Record Manila Land Sale Stokes Frothy Valuations: Southeast Asia

Bloomberg by Siegfrid Alegado, 11-06-2014

Record bids for two plots of land in a Manila business district have lifted prices to a 17-year high, raising concerns that a property bubble is forming.

The 1,600-square-meter (17,200-square-foot) site in the former military camp of Bonifacio fetched 732.8 million pesos ($16.3 million) and 800 million pesos each at a government auction in September. That was a record half-a-million pesos per square meter, about 80 percent higher than the previous government land sale in the area, according to the local associate of Savills Plc.

The "Philippines is at risk for an asset bubble," said Antton Nordberg, a property analyst at KMC MAG Group Inc., Savills's associate in the country. "The price of the land is just too high."

Land prices in the Philippine capital's five major business districts have surged to the highest since the Asian financial crisis in 1997-1998 as accelerating economic growth, rising remittances from more than 10 million Filipinos overseas and low borrowing costs fuel demand. The boom is spreading outside Manila, prompting the central bank to cap the value of property that can be used as loan collateral in part to cool real estate lending and investment that breached 1 trillion pesos as of the end of June.

The record bid "has an effect on property prices and rents," Kash Salvador, a Manila-based investment manager at broker CBRE Group Inc., said in a telephone interview on Oct. 15. "It could create the belief that anyone is able to lock in value seen usually in top-tier property."

Rising Values

Land values in at least seven cities tracked by Colliers International UK Plc climbed in the last quarter to the highest since the 1997-1998 Asian crisis, property analyst Romeo Arahan said. Manila home prices have surpassed 2008 levels and office space is near a six-year high, according to Colliers, as the Philippine economy expanded more than 6 percent in nine of the last 10 quarters to the end of June.

Closely held Goldenwill Inc. and Focus Palantir Inc. outbid a unit of Robinsons Land Corp. (RLC), the second-largest operator of shopping malls in the Philippines, at the Sept. 23 auction of the land sold by the Government Service Insurance System in Bonifacio. The Social Security System sold a Bonifacio property for 277,000 pesos per square meter a year earlier.

Based on the maximum of 12-story building height allowed in the area, average construction cost of about 60,000 pesos per square meter and an average profit margin of 40 percent, the developers may fetch 170,000 pesos per square meter, KMC MAG's Nordberg said.

Higher Prices

That will be 21 percent higher than current prices for office space and 30 percent more than apartments in Bonifacio, KMC MAG said in a note. The developers didn't give details about their buildings plans.

At 170,000 pesos per square meter, investors must be ready to accept yields closer to 5 percent, Nordberg said. Yields are 9 percent for office space in Manila and 7 percent for residential, according to CBRE data.

Residential condominium rents and prices increased about 5 percent each in the second quarter from a year earlier, according to Colliers. Office rents added 6.9 percent in the three months through June from a year earlier, the fastest pace in four quarters, while capital values rose about 5 percent, the broker said.

Banks' exposure to real estate jumped 22 percent in the second quarter from a year earlier, climbing the most since the central bank first began tracking the investments in 2012.

Lending Curbs

While prices may be rising too fast in some parts of the property market, overall "you don't see any clear evidence of a real estate bubble," central bank Governor Amando Tetangco said on Oct. 29. Tighter lending measures should help prevent a "sharp and abrupt" correction, Tetangco said.

Bangko Sentral ng Pilipinas raised its benchmark interest rate twice this year, to 4 percent, from a record-low of 3.5 percent.

The central bank said last month it will release an index to better gauge how real estate prices affect the economy.

Property loans will moderate in the next two years after Bangko Sentral last month ordered lenders to cap the collateral value of real estate mortgages at 60 percent, said Michael Wan, a Singapore-based economist at Credit Suisse Group AG.

A correction in the housing market is overdue, said Jose Sio, chief financial officer at SM Investments Corp., which controls one of the nation's biggest builder.

Sales at Megaworld Corp. (MEG), the nation's largest provider of space for outsourcing companies, continue to do well, Jericho Go, a senior vice president, said on Oct. 27. Megaworld shares rose to an all-time high the day after the Bonifacio sale. The company is the top landlord in the area, where it is developing 105 hectares (259 acres) into four different township projects.

"The central bank has been proactive, so I wouldn't say that the market is in a bubble," Go said.