Still looking up on real estate

By Cielito Habito
Philippine Daily Inquirer
Posted date: October 18, 2009

IF OUR ECONOMY AS A WHOLE has been spared from recession even as our erstwhile more dynamic neighbors have been badly hit, surely part of the reason is the resilience of the real property sector. The industry has managed to defy overall economic trends, particularly in the past year’s global economic downturn. Even as of the second quarter this year, real estate grew three times faster than the overall economy did. In contrast, it is this very same industry that had triggered the downfall of Thailand in 1997-1998, and of the United States in 2007-2008. It is therefore no small irony—and yet another manifestation of how different the Philippine economy can be from the usual mold—that real estate can contribute to the salvation of our economy when it has been the Achilles’ heel elsewhere. I’ve written twice in the last two years on why (NFL 5-7-07, 10-27-08).
Then and now

It turns out there’s more to it than what I’ve explained so far. I learned a thing or two last week from Vic Asuncion of CB Richard Ellis, a research and consultancy firm focused on real estate, when we both spoke before executives of a prominent player in property development. Underpinning his discussion was the dramatic contrast he portrayed between the overall Philippine economic landscape surrounding the 1997-98 Asian financial crisis and the current global one. He highlights five factors in this interesting contrast: lending activity, market demand, OFW remittances, personal consumption spending, and office space market supply.

On lending activity, financing was tight during the Asian crisis episode, as there was a general lack of liquidity in the system (translation: money was harder to come by, with less money in circulation and very little loan funds forthcoming from the banks). Interest rates were sky high, as the Bangko Sentral sent interest rates into the upper twenties in a vain attempt to forestall dramatic depreciation of the peso then. But today we see interest rates plumbing historical lows and the system awash with loanable funds, in the concern to stimulate economic activity within the global recessionary environment.

Broader, deeper

Another key difference between the two financial crises is the nature of the market demand then and now, with the current market being both broader and deeper. Foreign investors looking for office and commercial space dominated demand in the 1990s. Now it is a wider mix of foreign investors and local and foreign end-users looking for both residential and commercial space for various purposes. The current market spans the range of needs for office space for business process outsourcing (BPO) firms, commercial space in shopping malls, hotel and other tourism establishments, and residential housing units across various income categories.

Overseas Filipinos have also come to occupy a prominent if not dominant presence in the domestic property market, especially for residential condos, whereas demand from that source was negligible in the 1990s. Middle to upper range condo units continue to be snapped up by expatriate Filipinos who had wisely turned to real property investments here at home, rather than financial investment products whose values evaporated with the subprime collapse. I was amused to hear about complaints from residents in certain high-crust Makati condos on the invasion of their swimming pools by jeepney-loads of provinciano relatives of absentee OFW unit-owners during weekends. And an important factor here has been the way annual OFW remittances have shot up to $17 billion, whereas they amounted to less than one-third of that in 1997.

More dispersion

Asuncion also drew a contrast between personal consumption expenditures (PCE) in 1997-98, when GDP had slightly contracted and PCE grew at a “low 3.5 percent,” and the period just preceding the current global crisis. GDP registered a 7.2 percent growth in 2007, while PCE grew by 6 percent. Things have of course changed dramatically in the past year; PCE growth is now a measly 1.8 percent as of the first semester, amid a GDP growth of just about 1 percent in the same period. But the reason for the dramatic slowdown in PCE even with continuing growth in remittances—which the BSP attests to be due to increased saving—remains to be good news for real estate, the traditional favorite saving instrument of Filipinos’.

The final item in Asuncion’s list is the greater breadth of the market for office and commercial space, and the upbeat prospects therein. Whereas Makati and Ortigas were dominant in 1997, office space development is now also brisk in Fort Bonifacio, Quezon City, Alabang and Cebu, among other places. And while there is a better match between supply and demand in BPO office space (with a slight surplus now projected), there is greater growth in the demand for shopping malls, hotels and other tourism-related facilities. The good news here is that the growth is even more geographically spread. Five new malls are coming up in General Santos City in the next year alone, and that is only one example of how more widely dispersed this type of property demand has become.

So while things may be slower overall, real estate appears to continue looking up.

Comments welcome at chabito@ateneo.edu