declining contribution to real GDP, coupled with its increasing share of the bank lending portfolio, is symptomatic of credit-fueled overspending or malinvestments. (Figure 4, topmost chart)

 

Rising vacancies are just another sign of imbalances or supply-demand disorder.

 

Furthermore, given that the growth of the BSP’s real estate index materially slowed in Q4, this likely indicates a slowdown in speculative activities in the secondary markets, with the same activities shifting towards sales via the primary markets (property acquisition via developers). (Figure 4, middle picture)

 

It is important to point out too that the property sector and banks are closely intertwined or "joined at the hip." The property sector accounted for a significant share of Universal Commercial Bank loans: 23.8% of production loans, 21.1% of net RRPs loans, and 20.4% of gross RRPs loans. (Figure 4, lowest diagram)

 

That is to say, the industry’s decaying liquidity conditions and overreliance on leveraging to generate revenue and income growth are also manifestations of accruing imbalances.

 

V. Slowing Consumers, Rising Risks of a Material Slowdown in Rental Revenues

 

There’s more.

 

Risks are rising even in the industry’s core revenues: rental operations.

Figure 5

 

The decelerating cumulative revenue growth of listed non-construction retailers (SM Retail, Puregold, Robinsons Retail, SSI Group, Philippine Seven, and Metro Retail) mirrors the moderating growth of the BBC's rental revenues. (Figure 5, topmost window)

 

Since reaching its peak of 28.6% in Q2 2022—attributed to the BSP’s unprecedented injections and the ‘reopening’—year-over-year growth has steadily declined. The aggregate sales growth of the retail titans slowed further from 8.27% to 8.23% in Q4. (Figure 5, middle image)

 

Following the money trail, the slowing universal commercial bank credit growth rate has aligned with the BBC’s rent revenue growth. Credit growth has been indicative of the demand for rents.

 

By inference, rising rates would eventually exert pressure on rental revenues as vacancies increase due to retailers' faltering viability.

 

In short, misled by false monetary signals, retail entrepreneurs rush in to capitalize on the highly anticipated boom in consumer spending, even as the latter’s spending capacity is being eroded by inflation, the crowding-out effects of deficit spending, and malinvestments.

 

Such increasing divergence should amplify the exposure of malinvestments as unviable ventures.

 

VI. Rising Imbalances from Credit-Funded Real Estate Demand Amidst Rising Debt-Financed Supply

 

It's not just rent, but also the demand for real estate that has been anchored by bank credit expansion.

 

Therefore, it's unsurprising to see real estate (RE) revenues boosted by an upswing in the bank's consumer real estate credit growth.

 

The banking system’s real estate consumer loans grew by 7% in Q4 2024. However, its 38.4% share of consumer loans signifies the lowest since March 2020, as credit cards and salary loans have outperformed. (Figure 5, lowest diagram)

 

By the same token, unless productivity defines the character of the economy's development, the increasing credit-funded bets on the property sector would prove unsustainable.

 

Rising supply in the face of leveraged demand further magnifies its various financial and economic risks.

 

VII. How Inflation Benefited the Top 5 Developers and Why this is Unsustainable

 

That's not all.

Figure 6

 

The era of inflation has benefited property firms. Profit margins rose alongside the core CPI. Expanded profit margins have contributed immensely to the so-called 'bottom line,' supported by bank credit growth. (Figure 6, topmost and middle charts)

 

The fact of the matter is that the industry breathes in leverage, which drives the industry’s survival and expansion while providing less and less economic value added. (Figure 6, lowest graph)

 

The fiat money-based financial system requires ascending property prices to increase collateral values that buttress credit expansion. Therefore, policies have always been geared towards this process.

 

Unfortunately, diminishing returns plague the artificial boom from inflationism—where rising rates in response to inflation, malinvestments, and falling savings offset easy money policies.

 

VIII. The BSP’s Path Dependence: The Rescuing of Banks and the Property Sector

 

Ultimately, despite elevated inflation, the BSP will likely resort to its 'path dependence' of implementing an easy money regime when confronted with economic and financial risks.

 

It will likely deliver the 2020 bailout template, incorporating a mix of monetary policy rate cuts, direct and indirect liquidity injections (via financials), and revive, extend, and expand capital, regulatory, and operational relief measures.

 

On the other hand, political authorities will ramp up their fiscal tools, 'stabilizers,' where the political justification to increase defense spending will likely play a critical role in the coming series of 'stimulus.'

 

Deficit spending to GDP will hit new milestones.

