Boom but no bubble

THE HIGH-RISE residential sector is now in a boom but an asset bubble is unlikely, especially with precautions taken by monetary authorities, the Bank of the Philippine Islands (BPI) said.

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"The country’s current economic condition is somewhat similar to the situation back in 1997, wherein the financial and real estate sectors are both quite healthy and experiencing robust growth," the BPI Asset Management and Trust Group said in a report released on Monday.

The residential sector has shown remarkable growth in sales and expansion as a result. This surge has been supported by fast-rising income among Filipinos, particularly due to business process outsourcing and remittances of migrant workers.

With today’s low interest rate environment and investors’ search for higher yields, there are concerns that an asset bubble could be forming, especially in the high rise residential segment, similar to what triggered the 1997 Asian financial crisis.

However, BPI Asset Management explained, there are no indications of an oversupply of or speculative demand for properties. "Thus far, all of the data gathered points to a boom in the high-rise sector of the Philippine real estate industry, with no real signs of a slowdown or a bubble about to burst," it said. "An uptick on the supply side has been matched with steady demand and property prices have exhibited no sudden or significant upsurges."

While supply of new units jumped by 52% in 2011, BPI Asset Management said sales reservations also increased by 129%. Vacancy rates in premium residences in Makati City are also at a low of 5%, especially as expatriates choose three-bedroom condominiums in the face of limited supply and prohibitive rents of single-family houses.

BPI Asset Management also noted that land values and property prices are nowhere near levels seen during the 1997 Asian financial crisis. "Currently, land values are at about 66-68% of 1997 levels in nominal terms, though in real terms, values are only at about 33-34% of 1997 levels," it said. "Likewise, though residential segments have recovered, prices are still well below their peak levels in 1997 at 57% in real terms."

Price increases haven’t been steep either. Between 1995 and 1997, average price of a three-bedroom condominium in Makati City grew 63%. In 2011, it rose 4%.

"We believe that the strong Philippine property market should last for several more years as the banking system remains conservative through preemptive regulations from the Bangko Sentral ng Pilipinas (BSP)," BPI Asset Management said.

In August, the BSP tightened rules on banks’ exposure to real estate. While the cap on real estate loans was kept at 20% of total loan portfolio, BSP broadened the definition of "real estate activities" to include not just acquisition, construction and development of properties but also buying and selling, rent and management. It also mandated that banks report both real estate loans and investments in debt and equity securities that finance real estate activities.

Nevertheless, the fund manager identified asset bubble indicators that the central bank should monitor. A spike in country club shares, for example, could be a sign of speculative buying.

"Another sign to watch out for would be rent-to-own schemes, which result from developers being unable to pre-sell units indicating a possible glut on the supply side," it said, citing other indicators like a sharp drop in required down payment or an increase in repeat buyers -- people who buy several lots for investment.

via Diane Claire J. Jiao, Business World Online