InterAksyon.com
The online news portal of TV5
MANILA, Philippines - Mel, a government employee, received a text message, inviting him to a treat at one of Metro Manila’s most popular spas while listening to the sales pitch of a top property developer's agent for high-end projects.
"Is this for real? They are going to treat me to a spa so I would just listen to them sell me their condo? I could not even afford their monthly amortization," he told Interaksyon.com
This is but one of the many tactics that real estate developers now employ so they can dispose of their inventory, especially in a market that, some analysts say, is already swamped with similar condominium homes.
Asset bubble
"There are limited signs of an asset price bubble thus far, although some segments of the residential property sector could be at risk of an oversupply," the Bangko Sentral ng Pilipinas (BSP) said in its latest quarterly inflation report.
It noted that residential vacancy rates during the fourth quarter of last year climbed from the previous two quarters, driven by the higher vacancy rates for Grades A and B residential buildings. Colliers International said the increase in vacancy rates in Makati Central Business District is expected to continue because of the growth in supply for the next 12 months.
The BSP cut its key interest rates by 25 basis points last month and market players are expecting it would ease its monetary policy further by another 25 basis points to help prop up a slowing economy.
This could spell new record highs for the stock market, which has been climbing continuously at the beginning of the year. Lower interest rates could also boost real estate buying by end-users and investors - and fuel an asset bubble.
But BSP Deputy Governor Diwa Guinigundo said the property bubble seen in the high-end market does not constitute an asset bubble.
"We have some space for the other segments of the industry. We don't have to, therefore, consider putting up capital controls. Our existing monetary policy and macroprudential tools are sufficient so far," he said.
Despite the lack of capital controls or "speed bumps", Guinigundo said the BSP, like any other central bank in Asia, is keeping a close watch for any signs of bubbles in the equities or property markets, and would be proactive before any froth could start tickling the nose of monetary authorities.
It would be disastrous if they act on it only by the time it is already right in front of them, he said.
Digesting the supply
According to Vic Asuncion, head of research at CB Richard Ellis (CBRE) Philippines, there has been a bubble in the "luxury market" for quite a while since there are only a handful of such units being sold in the market today. These homes are the ones being developed by companies such as Ayala Land Inc. (ALI) and Kingdom Hotel - called Raffles Residences Makati - and by the JTKC Group - Discovery Primea. Most of these projects have only two or three units per floor, which at 350 to almost 700 square meters afford privacy to buyers.
Asuncion said the price escalation in this segment is driven by the scarcity of supply since no new projects in this category are coming on stream in the near term.
It is a different story, however, for the "high-end" segment, which sells for at least P100,000 per square meter. Asuncion said there is already an oversupply of expensive condominium homes, the prices of which are driven by speculation as investors expect to flip these units for almost twice their purchase price within the next 12 months.
"The market has to digest the supply first before companies can think of replenishing it," Asuncion said.
Because of this, several companies have already expressed going slow in building high-end condos in the near-term. Vista Land and Lifescapes had said they would be more cautious on condominium developments and focus more on the low- to middle-income horizontal projects, the bread-and-butter of its flagship brand Camella Homes.
Frederick Go, Robinsons Land Corp. president, said they would be "watchful" of the high-end segment but would continue to launch new projects for the middle market.
Jaime Ysmael, ALI chief finance officer, would not say there is a glut but told Interaksyon.com that "the residential market is cyclical and a supply and demand imbalance will eventually occur, which usually sorts itself out over time."
He said, however, that the demand for residential products remains strong, especially for the affordable segment, which is primarily an end-user market.
"Ayala Land is well positioned to operate in this environment given its broad product offering across its five residential brands in various markets all over the archipelago, especially with its expansion into the affordable segment where most of the 3.7 million housing backlog is concentrated," Ysmael said.
Accounting standards as culprit
Market analysts, however, warn that the bubble is already creeping into the middle income market as SM Development Corp. (SMDC) accelerated its condo-building frenzy, allowing it to top industry rankings.
Just last week, the property arm of the SM Group told the Philippine Stock Exchange that it would be squeezing into the DLSU-Taft condo market.
Because condo buying has been outpaced by the growth in supply, companies are now willing to give special discounts just to lure end-users and speculators. This was unheard of during the height of the property boom in 2006 until early 2007, before the global financial crisis.
SMDC gave big discounts to homebuyers in December last year as Jose Sio, the SM group’s chief finance officer, said in a TV interview that they have to move inventory just like they do with their retail business.
James Lago, head of research at PCCI Securities Brokers Corp., said this all boils down to the new accounting standards called International Financial Reporting Interpretations Committee 15 (IFRIC 15), where property companies can only recognize revenue from their projects if these are completed or already turned over. Before, real estate firms can pre-sell condo units up to a certain percentage before putting them up to minimize oversupply and revenue loss.
With IFRIC 15, the companies must build first and worry about selling them later.
According to developers, this accounting rule would hurt those with high-rise projects of 40 storeys or more since construction would take four years.
Besides the changes in the accounting standards, the overbuilding of property firms is accompanied by the continued strengthening of the peso against the dollar, which has hit overseas Filipinos - the top condominium buyers in the country.
Lago said it would take at least two years for the market to absorb the glut.
It seems like the property boom is winding down too soon, as the cycle usually ends by the seventh to the 10th year.
University of Asia and the Pacific economist, Vic Abola, says that based on this cycle, the bust is still not here as the industry is still on its fifth year. Lago, however, disagrees.
Whenever and until it comes, house hunters can look forward to more discounts in condo units and Mel, who has received a spa invitation from a real estate agent, could expect more invitations from property firms.
