A major spinmeister of the Philippine real estate sector, Global Property Guide, has gone schizophrenic
By the way, schizophrenia is defined by dictionary.com as a mental “state characterized by the coexistence of contradictory or incompatible elements”
Reason? GPC have been entangled in a dire dilemma. They have been afflicted with cognitive dissonance in defending the faltering boom. Hence the schizo!
On the one hand, the international property research outfit and broker remains steadfastly bullish on Philippine real estate sector, where it sees rising property prices as tantamount to economic prosperity
Yet on the other hand, it goes on to list more and more factors of concern that has afflicted the industry in 1Q 2016.
So the surfacing blights in the real estate sector has rendered the consensus, as epitomized by outfits such as GPG, in a facetious state of confusion.
Here is the opening:
The Philippines´ residential property market has performed spectacularly, due to robust economic growth. During the year to Q1 2016, the nationwide residential real estate price index rose by 9.2% (8% inflation-adjusted), according to the Bangko Sentral ng Pilipinas (BSP), the country’s central bank.
Quarter-on-quarter, the index rose 1.9% (1.9% inflation-adjusted) in Q1 2016. The residential real estate price index, published every quarter, is based on bank reports on residential real estate loans.
See? Rising prices equals prosperity. Period.
Before I proceed, I’d like to take into account what I wrote in October 2013 Cracks in the Philippine Property Bubble? (October 7, 2013) as signifying the self-limiting factors or natural barriers of property bubbles.
Property bubbles will hurt both productive sectors and the consumers. Property bubbles increases input costs which reduces profits thereby rendering losses to marginal players but simultaneously rewarding the big players, thus property bubbles discourage small and medium scale entrepreneurship. Property bubbles can be seen as an insidious form of protectionism in favor of the politically privileged elites.
Property bubbles also reduces the disposable income of marginal fixed income earners who will have to pay more for rent and likewise reduces the affordability of housing for the general populace.
Again GPG enumerates new factors, aside from the previous, namely slowdown in price growth of condo units in the Commercial Business District (CBD), reduction in rental prices and rising accounts of vacancies.
That’s aside from the “oversupplied” “Barrio Fiesta” “ghost cities” of the middle income market that has partly been brought about by the failure of the BPO industry to become buyers of such market
First, the slowdown in CBD condo prices: “Prices of high-end condominium units in Metro Manila’s CBDs rose at a much slower pace. The average price of a luxury 3-bedroom condominium unit in Makati central business district (CBD) rose by a modest 2.4% (1.23% inflation-adjusted) during the year to Q1 2016 to PHP151,622 (US$3,203) per square metre (sq. m.), according to Colliers International - the lowest y-o-y increase in Makati CBD since Q3 2010. During the latest quarter, condominium prices increased 0.2% (0.2% inflation-adjusted) in Q1 2016. (bold mine)
Reason and projection? “Metro Manila’s CBDs are expected to slow due to a demand /supply mismatch.”
Read again: “due to a demand /supply mismatch.”
Holy cow! My warnings have now transformed into a mainstream reality!!!
Despite demand /supply mismatch, the continuing downpour of supply!
“In the five major districts in Metro Manila, three residential projects were completed in the first quarter of 2016 – all in Fort Bonifacio: The Venice Luxury Residence-Carusso Tower (330 units), The Venice Luxury Residences-Dominico Tower (330 units), and Viceroy McKinley Hill (320 units). For the rest of 2016, around 11,700 units are expected to be delivered in Metro Manila’s five major CBDs, according to Colliers. Half the new supply will be in Fort Bonifacio, 30% in Makati CBD and the remaining 20% in Rockwell, Ortigas, and Eastwood.”
That’s aside from the 77% surge in the issued residential license to sell.
Now one can see where the 1Q and 2Q Philippine GDP and listed firm’s eps growth has been coming from: the race to build supply!
Now the moderation in rental rates: “Residential rents, amidst stable residential supply and low absorption rates. In the first quarter of 2016: -In Makati CBD, monthly residential rents fell by 1.6% q-o-q to an average of PHP869 (US$18.36) per sq. m. -In Fort Bonifacio, monthly residential rents dropped 2% q-o-q to PHP873 (US$18.44) per sq. m. -In Rockwell, monthly residential rents dropped 0.5% q-o-q to an average of PHP958 (US$20.24) per sq. m.-In Ortigas Center, monthly residential rents rose by 2% q-o-q to PHP516 (US$10.9) per sq. m. Rents in these locations are projected to drop further by 2% to 3.2% in the next 12 months, according to Colliers.”
