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?

 

 

How Market Manipulation in the Philippine PSE Magnifies the Risks of a "Black Swan" Event

  

Dubious practices, fraud and embezzlement are common during financial bubbles, which are usually created by central banks’ loose monetary policies and by a poor supervision of the financial sector—Dr. Marc Faber

 

In this issue

How Market Manipulation in the Philippine PSE Magnifies the Risks of a "Black Swan" Event

I. BSP Chief: Black Swans from Risky Investments Based on the Rosy Scenario

II. Parabolic ICT as the Single Benefactor of the March 21st Massive End-Session Pumps!

III. The Rotational Pump from ICT to the Financial Sector

IV. How Market Manipulation Amplifies Systemic Fragility

V. January-February 2024: PSEi 30’s Returns Outperform as Volume Slumped!

VI. Negative Market Breadth, Rising Risks of a Black Swan Event from Sustained Capital Consumption

 

How Market Manipulation in the Philippine PSE Magnifies the Risks of a "Black Swan" Event

 

The BSP Chief recently warned about "Black Swan" events resulting from the market's risky behavior. However, frequent pumps and dumps at the PSE could be examples of such events.

 

I. BSP Chief: Black Swans from Risky Investments Based on the Rosy Scenario

 

We'll open with an excerpt from a recent speech of the BSP Governor covering the publication of the 2023 Financial Stability Report (FSR) [bold added],

 

You have heard of "black swans" indicating highly unlikely surprises or "the butterfly effect" to describe how small things can lead to far-reaching consequences. These are the things we worry about. Indeed, financial market participants often make risky investments based on rosy scenarios. The more widely shared the scenario, the more dangerous it is. When something goes wrong in these scenarios, it sometimes leads to mass panic. There is a rush for the exits, causing massive investments to collapse… We remember the crisis, but we often forget the rosy scenario that led to it.  (Eli Remolona, 2023)

 

The default or mechanical response of almost every political authority or expert is to blame economic volatility on the marketplace.  But they hardly reveal the source of funding and incentives of market participants that lead to such 'market failures.'

 

Besides, abstract attributions like "make risky investments based on rosy scenarios" don't cause boom-bust cycles.  

 

Instead, the fountainhead of increased economic and financial fragility stems from a deepening of the politicization of the economy, channeled through policies that lead to the excesses in the aggregation of many variables like systemic overindebtedness, a massive misallocation of resources, intensive mispricing of markets, and hyperbolizing economic and financial conditions via inflated statistics.

 

If so, have authorities not been a focal point in this "rosy scenario" that breeds "black swan" events?

 

II. Parabolic ICT as the Single Benefactor of the March 21st Massive End-Session Pumps!

 

Let us help in identifying one avenue for a potential "contagion."

 

Though fragrantly evident to the public, the establishment remains remarkably taciturn to the relentless "rigging" of the Philippine equity benchmark, the PSEi 30.

Figure 1

 

An example is the dominance of pre-closing dumps and pumps (Marking the Close—MtC) in three of the week's five trading sessions. (Figure 1, topmost graph)

 

The aggregate volatility from these MtCs totaled about 1.95% of the weekly close of March 15th.  That's about double the .87% advance posted by the PSEi 30 this week (March 22nd).

 

To achieve their end-session target for the PSEi 30, the collaboration by index managers typically involves bidding up/selling down several top-tier issues (at least 5).

 

But Thursday (March 21st) signified a historical event.  The cabal of index managers directed their actions to the share prices of a single firm, ICTSI [PSE: ICT].

 

ICT segued into the 5-minute pre-closing float period up by 2.16%—only to reopen during the runoff-closing period with a shocking spike of 9.28%—a massive pump equivalent to 7.12%! (Figure 1, middle pane)

 

Ironically, there were only 119 trades conducted during the runoff period, with a single institutional broker accounting for 68% of the total!  Only about 16 brokers participated in the massive bid-up, some of which were retail. 

 

In short, a few participants "forced up" ICT share prices in the closing period!

 

Consequently, ICT's free float share of the market cap stunningly flew to an all-time high (ATH) of 9.22% last Thursday!  ICT toppled SMPH for the third-largest PSEi 30 firm! (Figure 1, lowest chart)

 

Because of the intensity of the ICT's advance, PSEi 30 resonated with it: it jumped by .9% to close the session by 1.55%! Incredible.

 

III. The Rotational Pump from ICT to the Financial Sector

 

The next day, though ICT gave up all Thursday's MtC gain and more, index managers rotated their support of the PSEi 30 by propping the financial components, which cushioned the PSEi 30s decline to only 1.17%.

Figure 2

 

The financial index not only gained by 3.34% WoW, but the "full" market share of the big three PSEi 30 banks surged to an unprecedented 18.5% last Friday! (Figure 2, topmost and middle diagrams)

 

As of March 21st, the top 5 market cap heavyweights (SM, BDO, ICT, SMPH, and BPI) accounted for a staggering record 50.98% share! (Figure 2, lowest image)

 

When accounting for the next five largest market caps, their cumulative share of the market increases to 73%!

 

That's right.  Only five to ten components drive the PSEi 30!

 

Beyond that, the mounting concentration of gains not only reflects the intention to artificially prop up the index, it also indicates INCREASED CONCENTRATION RISKS.

 

IV. How Market Manipulation Amplifies Systemic Fragility

 

Further, political policies fuel the distortive effects of market manipulation, as noted back in 2017: (bold original)

 

These growing incidences of vertical price movements have not been isolated from the progressing entropic developments at the PSEi as a result of massive manipulations.

