The simplest case of a purely financial bubble can be found in real estate. The trend that precipitates it is the availability of credit; the misconception that continues to recur in various forms is that the value of the collateral is independent of the availability of credit. As a matter of fact, the relationship is reflexive. When credit becomes cheaper, activity picks up and real estate values rise. There are fewer defaults, credit performance improves, and lending standards are relaxed. So at the height of the boom, the amount of credit outstanding is at its peak, and a reversal precipitates false liquidation, depressing real estate values—George Soros
In this issue
This Time is Different! PSE’s Property Index Soars to Record Highs as the PhiSYx Lags!
-Marked Divergence Between the PhiSYx and Property Index Surfaces
-The Property Sector’s Winner Take All!
-Bullish on Artificial Foundations? Property Sector Earnings Dependent on Credit Expansion and Politics Driven Overseas Chinese Buyers!
-Has ALI’s String of Special Block Sales Incited the Breakout? How Record Highs Are Forged
This Time is Different! PSE’s Property Index Soars to Record Highs as the PhiSYx Lags!
Marked Divergence Between the PhiSYx and Property Index Surfaces
For the first time since January 2018, the PSE’s Property Index vaulted to fresh record highs!
A 2.68% spike in the Property Index’s weekly returns, powered mainly by Ayala Land’s 3.19% and SMPH’s 3.28%, has set such a milestone.
But it has been different, definitely, this time around!
For the first time since 2007, a stark divergence between the property index and the PSYEi 30 has surfaced!
Synchronous actions by the headline index and the property index have characterized the previous landmarks of 2013, 2015, 2016, and 2018: Both indexes set records and dropped from it at the same time. (figure 1 upper window)
The nuance between the previous episodes has been in the degree of participation and the leadership role of the composite sectors.
Figure 1
The property sector’s feat comes as the PhiSYx remains 13.14% off its January 2018’s apex.
And from the undulations since pre-Lehman era, though both moved in uniformity, the property sector trailed the Phisix until the climax of 2017. (figure 1, upper window; red line over the black line)
Moreover, in 2017 until January 2018, the property sector overlapped with the PhiSYx demonstrating its improved contribution to the latter.
Since then until the present, the property sector has virtually outclassed the PhiSYx. The property sector has, thus, assumed leadership of the PhiSYx.
The Property Sector’s Winner Take All!
Year-to-date returns by sector confirm such developments.
As of April 26th, the property sector leads with a stunning 18.31% returns. Far next was services with 9.9%, the industrials with +4.07% and the holding firms with +2.64%. (figure 1, middle window)
Last but not least the Banks/Financials posted a 2.03% contraction! Banks have outperformed the PhiSYx in the run-up to 2008 and during the run-up to May 2013 peak. Ever since, banks have lagged the PhiSYx (figure 1, lower window)
It has been a winner take all for the Property index!
From a different angle, the headline index's 5.4% 2019 returns have been owed mainly to the property sector!
Not only does this signify the intensifying risks of concentration, but such divergence puts into the spotlight the dearth of participation of the broader members of the headline index.
Even worst, the banking sector, the country’s financial heart and the property’s sector foremost financier, has become a significant drag to the PhiSYx.
Bullish on Artificial Foundations? Property Sector Earnings Dependent on Credit Expansion and Politics Driven Overseas Chinese Buyers!
Of course, earnings and the introduction of the REITs, as popularly held, will supposedly play a significant role in the blossoming of the industry.
Figure 2
Because of the base effect, the PSYEi property representatives delivered a majestic 18.86% or Php 14.314 billion in annual net income growth last year.
Annual income grew by 25.5% or Php 25.6 billion based on the members of the property index.
The mainstream focuses on the brandished huge percentages and not on the nominal amounts.
Four firms, namely A. Brown, 8990 Holdings, Primex and Philippine Realty, have yet to disclose their annual reports. For the PSE, Alliance Global has yet to issue its 17Q even as 1Q earnings begin to roll in. Why the procrastination to publish their 17As by many firms?
But behind every benefit lies its corresponding costs.
Because Robinsons Land (RLC) deftly substituted a significant portion of its debt with equity, via stock rights, PSYEi property representatives’ debt grew by only 5.83% or by Php 28.8 billion last year.
Or, the property sector’s big four delivered Php 14.314 billion of marginal net income at the cost of Php 28.8 billion in marginal credit. That’s a ratio of Php 2 debt for every peso earned. Again thanks to RLC, that number has been suppressed.
For the members of the Property Index, annual net income growth of Php 25.6 billion came at the cost of Php 68.044 billion in debt. That’s a ratio of Php 2.68 credit for every peso earned.
On the aggregate, the annual net income for the PSYEi property and the Property index had been at Php 90.15 billion and Php 126.124 billion, respectively.
