New trend or symptom? PH property boom stokes fears of bust

First of a series

Sept. 22, 2014, was a date the officials of the Government Service Insurance System would not soon forget.

A few weeks earlier, the state pension fund had solicited bids from would-be buyers from the private sector for its two prime lots in Bonifacio Global City in Taguig as part of its efforts to monetize its investments.

Its officials were hoping for a good showing from bidders. After all, just a year before, its state-run cousin, the Social Security System, sold a similar prime lot nearby at a “good price,” which was P277,000 per square meter.

When the bids for the two GSIS lots were opened, however, everyone at the fund—and soon, everyone who read the news about it—were stunned in amazement.

Soaring prices

Two separate groups had submitted bids of P800 million and P732.8 million for each of the 1,600-square-meter properties. This meant the GSIS properties were sold at the equivalent of P500,000 and P458,000 per square meter—a new record that was almost double the previous level set by the SSS transaction.

“This got us wondering: Are the prices too much?” said Antton Nordberg of real estate consulting KMC MAG Group.

“Sure, the prices can be justified by virtue of the fact that the lots are in a prime location,” he said in a research note. “They are located right in the heart of BGC, a few meters away from major retail developments, as well as high-rise offices and residential buildings.”

“However, this might not be enough to justify how the price skyrocketed by 80 percent in a year,” Nordberg warned.

The GSIS property deal made observers verbalize a question that had been quietly nagging them for several months: Was the Philippine property market in a bubble that was set to pop?

The question is especially relevant since the local real estate market has been one of the biggest beneficiaries of the “quantitative easing” program of the US Federal Reserve coupled with the investor confidence-boosting policies of the Aquino administration.

Path to disaster?

And developers of both office and residential properties have benefited immensely from the twin stimulus effects.

Market watchers who were around two decades ago noted that similar conditions were present in the months leading up to the 1997 East Asian financial crisis—a wave of liquidity sweeping across so-called “tiger economies” coupled with the pro-business stance of the Ramos administration.

Exercise caution

Is the Philippines walking the same path to disaster it once did almost 20 years ago, or has it learned from its mistake?

As with trying to divine the direction of bullish markets, however, there were more questions than answers.

He asked, “What is the motivation of the buyers for this property?” “How did they value the property and decide how much to offer? What are the implications of this transaction? Is this the start of new trend or a symptom of the looming asset bubble?”

Justifying the P500,000-per-sqm price on the GSIS deal would mean that demand for office property and rental rates is expected to go up further.

And, as in any bull market, investors must exercise caution and examine carefully whether prices remain rational and backed up by solid fundamentals.

Nordberg said his best estimate for the current fair market value of similar properties in BGC should be around P290,000 per sqm, which is just slightly higher than the SSS transaction price made a year earlier.

“If the underlying demand for properties (such as favorable demographics or the business process outsourcing industry) is expected to exceed supply, then the faster growth can be justified,” the KMC MAG Group manager said. “However, the million-dollar question here is that, is the underlying demand that strong that it would justify an 80-percent price increase of land per annum?”

The property consultant concluded: “If you forecast the market conditions a few years ahead, well, no.”

(To be continued)