Disturbing trend

There is a very interesting article that was shared to us and written by Richard Mills, chairman of the Asia CEO Forum, that basically questions whether the impressive growth numbers for the Philippines are sustainable or even accurate in the first place.

The article quotes a recent paper written by a young researcher, Christopher Mills, which indicates that the Philippine economy is due for a period of slower growth and may have already been decelerating along with much of the reset of the world, contrary to what some say about the local economy being the fastest growing major economy in the entire Asia region with nothing but good times ahead.

The paper analyzed the performance of seven of the country’s largest conglomerates during the period 2010-2014 and compared them to the overall economy. The data used are the publicly filed financial statements of Aboitiz Group, Alliance Global Group, Ayala Corp., DMCI Holdings, JG Summit Holdings, San Miguel Corp., and SM Investments.

It initially showed that the averaged revenues of these seven conglomerates are very highly correlated to the overall Philippine economy. This, Richard Mills, said makes completed sense since the nation is dominated by these organizations and their success is critical to the economic success of the Filipino nation and vice versa.

But when the researcher next analyzed growth rates over the past few years, this is where he found a striking divergence. While the general economy showed a trend of increasing growth rates, the audited statements of the seven companies showed decreasing trend lines, Richard said.

The paper also studied profitability measures for the seven conglomerates and found similarly disturbing trends, with both return on assets and return on equity being in clear decline over the same period.

Richard, in his article noted that given the large spending by political candidates leading up to the recent election, the results make no sense since this spending should have powered up an already strong economy and the financial results of the large conglomerates.

He emphasized that the researcher’s analysis can only indicate the Philippine economy is headed for slower growth ahead and now that the election spending is finished, this reality could become more apparent in the coming months.

He added that ideally the new President will not have to make revisions on past economic growth numbers but if that is the case, that billet should be bit as soon as possible.

The research paper concluded that it was able to show that the growth rates of the Philippine economy and its largest conglomerates are highly correlated. While the growth rate of the economy is trending up, the growth rates of the conglomerates are going down, together with profitability which is trending down. These two things, it said, cannot be good for the continued growth of the Philippine economy in the long term.

Less profitability for these companies means that they will invest less in growing their business in the future and unless this reverses, the result could be a slowdown in the overall economy over time, it added.

Property growth prospects

Research firm Collier International has just come out with its first quarter 2016 property market report which showed that the office sector drove property market growth during the January-March 2016 period.

Collier, in its report prepared by research and advisory director Julius Guevara, projects a slight increase in office space vacancy across the major business districts of Metro Manila should all projects be completed as scheduled. An estimated 640,000 square meters of new office space is expected to be completed this year, potentially raising Metro Manila’s office stock to around 8.1 million sqm, but the increase will be tempered by steady demand for office space that is fueld by BPO companies, the report said.

For the residential sector, only three residential projects were completed in Metro Manila during the first three months of the year, all in Fort Bonifacio. For the rest of the year, Colliers expects an additional 11,700 units will be delivered in the major CBDs, almost half in Fort Boni. The report said that with the delivery of additional condo units  over the next 12 months, rental rates at the Fort are projected to decline by two percent, at the Makati CBD 3.2 percent, Ortigas Center 2.7 percent.

As far as land values are concerned, the report revealed that values in major business districts continue to increase, with land values in the major CBDs projected to grow between five percent and seven percent over the next 12 months. Values in Makati CBD averaged P502,000 per sqm during the first quarter, up 0.4 percent compared to the same period last year while those in Fort Bonifacio averaged P418,400 per sqm. It also showed that value of Alabang lots recorded the fastest growth to P123,000 per sqm while those in Ortigas Center averaged P180,000.

The total number of licenses to sell issued by HLURB for the first quarter grew by 77 percent, with balanced housing compliance units registering the highest growth year-on-year at 414 percent, followed by open market housing with 232 percent, low-cost condominium 181 percent, commercial subdivision 124 percent, mid-income housing 97 percent, memorial parks 93 percent, socialized housing with 81 percent, among others.

Meanwhile, Metro Manila retail stock reached 6.12 million as of the first quarter, with more than 700,000 sqm of retail space expected to be added to Metro Manila’s stock by the end of the year, the report said.

Ayala Land is further raising its retail footprint in the Metro with the completion of five malls that will deliver close to 160,000 sqm of additional retail space. The Colliers report also noted that super regional malls in Metro Manila are of near full occupancy, registering a vacancy rate of only 0.41 percent. Occupancy, it said, will remain high over the next 12 months, given the urban population’s rising disposable incomes, aggressive expansion of retailers, and continued influx of foreign retail brands. Collier is also projecting retail rents in Ayala Center and Ortigas Center to grow between 4-6 percent over the next 12 months.

The report added that rising household incomes due to expanding BPO and manufacturing sectors, robust OFW remittances, a low inflationary environment, increase in employment opportunities and stable political conditions all point to a positive medium term outlook for the Philippine retail sector.

It expects the local retail sector to become more competitive over the short-run as more foreign brands enter the market as a result of the full implementation of the ASEAN economic integration. Meanwhile, relaxation of foreign ownership restrictions in key economic sectors such as land ownership and further liberalization of retail trade are expected to sustain the local retail sector’s growth over the medium term, Collier noted.

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