The real estate puzzle

No Free Lunch

By Cielito Habito
Philippine Daily Inquirer
October 26, 2008

AMID OUR ECONOMIC SLOWDOWN since the start of the year even well before the US financial meltdown ensued, there is one industry that has defied the general trend, even doing better this year so far compared to last year’s performance. The real estate sector grew almost 22 percent in the first half of the year, even improving on its 20-percent growth in the same period last year. In stark contrast, industries that had been zooming with double-digit growth in recent years, especially communication and finance, struggled with a mere 2.6- and 2.4-percent growth in the second quarter of 2008. Even worse, mining, which had also been posting double-digit growth rates up to as recently as the first quarter of this year, saw a dramatic reversal to a double-digit decline (i.e., negative growth) of -18.5 percent.

But in real estate, the upbeat mood appears to continue even up to now, US meltdown and all, which I witnessed first hand recently when I spoke before a group of property developers. This is truly one bright spot in our economy right now, with growth even accelerating against all odds. This seeming puzzle moved me to do some informal research by asking friends in the know, just to understand exactly what is going on.

Unmet needs

Even before, I had been telling my audiences that there are two basic reasons that may explain why demand for the products of the real estate industry as a whole continues to be high. One, there has traditionally and persistently been a tremendous unmet need for low- to medium-income housing in this country. The preponderance of informal settlers (translation: squatters) in populous areas of our country is our constant reminder of this unmet basic need in our society. Government has constantly lagged behind the growing need for mass housing, even as it has committed to addressing this minimum basic need as a government priority. Thus, anything that makes such housing more accessible (e.g., the OFW phenomenon, or easier housing loan terms) would translate to rising demand for houses, and hence rising production figures in the real estate industry.

And then there is the brisk demand for office space from the O&O (offshoring and outsourcing) industry, the new name for what’s been commonly known as BPO (business process outsourcing), including call center operations. Demand here is projected to continue growing even in the face of a US economy slowdown or recession. This is because cuts in outsourcing by US (and European) firms who are already outsourcing business operations to us would be offset by new business from other companies not previously outsourcing who are now driven to outsource, precisely to cope with their overall economic slowdown.

Store of wealth

But there’s more to explain the seeming puzzle. Bank of Philippine Islands president Aurelio Montinola told me that BPI continues to show encouraging figures for their housing loans. He points out that unlike westerners who have an array of options to store their wealth in, Filipinos are basically limited to three things: Cash (whether kept under the mattress or in banks), stocks (including bonds, mutual funds and trust accounts) and land (more generally real estate, including condo units). When times are hard and inflation is high, people prefer not to hoard cash. Right now, the volatility in the stock markets also drives the weak-kneed away from financial investments. And so, those with spare wealth are running to real property, which Filipinos have always perceived to be the best store of wealth.

Ayala Land is indeed feeling this drive to acquire lands and condos, which I gathered in discussions with its president, Jim Ayala, and vice president, Art Corpuz. Even then, both think there will have to be an inevitable slowdown induced by the US meltdown, but this is more of a prudent forecast rather than actual experience as of now. For now, the brisk demand, about a third of which comes from overseas Filipinos, is in the P2-8 million property category, essentially the upper middle-income market.

Low income boost

But the figures are even better this year for the lower-income housing market as well, according to Pag-IBIG Fund president Romero Quimbo. He attributes this seeming boom-amid-adversity experience of Pag-IBIG to the reduction in the interest rates they effected since June last year, when on the guidance of the Vice President who is also the government’s housing czar, interest rates on their housing loans were lowered from 12 to 7 percent. According to Quimbo, this has almost cut in half the monthly amortizations for a P750,000 house from P8,000-9,000 to just P4,000-5,000. This appears to have made housing much more accessible to the lower end of the market, and has translated to much better figures for Pag-IBIG this year than in past years. The good thing about this against-the-tide surge in housing, whether in the lower- or middle-income levels, is that this sector has traditionally been known to have one of the strongest multiplier effects on the rest of the economy.

Will this good performance of real estate hold up even if the US goes into full-fledged recession? While it’s prudent to expect the worst, this industry has so far defied the trends, and from the explanations I’ve heard, it’s not a fluke.

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Comments welcome at chabito@ateneo.edu.