Ways to make developers survive crisis

By Tessa Salazar
Philippine Daily Inquirer
Posted date: March 18, 2009

LAST WEEK, Inquirer property started a series that reported on Global Property Guide ringing the alarm bells that “Asia is no longer insulated” from the financial crisis originating from the West.

Proof that troubled times has landed on our shores as early as late 2008 is evident in Global Property Guide’s survey of publicly-available house-price time-series for 2008, which showed prices declining steadily. And seen from a global perspective, the downturn is still accelerating.

Timely suggestions

So what can developers do to stay afloat and competitive during these times? Prince Christian Cruz, GPG senior economist, provides these timely suggestions:

• Developers can provide cheaper housing units by cutting back on certain luxuries such as gyms, function halls and swimming pools. Middle and working-class households are more concerned with basic necessities such as access to public markets, schools, churches and public transport.

• While the provision of ample parking space is welcome, developers must focus on accessibility by ensuring that households can reach their homes quickly and safely even if they use public transport. Most property firms develop cheap and affordable housing units located in nearby provinces such as Rizal, Bulacan, Cavite and Laguna where commuting time takes 2 to 3 hours to major commercial hubs in Metro Manila.

• Developers must know the buying capacity of working and middle-class families. The international standard for affordable housing is 3 to 5 times the annual income. This implies that for someone who earns P10,000 a month, an affordable house for him/her should cost between P360,000 and P600,000.

• Developers can explore the potentials offering rent-to-own schemes for prospective homebuyers. Instead of relying on lump sum payments (most overseas Filipinos pay in cash or installment divided over 1 to 2 years), developers get a continuous income stream for 10 to 20 years through a rent-to-own scheme.

Cruz was also worried at how “confined” the Philippine housing boom has been, with developers focusing mainly on overseas Filipinos while largely ignoring an enormous local demand from the locally employed middle-class and working-class sector. Now that the demand from overseas Filipinos was waning, an oversupply of unsold units could be “redirected” to local buyers.

Blessing in disguise?

Alejandro S. Mañalac, president of the National Real Estate Association, said that for his part, he has not heard of any condominium price drops (Inquirer Property reported last week that, according to the GPG report, prime 3-bedroom condo prices in Makati fell 2 percent in 2008 after an 11-percent rise during 2007).

“These data may have been based on resale units from owners (not developers) who had to make sacrifice sales,” Mañalac said.

He added: “The US crisis which started in 2008 was a blessing in disguise which caused the construction of more new high-rise projects to slow down lest we experience a glut, which is actually happening already in some areas where you have thousands of residential units due for turnover starting this year up to 2012.”

According to Mañalac, the Ifric 15 issue also made developers reconsider their plans to build high-rise buildings (which takes 3 to 5 years to complete) in favor of end-user projects which they could turn over within a year, and thus recognize their income in their books. “It’s a good thing that the implementation of this new accounting reporting standard was deferred until 2012,” he said.

“Another reason (the financial crisis) came at an almost perfect timing is that banks were already getting to be very aggressive in financing buyers up to 90 percent of the purchase price for some projects. The good thing, though, is that they were still very strict with the screening and compliance with their requirements.”

Pricing schemes

Mañalac agreed that developers should reevaluate their pricing schemes, especially of condos, in order to sell. “But this does not mean that they have to lower their prices since they really still have to cover themselves for future increases in construction costs. However, the developers should be more prudent in their price increases since the market is made up of end-users who are really looking for more value for their money, unlike before when end-users, investors and even speculators took up the units.”

Mañalac added that developers should also be more wary of offering easy-payment schemes which are somehow similar to “subprime” accounts—one of the key sources of the US housing crisis. Based on actual data, most of those who canceled their payments or purchases were buyers who paid minimal amounts (usually the reservation fee rates) and a few monthly installments under the “no down payment” terms. On the other hand, buyers who had already made substantial down payments (20 to 30 percent of the commercial value of the property) were less likely to discontinue their investment.

Will there be more condo projects put up, but with less people buying them?

Mañalac sees the building half-full.

“Unlike most of our neighbors in Asia, preselling is very much an accepted practice here compared to their policies wherein the developers will have to build first before they can sell. Going a step further, some of the big developers only start their construction once they have hit over 60 percent in sales. This means most if not all the buildings under construction that you see now are already substantially sold if not totally sold out already. Now, having tenants for those units which were purchased primarily to generate rental income is another story.”