Rising rental vacancies: “In Makati CBD, residential vacancy rates across all grades increased to 9.58% in Q1 2016 from 8.93% in the previous quarter and 7.9% a year earlier, as take-up slowed due to the substantial additional supply in neighboring areas, based on figures from Colliers. For the luxury segment, the vacancy rate stood at 8.33% in Q1 2016, significantly up from 5.95% in the previous quarter and 4.3% in Q1 2015 For the other segments, the vacancy rate rose to 9.76% in Q1 2016, from 9.36% in the previous quarter and 8.66% in a year earlier.”
The Middle Market Ghost Cities.
The missing OFWs: “Lower down the income scale there is cause to worry… We believe that the middle tier is over-supplied. Many of these lower middle-class condominium developments are ghost cities. A visit to any ‘Barrio Fiesta’ in any city where Philippine OFWs work abroad is dominated by condominium offerings from developers like Megaworld, DMCI, Ayala Land, etc. The Philippines is one of the world’s largest remittance recipients, with 10.5 million Philippine Overseas Foreign Workers (OFWs) living and working in 210 countries and territories worldwide, 47% of them permanent migrants, 40% temporary, and the rest "irregular migrants"...
Yet why Ghost cities? GPG: “According to the Philippine Housing and Land Use Regulatory Board, 452,198 condominium units were built in Metro Manila from January 2001 to March 2014. Then last year, around 32,700 residential condominium units were launched in the metropolis. There are around 807,496 families or 27.5% of the NCR population who have a dispensable income greater than PHP34,962 (US$783), which is the required monthly income to be able to afford the monthly amortization of PHP 10,500 (US$235). PHP10,500 (US$235) is the minimum monthly amortization for a housing loan of PHP2 million (US$44,801), with accommodating loan rates of 90% LTV, with an annual interest rate of 5.7%, and a loan tenor of 30 years.”
How about the no-show of BPO market? GPG: “In 2015, revenues from the BPO industry reached US$22 billion, up from US$18.9 billion in the previous year. In terms of job generation, the industry accounted for around 1.1 million direct employees in 2015, up from 1.03 million employees a year earlier. The BPO industry aims to add around 225,000 new jobs and to reach US$25 billion in revenues this year, according to the Department of Labor and Employment (DOLE). The BPO industry was mainly driven by the healthcare sector that accounted for around 100,ooo employees, and the BPOs in so-called “Next Wave Cities”, according to Danilo Sebastian Reyes, the chairman of the IT & Business Process Association of the Philippines. The 10 “Next Wave Cities” include Baguio City, Davao City, Dumaguete, Iloilo, Lipa, Metro Bulacan, Metro Cavite, Metro Laguna, Metro Naga, and Metro Rizal. BPO agents are likely to wish to rent residential spaces near their workplaces due to their night shift schedules. Since BPO agents have foreign countries as their clientele, their work hours follow suit. This means that most BPO employees work at the night time where commuting is risky while taxi cab fares are expensive. There is a puzzle here. The income of this rising demographic overlaps with the investments made by the OFWs. Many call-centre agents are in the targeted income-bracket. But anecdotal evidence suggests that many of condominiums bought by OFWs are in the wrong place for call-centre agents. In any case, the bottom line is that their spending-power is not yet strong enough to absorb supply. Many have family obligations and prefer to live at home or with relatives.”
First of all, this represents a stereotyped mainstream article that masquerades itself as a discourse on economics by shouting statistics.
Just where have the economic function of prices been in all these? Or how has prices been affecting demand?
Here is the law of demand: “all else being equal, as the price of a product increases, quantity demanded falls; likewise, as the price of a product decreases, quantity demanded increases”
The article gives importance to only changes in property prices. Ironically where prices matters most, it has been blind to the effect of property prices on people’s spending patterns or even business conditions.
Or given the sustained rise in property prices how have such affected demand for middle income properties, CBD property prices and rental prices? Have demand been backing off due to price or affordability factors?
The creed has been high prices can only mean prosperity! PERIOD. Ergo the confusion!
Second, how has statistics substituted for individual actions?
For instance, statistics on BPO industry’s income, dispensable income and income required to buy real estate projects have been stated. For the writer, this must have adequately matched demand and supply. PERIOD. But then, it hasn’t. So another source of bewilderment.
The writer hardly ever considers the other factors that might have influenced the middle income buyer. It signifies a cosmic black hole for them.
The consensus hardly thinks of the relative changes in purchasing power of the peso in terms of the other goods and services, or how uneven consumer price inflation variably affects real income of individuals rather than of the aggregates. Example given the sustained surge in education (tuition) inflation, a person who spends on private education for his/her child will have less income to spend on other things. This will be different to a person whose educational requirements have been subsidized by the government through public schools.