On the other hand, the annual aggregate debt for the PSYEi property and the Property index had been at Php 523.04 billion and Php 786.9 billion, correspondingly.
That would signify credit intensity of Php 5.8 for every peso earned for the PSYEi property and Php 6.24 for every peso earned for the Property index!
That’s a lot of leverage involved, grounded, of course, on the perpetuation of the beneficial effects from easy money policies.
And that’s a lot of optimism that demand from foreigners, mostly from the Chinese, will continue to bolster Philippine real estate.
Back in the 1Q of 2018, this comment from a property developer reverberates, from Nikkei Asia (March 30, 2018): “The real estate arm of DMCI Holdings, a major condominium builder in Metro Manila, said over 50% of its international sales in the first quarter are from Chinese, with mainland investors snapping up units. "If we don't control them, it could go up to 90%. No kidding," DMCI President Isidro Consuji said early this month. DMCI has imposed a self-restriction of "one buyer, one unit." "Our worry is that if we have too many absentee residences, you might have what you see in Shanghai or Beijing -- totally sold buildings but nobody is living there. It's also out of our objective of selling to end users -- preferably local end users," Consunji said.” [bold added]
The highlighted statement signifies a STRIKING ADMISSION of an extant property bubble in the Philippines!
Due to the government’s conduct of its foreign affairs, the Philippines have been IMPORTING China’s bubbles, thereby aggravating the current conditions. And because of mass buying of overseas properties by Chinese have affected housing prices that have spilled over into domestic politics in Canada, New Zealand, and Australia, several of them have responded with a variety of curbs (Canada, New Zealand, Australia). These experiences demonstrate the vulnerability of excessive reliance on overseas demand.
Whether about easy money or foreign buyers, demand for domestic real estate has originated from artificial foundations.
How about the unseen opportunity costs of speculating on real estate?
And given the arbitrariness of a considerable element of the published Financial Statements, the accuracy of the financial conditions of the industry hardly represents a certainty.
Even the books of property or any listed firms may conceal the actual exposures on leverage or gearing.
Nonetheless, as demand remains uncertain, debt should be fixed.
And notwithstanding the leverage exposures, Price Earnings Ratio (PER) for the two biggest record-breaking firms has remained extravagant. (see figure 2 lower window)
Has ALI’s String of Special Block Sales Incited the Breakout? How Record Highs Are Forged
Last week’s record run in share prices of the largest two property firms came at the heels of the announcement that Ayala Land would test the REIT market.
Media reported ALI’s “plans to raise about $500 million listing certain office buildings in Makati City through the REIT framework, which allows companies to spin off recurring income assets as publicly-traded vehicles on the Philippine Stock Exchange.” (Inquirer)
On Thursday, April 25th, Ayala Land announced that it intends to publicly list as a Real Estate Investment Trust ("REIT"), AyalaLand REIT, Inc. ("AREIT"), and seed AREIT with prime, Grade-A commercial office assets in Makati representing its offer structure.
The REIT’s basic business model: “The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders”. (Investopedia)
In contrast to popular wisdom, there’s no magic in REITs except that as shares held in a trust it pays out a larger amount of dividends.
But ALI’s entry to the REITs may just be a part of the story.
Since April, significant amounts of Special Block Sales of Ayala Land shares have been reported almost daily by the PSE.
With prices rising almost daily, it looked as if the string of Special Block Sales had been guiding the market’s pricing of ALI’s share upwards. Samples of them shown below (figure 3 upper window)
Additionally, the enormous almost daily Special Block Sales may have signaled the possibility of the unveiling of a significant event.
That event did materialize; ALI's entry to the REITs.
Figure 3
How do milestones occur on the PSE? The intraday charts of ALI, SMPH and the PSYEi on the 25th of April demonstrate this. (charts from colfinance and technistock)
With the market resisting any significant moves in the regular session, the index managers used the market intervention period to mark-the-close or “force up” prices of these issues to cement their record performance.
Since all actions have consequences, the serial pumping on the PSYEi’s real estate stocks have virtually pushed up its weightings relative to non-real estate PSYEi firms and relative to lesser weighted PSYEi real estate firms.
That said, the PhiSYx has become increasingly dependent on the sustained performance in the share prices of the two largest property firms.
So would this mean that such divergence represents a new normal for the PhiSYx?
Figure 4
Or, would these outperformers pull up the laggards to end the divergence positively? Or, what would happen if laggards should weigh on today’s market’s darlings? Will divergence transmute into negative convergence?
Figure 4 shows three of the four PhiSYx property stocks at records or near record highs in the backdrop of the recent rise of yields of Philippine treasuries (and inverted curve).
Truly interesting times!
