The Philippine real estate industry (part 2)

According to the Institute for Development and Econometric Analysis, Inc. (IDEA), latest Industry Trends, a regular publication produced by IDEA, as the real estate market heats up, the economy as a whole has benefited greatly from the industry’s recent success, growing by an annual rate of 10.3 percent from 2008 to 2012. The financing behind real estate projects has also grown in step. While the industry’s demand for bank financing grows, so does the percentage of real estate-related loans to lenders’ total loan portfolios, and along with it, financial institutions’ exposure to industry-specific risks. Thus, the number of non-performing real estate loans and its ratio to total real estate loans, and to the total loan portfolio, have become statistics to watch in order to monitor this integral part of the financial system’s health.

Likewise per same published report, despite increasing exposure and quickly rising total real estate loan books, the amount of non-performing loans has actually been decreasing over the last two years. Sound macroeconomic conditions and the improved credit profile was reflected in the Php5 billion decrease in bad loans related to the real estate industry over a two year period. Recently, there has been much concern that the 90 percent rise in selling prices and 60 percent increase in rent since 2004 is an indication that asset bubbles may emerge in the near future. Some haven noted that these conditions are similar to some of those that were seen right before the 1997 crisis. World Bank data, however, was quick to point out that despite these fears, the situation is most likely not as precarious as many make it out to be.

According to IDEA, despite the resilient underlying demand and improved fundamentals of Philippine real estate companies, vulnerabilities in the sector remain and may accumulate if key sources of risk are not managed. A substantial portion of buyers in the residential category are OFWs, and sales in that segment are exposed to adverse shocks to the global economy. World Bank data cites that there were a significant number of defaults since 2009, in the wake of the US and European debt crunch, by OFWs who were unable to pay their mortgages. Also, the low interest rate environment may lead banks to relax credit standards, as we saw in the events preceding the US’ 2008 financial crisis. A few lenders have increased their “loan-to-value-ratio” (how much one can borrow against the value of the collateral) from 70 to 80 percent. Some industry analysts stated that his number has even gone as high as 90 percent). Also, like practice in the US, some banks have waived several prudential requirements, such as proof of income, to generate more sales.

All in all, the Philippine real estate Industry is one that is benefiting from low interest rates, sound macroeconomic fundamentals, and booming demand. Constantly rising OFW remittances and a successful BPO industry continue to help maintain demand through the recent years, and with their current growth, are expected to be drivers of consumer appetite. With more investments even in other industries coming in, foreigners relocating to the country have become a fast growing source of demand for residence. These factors which benefit the industry, however, are also sources of a significant amount of risk. Moving forward, added vigilance is needed in order to keep the industry and related sectors, such as the financial system and the construction industry, healthy and growing as per researchers of IDEA.

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