RP property sector on way to recovery

By Judith Balea, abs-cbnNEWS.com

Posted at Sep 28 2009 01:40 AM | Updated as of Sep 29 2009 09:37 AM

MANILA - After experiencing some softening due to the global financial and economic debacle, the real estate industry is starting to make a turn for the better.

Sales of most developers picked up steam in the second quarter, prompting property analysts to say that a mild but continuous recovery is on the cards for the industry this year.

Buyers have returned to the residential market, while sustained consumer spending has supported expansion activities in the retail segment.

In the office sector, meanwhile, a glut of supply still remains although demand is seen to outpace this soon, raising expectations of rents climbing again.

Two years since the US subprime crisis—which snowballed into a worldwide economic downturn—hit local shores, appetite for real estate properties continues to be supported by the steady inflow of remittances from Filipinos working abroad, expansion of outsourcing companies, high credit liquidity, and lower interest rates and friendlier payment terms.

Sales pick up

According to property consultancy firm Colliers International, residential sales for new and pre-selling developments started to pick up in the second quarter of 2009, but secondary market sales were still sluggish.

Nonetheless, it said players now have the opportunity to launch delayed projects this year.

"There was a slight uptick in the market for the second quarter as demand for smaller units from both foreign and local intensified. The country's residential sector is showing some signs of recovery. Developers are fast to hint a better performance even in the high-end market which took a big hit since the market slowed down late last year," it said in its latest market overview.

Ayala Land Inc. and Vista Land & Lifescapes Inc., for instance, have been encouraged to pursue more projects after booking increases in reservation sales, a leading indicator of their overall sales revenue and financial performance.

Sales of Ayala Land have reached a monthly mark of P1-billion starting March until June, representing high double-digit growth rates, while those of Vista Land rose 35% to P4.5 billion in the second quarter from P3.4 billion in the previous quarter.

"Confidence in the market has returned," Ayala Land Premier sales head Tom Mirasol said earlier, just as Vista Land chief information officer Ricardo Tan noted that "we've been seeing signs of recovery in the sector with the gradual return of consumer confidence."

The two companies believe that the worst effects of the crisis were already felt in the first quarter, when they recorded significant declines in their bottomlines.

For both of them, the main drag was the high-end residential segment.

Ayala Land's first-quarter net income fell 50% to P907 million due to a 24% drop in new bookings under its upscale brand Ayala Land Premier. Vista Land, on the other hand, posted a 22% decline in net income to P592 million as revenues of its high-end housing arm Brittany fell 5%.

The vulnerability of the high-end market to any weakness in the economy is nothing new to them, especially after having been through the 1997/98 Asian financial crisis where the contagious bursting of the real estate bubble ended the heydays of luxurious properties catering to a few elite.

Since then, property players have been more in touch with the demands of a bigger market, consisting mostly of overseas Filipino workers (OFWs).

Vista Land said that 60% of its sales continue to be supported by the $1-billion-plus monthly remittances from OFWs, who have been buying middle-income and affordable homes for their families here at home.

Seeing the stable demand for these types of developments, Ayala Land, for its part, has intensified efforts to get ahead in the game.

It recently established a subsidiary focusing on low-cost housing, a market where it expects "much opportunity and future growth."

"The formation of this new subsidiary supports our strategy to expand our market beyond what we currently offer and serve a broader segment of the population that demands more affordable but quality residential developments," stressed Ayala Land president Antonino Aquino.

Retail, BPO still promising

Apart from the resurgence of interest in the residential, bright prospects in the retail and office space sectors are keeping the property industry afloat.

In retail, most developers are bullish as this segment appears to be recession-proof.

“With 70% of the country’s gross domestic product (GDP) contributed by personal consumption expenditures, a recession-proof retail industry is not hard to believe,” Colliers said.

Two factors indicate that malls have been affected by the crisis the least: low vacancy and high foot traffic.

According to Colliers, Metro Manila malls are filled with non-traditional retail tenants like spas, clinics, leisure and entertainment shops—the new concepts behind the decline in vacancy to 10.7% as of the second quarter of the year from 11.2% in the earlier quarter.

Foot traffic, meantime, has been estimated at 100,000 people daily in major malls such as the Sys’ SM, Ayalas’ Glorietta and the Gokongwei’s Robinsons. This translates to more demand for various products and services inside the shopping centers, which in turn, means more occupancy for the developers.

For the past years, sales at these malls have been a gauge of trends in consumer spending, which contributes majority of the country's domestic output and is considered the main engine of economic growth.

Analysts estimate that 30% of total consumer spending happens inside malls, and two-thirds of this slice of the pie is accounted for by SM alone.

SM, which operates the largest network of 34 malls nationwide, ended the first half of the year with a net income of P3.41 billion, up 8% year-on-year, as revenues grew 15%. It booked a 5% increase in cinema ticket sales and a 4% growth in amusement and other income as more consumers availed of these offerings compared to last year.

Rental fees collected, which account for the largest portion of its revenues and are often based on tenants’ sales, soared 17% to P8.40 billion in the first 6 months from last year’s P7.17 billion.

In the office sector, meanwhile, companies led by the business process outsourcing (BPO) industry—which earlier postponed expansion plans due to the crisis—will try to take advantage of current low rental rates, triggering the oversupply in office spaces to correct itself by mid-next year, said another property consultancy firm, Jones Lang LaSalle Leechiu.

“Unlike many other places, we are not experiencing any net contraction in demand here, thanks to a robust BPO industry and other players ready to absorb new inventory,” explained David Leechiu, Jones Lang LaSalle country head.

“We will continue to have cheap real estate in Metro Manila and Cebu only until mid-2010. Prices may climb rapidly then as supply dries up,” he added, noting that this would mark a faster recovery compared to the Asian financial crisis, wherein prices took 5 years to stabilize.

But before rental rates start to increase, both Jones Lang LaSalle and Colliers are looking at another round of rental declines towards the end of the year “as tenants exploit their bargaining power.”

In the second quarter, Leechiu said rates for prime office spaces in the Makati business district fell 42% year-on-year to P700 from P1,200 per square meter monthly. This was the steepest drop among 12 areas in Metro Manila.

Nevertheless, Leechiu expressed optimism that the real estate office sector will pick up again soon, owing to demand from large multinationals especially since big banks such as JPMorgan Chase, Deutsche Bank and Citibank are now undertaking their own outsourcing operations.

Growth drivers

The same factors—strong OFW remittances, healthy bank liquidity, and low interest rates—are likely to continue to drive property sales in the Philippines.

Previous market consensus of a decline or flat growth in money sent home by Filipinos abroad is being revised as clearly, there are no signs that remittances are shrinking.

In fact, the central bank now projects remittance growth to top 3% this year, higher than earlier estimates, following a surprising 9.3% growth in July.

“These are all good news for the economy and the real estate industry as a whole. OFW remittances are worth 10% of the GDP and around 30% of remittances are spent on housing and housing-related activities,” said Colliers.

Aside from this, ready credit lines are made available to home buyers by local banks, which are now bigger and more capital-intensive following past consolidations and implementation of sound lending and investing measures.

Consumers are also enjoying lower interest rates on home loans, with lending rates down by a total of 140 basis points since the central bank started easing its monetary policy in December.

In the first 6 months to June, government data showed that banks’ exposure to the property sector in terms of loans and bond investments—signifying their willingness to lend—grew 23.3% to P377.8 billion from P306.3 billion in the same period last year.