 

Most will be rationalized from a demand shock—new information that alludes to G-R-O-W-T-H regardless of the validity of its premises.

 

In reality, both market manipulation and vertical prices are symptoms of the mortal sins of unabated credit expansion or currency debasement. (Prudent Investor, 2017)

 

Because only a few issues have fueled the upside performance of the headline index, the sustained shortfall in volume points to the unsustainability of its momentum. 

 

Yet, without an increase in disposable incomes or "real" savings, this requires a sustained and intensified increase in inflows from foreign savers.

 

As fund manager John Hussman explained, (bold mine)

 

All securities are essentially a way to trade current saving for a claim on future output. The value of all the securities in the economy derives from the claim on future output that this stock of real and intellectual capital can generate over time. During speculative bubbles and periods of malinvestment, saving is invested in unproductive projects that essentially result in unintended consumption rather than accumulation of productive assets. This means that the stock of outstanding securities is essentially “backed” by a smaller stock of productive capital to service those securities over time. (John Hussman, 2015)

Figure 3

 

Volume spikes rather than sustained increases have characterized the PSEi 30's race to 7,000. Ironically, the pesos’ mainboard volume remains below the Q3 levels! (Figure 3, upper chart)

 

Furthermore, market breadth has barely supported the .87% weekly advance by the PSEi 30 as the advance-decline distribution has been almost neutral for the PSE (490-491) and the PSEi components (15-14 and one unchanged).

 

Though the character of the 'rosy scenario' presented by the upswing of the PSEi 30 has been starkly different from a generalized boom phase of a full-fledged credit bubble as exemplified by India's case, this imperative to force upon a bull market cosmetically and inorganically shares a similar outcome: capital consumption that leads to a bubble bust. (Figure 3, lower visuals)

To sum it up, the intensifying vertical price actions of a few PSEi 30 heavyweights, backed by rotational pumps, are likely indications of mounting desperation to foster a bull market.  However, its inability to sustain such momentum could indicate buyer exhaustion and a potential (secular) reversal.

 

V. January-February 2024: PSEi 30’s Returns Outperform as Volume Slumped!

 

To expand our insights on the local market structure, let's analyze the first two months of PSE/PSEi 30's performance in 2024.

Figure 4

 

Sure enough, it's impressive that the PSEi 30 reached 6,900 in February, but the gross volume, which includes block trades and cross sales, tumbled to levels last seen in 2011!  (Figure 4, upper chart)

 

Put another way, while the PSEi 30 vaulted by 7.7% from end-December through February 2024 to shatter the decaying returns over the long term, this occurred in the face of sputtering volume.  That is, the PSE's gross volume plummeted 26.4% YoY! Amazing! (Figure 4, lower graph)

Figure 5

That's a measure of the general performance.  As a share of the total, the first two months saw a rebound in the volume of the holdings (2 years) and the property sector (from last year) compared to the slowing Financials (YoY).  (Figure 5, topmost diagram)

 

In contrast, the peso volume of industrials and services, which include the "Fly Me to the Moon" ICT, resumed their downward trek (in the last 2 and 3 years respectively).  Remarkable. (Figure 5, middle image)

 

The pecking order of peso volume by sector share in the first two months of 2024: Holdings, Industrials, Financials, Property, and Services. (Figure 5, lowest window)

Figure 6

 

Paradoxically, the financial index, which stormed towards its 2018 All-time high (ATH), saw its peso volume contract by 30.5% YoY! (Figure 6, upper chart)

 

Since the BSP's unprecedented rescue of the banking system in 2020, Financials have outperformed.

 

Specifically, the PSEi 30 banks have been responsible for most of the gains in the Financial Index. Apart from the ICT sector, rotational pumps into PSEi banks have contributed significantly to the PSEi 30's advances.

 

VI. Negative Market Breadth, Rising Risks of a Black Swan Event from Sustained Capital Consumption

 

It is not just volume but market breadth remains in stagnation.  Despite marginal improvements (from 2020), the advance-decline spread remained negative. (Figure 6, lower image)

 

The volume slump and poor market breadth reveal the lack of participation from the general public.

 

The genuine bull market climaxed or culminated in 2013, after which the rest of the index performance was primarily characterized by strategic maneuvers.

Figure 7

 

Let us unpack this.

 

The deficiency of the PSE’s trading volume didn't emerge out of a vacuum. These can be traced back to the diminishing liquidity in the banking system (expressed by the cash-to-deposits downtrend), which has, in part, been exacerbated by the swelling of the government’s deficit spending.  (Figure 7, top and middle graphs)

 

Bluntly put, diminishing volume is a symptom of capital consumption.

 

In the end, what have the authorities done to decrease the odds of an outbreak of (future) economic volatility or a "black swan" event resulting from (today's) market manipulation or "risky investments based on rosy scenarios?"

 

What will they do to diminish its impact?  

 

Do they even know? Have they been "asleep at the wheel?"

 

Or have 'risky investments' become too politically entrenched to perpetuate their refinancing and credit expansion to fund malinvestments, which have been peddled to the public under a statistically 'rosy scenario'? (Figure 7, lowest chart)

 

"Market failure," really?

___

References

 

Eli M Remolona, Governor of Bangko Sentral ng Pilipinas:  Message during the release of the 2023 Financial Stability Report, 13 February 2024, Bank of the International Settlements, March 22, 2024

 

Prudent Investor Newsletter, BW-SSO Price Actions and Market Manipulations Signify as Twin Symptoms of the Raging Credit Bubble! February 13, 2017

 

John P. Hussman, Ph.D Stock-Flow Accounting and the Coming $10 Trillion Loss in Paper Wealth Hussman Funds, April 6, 2015