Is there a bubble?

Whether it be the office, residential, retail, hotel and gaming, and industrial sector, the expectation is the same – all signs point upwards for property development.

And the Philippines’ investment rating upgrade has effectively generated new and expanded demand not only for real estate, but also for other goods and services, a recent study by Pinnacle Real Estate Consulting Services. It slso pointed out that the forthcoming ASEAN economic integration is also fuelling investments from Malaysia, Singapore and Thailand apart from the usual trading partners of the Philippines like the US and Japan.

The top real estate players are aggressively positioning their products and platforms to take advantage of the bullish market. Most of the players are exploring various market segments and asset classes to generate growth. They are also partnering with international and ASEAN companies to create synergies and opportunities.

“The top real estate developers have also been taking advantage of this great opportunity. Based on the programmed capital expenditures for 2014, the top 15 developers have a total CAPEX of approximately P300 billion for 2014 to fast track their projects. Apart from the strong demand from the local and overseas market, most if not all of the top developers are already preparing for the ASEAN Economic Community integration,” the study said.

According to reports, major multinational companies, some of which belong to the Fortune 500 list, are actively looking to invest big time in the Philippines. One good indicator is the demand for flexible office spaces such as Regus. Its Philippine country manager reported that their business tripled in two years, and that they are receiving 800 to 1,000 inquiries every month. Regus now has 12 centers in Metro Manila and one in Cebu, it added.

The same study, meanwhile, describes developments in the office sector as follows: strong demand, sustained low vacancy, and slight rental increase.

The business process outsourcing (BPO) industry continues to drive demand for office spaces in the entire country, accounting for approximately 80 percent of the demand for the Grade A office spaces. Key industry players projected an additional of 120,000 employees this year, and probably breaching the one-million employee mark. The BPO industry is seen to generate a total of $18 billion in revenues for 2014.

Pinnacle noted that even with the new office buildings this year with a total leasable area of close to 500,000 square meters, rents are expected to be stable and may even increase slightly. Many of these buildings are pre-committed and have signed up lease contracts even prior to completion.

Vacancy of Premium Grade A and Grade A buildings is projected to stay below five percent across the major business districts by end of the year. Rents in Premium Grade A will continue to command rates of P1,100 per sqm per month, which is one-fifth of rents in Hong Kong.

Rents in Makati CBD Grade A buildings have an average of P765 per sqm per month, while small and old buildings in Makati are offering rents at an average of P550 per sqm per month. This is the rent offering in the Mall of Asia Complex, while rents in the Ortigas Business District are slightly higher at P575 per square meter. Bonifacio Global City rents have breached the P800 per sqm per month, while Quezon City rents are still at P625 per square meter-level.

Meanwhile, the study said that recent estimates peg the housing backlog at five million. The open market, especially the mid-market and affordable residential units are typically for “end-use,” while the upper mid-market and high-end market segments are marketed for “investment opportunity” or rental income.

The high-end and upper-mid market condominium units usually have strong leasing activities. Rents are from P50,000 to P100,000 per month for upper-mid condominium units, while rents of above P100,000 per month are for high-end, depending on the sizes. Luxury condominium units have breached the P300,000 per month-rent.

More attention is now given to the affordable and socialized segments. Big players have been active in building in this segment, instead of partnering with smaller players to comply with the 20 percent-socialized housing component as required by the Urban Development and Housing Act. The Subdivision and Housing Developers Association (SHDA) is also targeting to build one million housing units by 2016 to address the housing backlog, the study mentioned.

So to summarize, rent and price for luxury residential remains high, mid-market is competitive, budding rental market, and more attention to socialized and affordable segment, Pinnacle said.

And now for the hotel and gaming market.

The study emphasized that another record-breaking visitor arrivals for the first seven months is expected to push the occupancy and room-rates of hotels up. Apart from the investment grade of the Philippines as a whole, the gaming industry has been very active in attracting visitors to fill up their casinos. The hotel and gaming industry, as well as the public in general, has been waiting for the opening of City of Dreams, which would add 920 rooms to the market.

Kazuo Okada’s Tiger Resort Leisure & Entertainment Inc. will offer the most number of hotel rooms in PAGCOR Entertainment City once it opens the first phase of its $2-billion Manila Bay Resorts by the end of 2015. The first two phases of the 44-hectare integrated casino and resort project will introduce a total of 2,000 hotel rooms in the market. The company is very bullish about the prospects of their multi-billion dollar project due to its location, which is about a two-to-three-hour flight for billions of people, the study added.

The gaming industry is fuelling the influx of international brands while local players have been operating their own brands in secondary locations, according to Pinnacle.

The industrial market, meanwhile, is not to be left behind.

Pinnacle’s study noted that the growth of the industrial and manufacturing sector has been filling up even the massive Clark Special Economic Zone and Subic Bay Freeport Zone. Between these two special economic zones, the combined available industrial space is less than 150 hectares.

Clark Development Corporation (CDC) recently signed 193 contracts in the first seven months of 2014, with a total aggregate investment of P4.1 billion. At least 178 of the total signed contracts are subleases, with three of these either revived or recovered while 12 are direct leases. The new investments translate to 81,500 additional jobs within five years.

The tremendous growth being experienced by the property sector has prompted some to fear that this is just a bubble and that it will burst anytime.

“Housing bubbles occur when demand rises in the face of limited supply, attracting speculators who quickly buy and sell properties to get a quick profit. At one point, supply increases to keep up with the hot trend, but by this time the demand begins to taper off or stagnate. The prices sharply drop, and the bubble bursts. A bubble is premised on an ‘artificial’ rise in prices, brought about by two things: speculation and very low loan rates. The properties are not actually used or developed, but passed on for profit, gaining price with each exchange. The low loan rates also attract buyers who cannot ordinarily afford the property, and may be vulnerable to any shift in the economy. These factors create a situation that bloats property beyond any sustainable value.” ()

The Bangko Sentral ng Pilipinas maintains that there is still no asset bubble in the Philippine property sector despite the sustained rise in banks’ lending to the real estate sector. BSP Governor Amando Tetangco Jr. says “latest indicators still show that there is fundamental demand for housing and for real estate for industry and business, such as for BPOs (business process outsourcing companies), and that there are still no signs of over-stretched valuations in the sector.

But he adds that they continue to closely monitor developments in the real estate sector – bank exposures, as well as the trends in prices of and in the supply and demand for real estate.

Latest central bank data showed banks’ exposure to the real estate sector went up 22 percent to P1.097 trillion in end-June from P900.148 trillion in the same period last year. It was also higher than the P1.035 trillion recorded in end-March.

The bulk of the exposure during the period was in loans to the property sector, which grew 21 percent to P924.317 billion from year-ago levels, while the rest were in the form of investments which rose 26 percent to P172.907 billion.

The BSP in July this year introduced another set of tighter regulations to assess the banks’ exposure to the property sector. Under BSP Circular 839, banks will now undergo a separate stress test so the central bank can evaluate the impact of their exposure to the real estate sector once borrowers fail to service their loans.

The new rules require banks to maintain a common equity Tier 1 capital ratio of at least six percent, and a minimum risk-based Capital Adequacy Ratio of 10 percent even if 25 percent of a lender’s exposure to the property sector has been written off.

Let us hope that the BSP is just being prudent and that there is really nothing to fear.

But what remains as an indisputable fact is that the BPO sector remains a force to reckon with and that it will drive local property demand, at least for the office sector, for many more years. Real demand is still there rather than mere speculative demand. And this will at least keep us confident about the property sector’s prospects for the short-term.

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