 

The vent for all the series of political rescues of the elites will be vented on the exchange rate: the USD Peso.

 

Figure 7

 

Lastly, the recent market rout stock market rout has been led by the shares of the BBC.  

If anything, the recent downshift in their share prices reinforces a massive "rounding top." (Figure 7)

 

Have share prices of the Big Boys' Club been showing the way?

 

 

Robinsons Retail and Robinsons Land 2023 Performance: Assessing the Health of the Philippine Consumer

  

The only way to make an economy richer per capita is by increasing per capita productivity, which means investing in productivity-enhancing research and technology and in needed infrastructure. Surging asset prices increase the wealth of individuals, but not of the system—Michael Pettis

 

In this issue:

Robinsons Retail and Robinsons Land 2023 Performance: Assessing the Health of the Philippine Consumer

I. Robinsons Retail’s 2023 Record Sales and Profit Margins Anchored on Negative Real Growth as Net Income Fell

II. RRHI’s Topline Performance in the Lens of the Consumer’s Health

III. RRHI Expands Leverage to Finance Increased Exposure to Banks as Liquidity Issues Emerge

IV. Robinsons Land’s 2023 Rental Revenues Soar to Historic Levels (Diverging from RRHI’s Performance)!

V. Record RLC’s Net Income Levels Despite Consumer Health in Question

VI. Robinsons Land’s Real Estate Sales Under Pressure; Increasing Leverage Means Escalating Fragility

 

Robinsons Retail and Robinsons Land 2023 Performance: Assessing the Health of the Philippine Consumer

Underneath the bullish headlines, the 2023 performances of Robinsons Retail and Robinsons Land unveil substantial signs of fragility.  

I. Robinsons Retail’s 2023 Record Sales and Profit Margins Anchored on Negative Real Growth as Net Income Fell

Figure 1

 

In 2023, one of the leading retail chains, Robinsons Retail Holdings [PSE: RRHI], reported an increase of 7.44% in revenues to a record PHP 192.13 billion, which was driven by a 3.71% store expansion. (Figure 1, topmost chart)

 

The 2023 revenue growth was less than half the pace of the 16.6% in 2022.

 

In 2023, its blended same-store sales registered at 3.91%, which was about a third of the 11.8% in 2022.

 

The thing is, with the annual CPI at 6%, the real revenue growth of 1.44% mainly came from new stores, as identical store sales registered a contraction. (Figure 1, middle window)

 

Interestingly, boosted by inflation, RRHI's profit margins reached a record high in 2023, which increased its buffers.

 

Nonetheless, its net income plunged by 28% in 2023 to Php 4.7 billion, or net income attributable to equity holders plummeted 29.9% to Php 4.1 billion "weighed down by foreign exchange losses, equitized losses from investment in associates and interest expense on loans," according to its annual report. (p.38) (Figure 1, lowest image)

 

II. RRHI’s Topline Performance in the Lens of the Consumer’s Health

 

Figure 2

 

In the context of the GDP, aside from benefiting from rising inflation through higher margins, the deceleration in household GDP resonated with the firm's sales per store and overall revenue growth. (Figure 2, topmost and second to the highest graphs)

 

However, the slowdown in RRHI's revenue growth was broad-based, with only the drug segment, the company's second-largest contributor after the supermarket, showing improvements in growth rates, i.e., from 10.6% in 2022 to 13.4% in 2023. (Figure 2, second to the lowest window)

 

Interestingly, the fluctuations in the CPI mirrored the fluctuations in RRHI's quarterly revenues. (Figure 2, lowest chart)

 

Said differently, the consistency of the relationship depicts causality.

Figure 3

 

And the brisk but peaking household credit boom (23.97% in 2023) appears to have contributed significantly to the slowing of its sales growth or the "law of diminishing returns".

 

Unsurprisingly, consumers increased their use of credit to offset the decline in their purchasing power, which allowed RRHI to boost its margins.

 

III. RRHI Expands Leverage to Finance Increased Exposure to Banks as Liquidity Issues Emerge

 

Curiously, RRHI increased its equity exposure in BPI to 4.4%, funded with a long-term Php 15.5 billion (Php 10.65 billion and Php 4.84 billion) loan (p.48).  (Figure 3, topmost diagram)

 

In January 2023, the Bank of the Philippine Islands merged the company's bank, Robinsons Bank, into its fold. (p.5)

 

RRHI increased its exposure to BPI to 6.5% with the recent share acquisition, which comprised about a tenth of the firm's Php 155 billion assets in 2023.

