Sizzling market shows no signs of cooling
Manila Times by Ben Kritz, 09-07-2014
Should regulators start to worry?
What may be a brash assessment of the state of the Philippine
property market is a quick, simple conclusion based on
available figures that indeed, there is a "bubble" forming,
given the stirrings in the sector caused by brisk economic activity
and the inflow of both hot money and overseas Filipino workers'
(OFW) remittances over recent years.
But things are not always what they seem, especially when it
concerns this market.
More than a few analysts have raised concern about a possible
overheating in the real estate sector in the country. One reason
such perception persists among property market observers is that
the focus of most analysis is from the perspective of capital
investors, and is largely limited to observations of high-end
markets in Metro Manila, specifically, the Makati central business
district, Ortigas Center, and Bonifacio Global City.
Seen from a purely investment and regulatory perspective, the
concerns about a property "bubble" cannot be entirely discounted;
in any "hot market," price and demand pressures can easily outrun
the wider economy's ability to absorb them. The possibility of the
real estate market overheating and creating problems for the
financial sector has been the focus of attention from the central
bank in recent months, and is a serious concern from the point of
view of a number of analysts (see Rigoberto Tiglao's column on
From a consumer perspective, though, the picture of the
residential real estate market is much broader, and very much more
attractive, though not without some potential risks, than
conventional analysis might indicate.
In this first installment of this week's special report,
Columnist Ben Kritz examines the features of the local property
market and presents an overview of the residential real estate
segment. While this sort of examination necessarily involves
reference to a sizable database of raw statistics, they do present
an interesting picture, and a largely positive one for the
prospective property buyer.
First of three parts
By the numbers
Construction activity, given its role as a key component of gross
domestic product (GDP) under the category of "capital formation,"
is carefully tracked and presented by the Philippine Statistics
Authority (PSA) in a fairly detailed overview on a quarterly
The data is based on the number of new construction permits
issued during the period, and divided into residential
construction, non-residential (i.e. commercial and industrial)
construction, and "additions, alterations and repairs," which
include any construction to add on to or refurbish existing
As has been the case for many years, the number of residential
construction projects during the second quarter of this year - the
most recent period for which full data is available - was far
greater than any other type of construction activity.
Residential property construction in the April to June period
this year accounted for 72.8 percent of the total number of
construction starts. The 23,817 residential projects started in the
second quarter represented an 11.5 percent increase year-on-year, a
slightly faster rate than growth in construction overall, which
expanded by 11.2 percent from the second quarter of 2013.
In value terms, new residential construction projects rose by
P1.89 billion to reach P34.52 billion in the second quarter of this
year from P32.63 billion in the year-earlier period.
Residential building accounted for about 54 percent of the
overall P3.51 billion increase in total construction value, which
was otherwise driven by the sharp rise in the value of existing
buildings' additions, alterations and repairs.
Non-residential construction, while expanding slightly in the
number of new projects started, actually declined in value by a
little over P1 billion from a year ago, from P28.51 billion to
NCR not the hottest market
Despite the focus of market analysts on key areas within Metro
Manila, the National Capital Region actually ranks a poor
sixth-place among the 17 regions tracked by the PSA in terms of new
construction starts. By this measure, the hottest market in the
country right now is the Calabarzon Region (Region IV-A),
comprising the provinces of Cavite, Laguna, Batangas, Rizal, and
Quezon, with 5,920 new projects in the second quarter of 2014,
nearly 25 percent of the national total.
Cavite is the most active province in terms of both residential
and non-residential construction, accounting for about 10.3 percent
of the total and 10.5 percent of residential projects nationwide in
Q2, with 2,503 projects worth a total of P3.1 billion getting
Other regions with strong markets include Region III (Central
Luzon) with 3,131 projects; Region VII (Central Visayas) with 2,530
projects; and Region XI (Davao Region), with 2,033.
Overall, however, the pace of construction starts seems to be
decelerating, if only slightly, from last year. Another measure of
construction and real estate marketing activity is the number of
"licenses to sell" issued by the Housing and Land Use Regulatory
Board (HLURB); as a matter of practice, developers obtain these
licenses early on in a project's development, often before ground
is broken, in order to give themselves flexibility in pre-selling
residential units, which is an important source of construction
According to HLURB data, which is only available for the first
quarter of 2014 as of now, a total of 153 licenses to sell for
projects comprising a total of 47,417 units were issued in the
first quarter, a rate that is slightly slower than in the 2013
period, when 637 licenses for 225,051 individual units were issued
by the agency.
