Foreign funds pumping money into PHL 'second tier' property developers

GMA News Online by Siegfrid O. Alegado, 01-14-2014

Multimillion dollar deals are brewing in the property sector. 
 
Foreign institutions diversifying their portfolio in Asia in the past months have been in talks to infuse $10 million to $300 million into "second tier" Filipino property developers, real estate consultants interviewed by GMA News Online said.
 
"There is strong foreign interest in real estate in the Philippines," Julius Guevara, Colliers International Philippines head of Research and Consultancy Practice, said. "Most of these are in talks stage, but we've been experiencing a lot of activity especially in the last six months," said Guevara, who has been "introducing some investors to smaller developers." 
 
The foreign institutions are mostly mandated to invest only in real estate or to put bulk of their placements in the sector, said Michael McCullough, Managing director at real estate services KMC MAG Group, an associate of London Stock Exchange-listed Savills. "They want to put money into the Philippines, and they expect a certain type of return," McCullough, who is closing a $25-million deal between a Hong Kong fund and a Filipino developer for a "condotel" project in Manila, said in a separate interview.  
 
The Philippine growth story and consecutive ratings upgrades stoked interest of foreign funds, according to consultants. The Southeast Asian country - which was the second fastest growing economy in Asia after China during the first three quarters of 2013 -  scored its  first investment grade rating ever from Fitch Ratings last March.  Standard & Poor's followed last May  and Moody's Investors Service last October.
 
"They see a growing market here in the Philippines, where yields here are definitely higher. There's also just so much good news coming out of the country," said Henry Cabrera, Associate Director at property consultancy Jones Lang LaSalle (JLL). Cabrera said another Hong Kong fund is "in discussion terms" with a local partner. 
 
Colliers' Guevara said offshore funds need to tap local partners because they lack expertise in navigating the domestic property sector. There are also restrictions on foreign ownership of land and equity under the Philippine Constitution, he added. 
 
Asian funds
 
Consultants declined to name the foreigners involved in the transactions to protect their business interest. "It's a mix, but most are Asians," said Guevara. Cabrera noted the funds they are handling - up to $250 million - are usually from Singapore, Hong Kong, Japan, Indonesia and the Middle East. The funds are shying away from declining yields and tightening real estate laws in Singapore and Hong Kong but are wary of the waning attractiveness of other emerging markets like Thailand, which is currently plagued by political turmoil. 
 
"These are Asians buying Asians," said KMC's McCullough. The local counterparts are mostly what consultants label as "second tier" developers. "Obviously, they (foreign investors) don't have a lot of choices here. Because the established players don't need the money," said McCullough. 
 
Top developers - like the SM Prime Holdings Inc., Ayala Land Inc., Robinsons Land Corp., and Megaworld Corp. - are awash with cash and could also easily tap the capital markets to pursue their projects. Nicholas Antonio Mapa, economist at the Ayala Group's Bank of the Philippine Islands (BPI), said the regulatory limits on real estate lending place a strain on funding for smaller developers. 
 
Bangko Sentral ng Pilipinas has cast a wider net in capturing the financial system's exposure to the property industry, telling banks to report more types of credit and investments in the real estate sector. As such, "all these local developers, upcoming developers at that, will be searching for funds. And its on private equity," McCullough said.
Crowded Manila

JLL's Cabrera said top developers have monopolized land holdings in Metro Manila, which ranks fourth in the list of most preferred cities for real estate investors in Asia Pacific this year prepared by  Washington-based Urban Land Institute and global financial services firm PricewaterhouseCoopers. "For now, they (foreign investors) are looking at Cavite, Laguna, Bulacan and Pampanga for developments, mostly single detached housing," he said. Tourism hotspots like Boracay and Palawan "have been on investors' map," said Collier's Guevara. 
 
However, KMC's McCullough has a different view to things. "Look, Metro Manila is Metro Manila, so the interest is there," he said. But the next wave cities are also gaining attention, McCullough said, noting "one of the bigger funds" they are handling "is looking at Cebu."
 
The downside
 
BPI economist Mapa warned of risks stemming from the deals. "Some funding constraints may be seen by  smaller developers in the future if they will access from offshore dollar funds," Mapa said, noting the pressure on interest rates and the peso's weakness against the greenback. The peso depreciated by over 8 percent to trade back at 44:$1 last year. "It's really not a problem, but it could lead to problems domestically," he said, adding that what is needed is strong monitoring to cushion any financing risks that could arise. 
 
But Cabrera noted the parties involved know the risks that come with the deals. "They see growing opportunities, but see it with certain risks including political and foreign exchange," he said. - VS, GMA News