The article is right to note that there may be other household commitments by employees of BPO and OFWs—say allowances to parents, contribution to tuition of siblings and etc… But this looks more like rationalization or finding an excuse than believing that such represents incentives for action (purchase or non purchase of property).
Moreover, the buyer’s preferences or priorities may be to shop, or to party, or to travel, or to dine out and or to socialize.
Yet these are only some of the multifarious options available to an individual. In short, the writer runs amiss on why people’s priorities have not been in property. The misperception exists because they (the writer and the industry consensus) see property as the only priority for people.
Ideas have consequences. Hence, misperceptions lead to misplaced actions (race to build supply).
Third, if this has been about G-R-O-W-T-H, then just where has income and social mobility been?
IF the middle income property markets have been blemished by Barrio Fiesta “ghost cities” due to inadequate demand in the face of excess capacity—in the context of the populist notion that rising prices equals growth—then just whatever happened to the ballyhooed economic growth???
Or why has the middle and low income segments of the population been missing the property inflation boat? Or if the low and middle income market for the property sector has been going nowhere, then just how can property inflation, mostly on high end properties, redound to G-R-O-W-T-H?
How valid is the notion that the upper income and wealth stratum represents the general economic conditions? Because the establishment and media owned by the establishment say so?
Or perhaps they have neglected the fact that credit has been made available only to a few. And the few with access have used such credit, especially since they have been subsidized by the BSP, to speculate on the property markets and pump prices up. Hence, the chasm between middle and high end markets.
As for the divergence between national and CBD prices, yet what is the connection between housing dynamics of CBD and the rest of the nation?
Have property prices nationwide (ex-CBD) been surging because of migration effect? Or have people moving out of CBDs and into the provinces?
Or have national property prices been surging because of relative economic conditions—provinces outperforming the CBDs?
Or have economic opportunities been migrating out of the metropolis?
Or better still, has nationwide property prices been soaring because of the spillover effect from BSP’s subsidies to the property sector?
In short, has the property bubble spread from the CBD to the rest of the nation?
Now, how will sustained slowdown in CBD prices affect the nation? Will the nation be immune? Or will the chain from the contagion effect run the other way around? Will there be a feedback loop mechanism?
Fourth, the article exhibits an incredible devotion to the gospel of government statistics.
The article uses selective perception to put a premium on real property prices while discounting nominal based property to make a (beg the question) conclusion: “Surprisingly, despite so much price appreciation, the Philippine housing market has still not recovered from the crash after the 1997 Asian Financial Crisis. Between 1997 and 2004, luxury condominium prices dropped 30.4% (53.7% in real terms), in the biggest property crash of all countries affected by the Asian Financial Crisis. In current price terms, both rental rates and property values are back above 1997 levels. However residential property prices in Q1 2016 are still 30.5% below pre-Asian Financial Crisis levels in real, inflation-adjusted terms."
Yet no justification has been made as to why real prices have been superior to nominal prices.
Just how accurate has the government’s inflaiton data been? As I wrote back in 2014, even the BSP’s Deputy Governor Diwa C Guinigundo admitted to the limitations of domestic official statistical ‘inflation’ data” due to the distortions brought about by rent control legislation: “The rent component of the CPI is, however, not reflective of the market price because of rent control legislation. The absence of a real estate price index (REPI) reflects valuation problems, owing largely to the institutional gaps in property valuation and taxation”
In short, market distorting mandates have understated inflation!
But there is an underlying incentive to this, pay welfare obligations with diminished purchasing power for the government to keep the rest. After all, (monetary) inflation is a HIDDEN tax.
Oh despite the BIG silent stimulus implemented by the BSP during the 4Q 2015 and 1Q 2016, the property sector hardly recovered materially in 1H 2016.
In the 1H, the best performing NGDP (gross sales) was RLC with 8.93%. RLC followed by ALI +8.49% and SMPH %6.11%. Meanwhile DMC’s real estate NGDP plummeted 8.57% while MEG saw near zero growth of .05%. Awesome divergences!
The average growth for the 6 PSE firms was 3.34% in 2016 down from 13.79% in 2015 but up from -2.79% from 2014.
On an aggregate basis (summation of gross sales of ALI, SMPH, MEG, DMC, LTG and RLC), 1H sales dropped to 5.36% from 9.49% in 2015 and 10.86% in 2014. Yet 1H was bolstered by the 2Q which posted 7.07% in 2016 up from 3.53% in 2015 but down from 13.2% in 2014.
Reality seems to be catching up with the mainstream: demand /supply mismatch!