Prices rising, but at slower pace
In terms of prices, variances across the entire country make a
"national average" virtually meaningless; according to property
monitor Collier's International, the average per-square-meter price
during the first quarter was $3,043, or approximately P132,498 per
square meter at the current peso-dollar conversion. This figure,
however, is an average of prices in Makati, Bonifacio Global City,
and Ortigas - the default area monitored by most analysts - and is
in all likelihood significantly higher than most other areas of the
Nevertheless, the trends in prices seem to be consistent across
the whole country, despite differences in the actual values. After
experiencing a decline in 2008-2009 in the wake of the global
financial crisis, residential real estate prices have increased
Collier's notes, however, that the pace of the increase has
slowed considerably this year; after rising by an average of about
3.44 percent through 2013, Q1 2014 saw residential real estate
prices advance by only 1.2 percent, the slowest increase in two
years. Despite this, Philippine property prices are still advancing
at the fifth-fastest rate in the entire world, according to the
Global Property Guide.
There are two key reasons for the moderation of price increases
despite high demand. The biggest reason, in Collier's view, is the
recent action by the Bangko Sentral ng Pilipinas (BSP) to tighten
real estate lending by banks; for example, the central bank has
recently implemented a credit "stress test" for lenders to ensure
adequate capitalization and provisions for bad loans.
This and other moves, such as increasing banks' reserve
requirements, have slowed the pace of real estate lending. Real
estate lending is still expanding at an impressive rate, having
expanded by 25 percent to P843 billion in 2013, but this was
markedly slower than the 34 percent expansion the sector
experienced in 2012.
The net effect of tightening lending is to boost the supply by
eliminating some customers, and as a result, developers have had to
moderate the increases in property prices while banks have been
encouraged to offer more flexible financing.
The majority of real estate loans are still relatively
short-term (high down payment followed by 5- to 7-year loan
periods), high interest loans. However, Global Property Guide notes
that more 'conventional' terms, such as 15- and 30-year tenors on
loans up to 90 percent of value, are being offered by some banks,
although these are not yet common.
The second reason price increases have decelerated is the
noticeable shift in the market. Property consultancy KMC MAG Group
in its Midyear Review of the Philippine property market points out
that growth in the high-end market (i.e., the market in Makati and
other upscale areas typically monitored by analysts) has slowed
considerably, but that demand has grown in the middle-income
This is a rare case in which the usual function of demand and
prices does not work as it normally does; while developers, who are
behind the demand curve (although this is also area-dependent), can
command higher prices, the boundary between having a development
which is fully subscribed and one that is mostly empty is
exceedingly narrow, thanks to intense competition.
Developers also have to be flexible to some degree in matching
the income and credit-worthiness of their prospective buyers; even
if raw economic math indicates much higher prices could be charged,
the realities of the marketplace serve as a damper on price
A big part of the reason for the "power of the buyers" in the
Philippines, as KMC MAG points out, is that unlike other hot real
estate markets (such as in China, and to some degree in Malaysia in
the past couple years), the market is mainly made up of OFWs and
relatively financially stable middle-income domestic buyers who are
seeking homes for themselves, rather than buying property as a
While the continuing increase in prices, even though retarded
somewhat by market conditions, may push some buyers out of the
market eventually if the larger economy does not keep pace, one
fortunate sign for buyers is that prices are not increasing nearly
as fast as property values.
According to estimates by the Global Property Guide, residential
property values in the Philippines are growing by about 10 percent
over a one-year period, about 32 percent over five years, and about
75 percent over 10 years (the increase in property values typically
decelerates over time). Thus, the typical Filipino homebuyer can,
at least at this point, count on a stable investment for his or her
A buyer's market, but not without risk
Even though the prospects for property buyers in the Philippines
are generally very positive, price and demand pressures being
exerted on a supply side that appears to have been a little late in
recognizing the shift to a more middle-income market means there
are risks for consumers.
Developers have only a narrow window of flexibility in pricing
their offerings, and are under added pressure to keep expanding not
only because of high demand, but because of intense competition in
the real estate sector as well.
That has, unfortunately led to a number of issues that have left
some homebuyers facing a nightmare instead of the dream home they
thought they were buying - high transaction costs, problems with
land titling and registration, construction quality issues, and
lack of infrastructure and amenities in some developments.
In the second part of this special report on Wednesday, we will
examine some of these issues, and investigate what is being done -
or not done - to protect consumers and the wider property market
from the negative financial impact.