Residential property sector seen facing oversupply woes

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A vendor sells snacks in front of a sign of Philippine property real estate developer Megaworld Corp. advertising their new project "The Trumps" in the financial district of Makati in this file photo. The World Bank report has raised the specter of risks arising from oversupply in the residential segment as it said growth in the supply of condominiums in the pipeline had started to outpace demand growth. AFP PHOTO/JAY DIRECTO

The Philippine real estate market is generally stable but the residential segment may face “risks arising from oversupply,” according to the World Bank.

The World Bank also said the shift toward non-bank financing required careful monitoring of the developers’ exposure.

In the Philippines, households tend to have greater preference for holding wealth in the form of real estate rather than equities.

A report from state-run think tank Philippine Institute for Development Studies says ownership of dwellings and real estate has been growing steadily at high single-digit rates from 2006 to 2011 except for a relatively low 4.1 percent growth in 2009.

“Given these, a closer look at real estate market developments is a critical element of ensuring macroeconomic stability. The Philippine real estate market today is largely driven by BPOs [business process outsourcing] and remittances, and less on investors seeking higher returns,” according to the World Bank report.

The BPO industry, which has seen impressive growth in the last decade, has fueled the demand for office space and even residential units while remittances fuel demand in the low-end to mid-range residential market.

An estimated 60 percent of remittances directly and indirectly benefit the real estate sector, which includes mall operations, according to real estate research and consultancy firm CB Richard Ellis.

The BPO industry continues to post strong demand for office space, the study says. The influx of new BPO companies and the expansion of existing ones have resulted in a much faster take-up of office space in central business districts.

Out of the total office space stock of 5.7 million square meters in Metro Manila in 2011, the BPO industry accounts for two million square meters, or more than 40 percent of total (Colliers International 2012). Achieving full occupancy is much faster now as major BPO firms can easily occupy an entire building, which previously took about one year to fill.

Yet, the combination of new and lagged projects being completed in response to strong demand may later push vacancy rates upward and may mute rental growth beginning 2012, the World Bank said.

“This reflects delayed supply responses to demand shocks, slow price adjustments owing to illiquidity, and market imperfections (e.g., difficulty of quick sales during times of illiquidity),” the World Bank said.

With increased supply, despite a record low rental rate (4 percent) in 2011, the vacancy rate in the Makati central business district has started to rise in the fourth quarter of 2011 from 3.8 to 4.1 percent (quarter on quarter), the World Bank said.

It also noted that the growth in the supply of condominiums in the pipeline had started to outpace demand growth.

Despite the generally neutral to positive outlook, the World Bank said the residential segment faces risks due to oversupply of available units, a potential contraction in remittances (due to unrest in the Middle East, reduced employment in Saudi Arabia, slower growth in the United States and recession in the Euro area) and the upward pressure on oil prices, which could crimp spending.

The World Bank noted, too, that anecdotal evidence suggested that an increasing number of developers had been offering in-house financing to buyers.

A drawback of this program is that smaller developers may not always conduct sufficient due diligence on the loan applicants and some do not even require loan applicants to submit proof of income.

To mitigate risks, developers tend to charge higher interest rates for in-house financing than market rates and these rates are often fixed, unlike bank interest rates, limiting the developers’ capacity to adjust to a short-term adverse financing environment.

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  • http://www.lifeinsuranceph.com/ Life Insurance Philippines

    There is no bubble to burst. Think about it. Population of 100 MILLION people. Assuming a family size of 5. That’s 20 Million families. How many families own a condo (demand)? How many condos have been built or are being built (supply)? I don’t think there is enough supply to meet the demand. It’s simply a question of pricing and affordability. Sell condos at prices of P300T each and you will have a lot more people buying than renting.

  • asdafaa qwesda

    I’m surprised the bubble has lasted this long. Ah well, time to save up for a condo about to be sold at a loss!

  • http://twitter.com/Richeety Rae Nava

    Oversupply?? 

    eh bilhin sana lahat yan ni Thief Justice Corona, kungdi sya nabulyasot

    meron pa siyang unlimited, undisclosed amount of US dollars 

    supply

  • http://twitter.com/Umbokpitaw Doodz

    Watch for the bubble to burst.. Good opportunity to invest. Be patient and wait for another 5 years..Let us see ! If it happened in US, in Greece and in Europe, do you think it will not happen in PI? We do not have a solid base economy..We depend on OFWs…and BPOs..

  • http://pulse.yahoo.com/_JEMNLLYAP5EA7SM3A6QUOGV62Q Chris

    We’ll see if the WB is right this time .. coz they failed in 1997.

  • http://pulse.yahoo.com/_Q3QGG5QHBLRMZTIYWUFURY6J2E Night

    WALA YAN…. SIGE BILI LANG NG BILI NG CONDO

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