 

Consequently, the firm's interest expense soared to an all-time high of Php 3.122 billion, as the company's debt load also spiked to an unprecedented Php 21.4 billion. (Figure 3, middle chart)

 

Additionally, as the firm's cash reserves plunged from Php 17.8 billion to Php 13.2 billion, the gap between the short-term debt continues to narrow. (Figure 3, lowest chart)

 

The increasing burden of the firm's debt levels, supporting its non-retail expansion, coincides with mounting strains in credit-financed consumer spending. This suggests increasing uncertainty and risks.

 

Moreover, the retail industry appears to be undergoing an "investment boom" despite a slowdown in consumer spending, as evidenced by retail sales and income.

 

Such divergence or developing mismatches exemplify "malinvestments" resulting from the mispricing caused by inflation.

 

IV. Robinsons Land’s 2023 Rental Revenues Soar to Historic Levels (Diverging from RRHI’s Performance)!

 

Figure 4

 

RRHI's sister firm, Robinsons Land Corp [PSE: RLC], posted a 19.1% surge in rental income, the percentage share of the total soaring to 44.5%.  (Figure 4, topmost graph)

 

However, due to the 51% plunge in real estate (RE) sales, RLC's total sales growth contracted by 7.7%. (Figure 4, middle pane) 

 

Moreover, mall rental margins exploded to a record 70.5%, which powered its % share of the total significantly higher. (Figure 4, lowest two images)

 

These advances occurred even as the company's shopping mall occupancy rate was reported at 92% (or an elevated vacancy rate of 8%).

 

Once again, the soaring margins amidst rising CPI benefited big property firms like RLC, which have relied extensively on credit expansion for operations.

 

Figure 5

 

The lending growth rates of Universal Commercial Bank (UC) to the trade and real estate industry have paralleled RLC's debt growth. UC bank lending to these industries grew by 9% in 2023, while RLC’s debt expanded by 5.5%. (Figure 5, topmost image)

 

Additionally, the spike in credit card growth (30.1% YoY) has had a significant impact on RRHI and RLC's sales growth. (Figure 5, second to the highest diagram)

 

More pointedly, demand for the retail and real estate industries has been heavily reliant on bank credit.

 

V. Record RLC’s Net Income Levels Despite Consumer Health in Question

The substantial improvements in margins from the shopping mall rental and hotel businesses contributed the most to RLC's record net income levels (Php 13.4 billion) in 2023—on the back of easing growth rates. (Figure 5, second to the lowest and lowest graphs)

 

In any case, consumer conditions ultimately determine the feasibility of the retail industry and, subsequently, the leasing operations business of shopping mall operators, as well as real estate sales.

 

Unless supported by productivity growth or increases in real savings (production less consumption), credit-financed spending only draws from the future and is therefore unsustainable.

 

Worst, the crowding-out effect of the unproductive colossal government deficit spending only weakens private-sector consumption.

 

That is to say, if the retail industry struggles to increase or maintain its profit rates, this race-to-build supply or "build and they will come" precept, anchored in the assumption of unfettered consumer spending, will likely result in considerable vacancy rates and rising accounts of "white elephants."

 

VI. Robinsons Land’s Real Estate Sales Under Pressure; Increasing Leverage Means Escalating Fragility

Figure 6

 

Moving into the RLC's real estate operations, while their operations in China (Chengdu Xin Yao project) bore the brunt of the plunge in real estate sales, the slump also includes local operations, particularly the 38% cascade in the firm's horizontal projects (Robinsons Homes). (p.264) (Figure 6: highest and second to the top windows)

 

Although real estate margins soared in 2023, the decrease in sales led to a decline in its share contribution. (Figure 6: second to the lowest diagram)

 

Consistent with our earlier theme of credit-driven demand, RLC reported historic debt levels of Php 46.96 billion.

 

With a rising debt stock and higher-for-longer rates, the firm's financing costs, like its retail counterpart, also hit an all-time high at Php 1.91 billion. (Figure 6, lowest graph)

 

All of these factors have evidently been overlooked by the consensus. Essentially, increased reliance on leverage translates to weaker future demand and greater credit risks.

 

And given the interconnectedness of everything, mounting sectoral fragility translates to escalating systemic risks

___

References:

Robinsons Retail Holdings, 17-A Annual Report, PSE.com.ph, March 27,2024

Robinsons Land Corporation 17-A Annual Report, PSE.com.ph, March 25, 2024