With voice of reason, BSP hopes to avert property crash

(Conclusion)

As the entity designated by law to safeguard the health of the local financial system, it is completely understandable—and expected—that the Bangko Sentral ng Pilipinas will be worried about any crisis that may stem from a reversal of fortunes in the red hot Philippine property market.

Two decades ago, the BSP was at the forefront of helping defend the economy from the effects of the East Asian financial crisis that swept across the region and hit the property market particularly hard.

Indeed, no less than BSP Governor Amando M. Tetangco Jr. warned —as early as two years ago—that many of the market upheavals he had experienced in his long central bank career started with the popping of a property bubble.

Because of this, the BSP took the initiative of heading off what could be the beginnings of a speculation-induced reversal in the real estate market.

The BSP said it would soon mandate local banks to cap real estate loans at 60 percent of their collateral values, down from the average of 80 percent at present.

At present, banks have the flexibility to lend as much as 90 percent of a collateral’s value, depending on the asset class. The new policy, however, will cap loanable values across the board at 60 percent.

The move is part of a broad measure of reforms that the BSP will roll out over the near term to buttress the Philippine banking system from the effects of any looming market volatility.

The tighter credit policy will also translate to higher interest rates as banks demand higher returns to compensate for their higher risk exposure to real estate loans.

Together with the more stringent collateral requirement, Tetangco recently announced that universal banks with over 100 branches must boost capital to at least P20 billion from the present floor of only P5 billion.

In the meantime, commercial banks with more than 100 branches must increase their capital levels to at least P15 billion, which marks a sharp rise from the present mandated level of only P2.4 billion. Similarly, smaller thrift, rural and cooperative banks must also boost capital levels.

A senior BSP official, speaking on condition of anonymity, said this policy shift was being implemented by regulators who were worried about banks’ traditional collateral-based lending mind-set.

“That’s how crises happen,” the official explained. “Banks lend based on the value of their real estate collateral which everybody thinks is worth a certain amount today, but is suddenly worthless the following day.”

Ultimately, the goal of regulators is to cool the booming real estate market and guide it to a soft landing, rather than allow runaway market forces to bring it to a crash.

Nonetheless, some pain in the property sector is inevitable, given present trends.

“Land is getting very expensive especially with some of the recent purchases,” said Colliers International consultant Chris Wells, referring to the recent sale of Government Service Insurance System lots in Bonifacio Global City, Taguig at a record P500,000 per square meter. “At these record prices, there may be a little bit more risk than normal.”

But Wells feels that any threat to the Philippine property market will target specific sectors instead of the entire industry.

“I’m bullish on the commercial and industrial segments, the reason being there’s so much more growth opportunity in the BPO sector, and commercial space is not being built as quickly as residential space,” he said. “I’m more bearish on the residential sector. The very high end is OK because there’s not as many projects available.”

Asked which segment he is worried about, the Colliers official replied: “The projects in the P10-15 million peso range, not the ultra luxury, upscale market.”

“This is a supply and demand issue,” he explained. “There aren’t as many end users in the market and it’s much more of investors who are going in [as buyers]. So you’re having not as many people renting them at the end of the day. It is quite popular for many to purchase it and not rent it out, and just see it as a capital asset.”

“I do think that, in the Philippines, there will be some kind of market correction,” Wells warned. “It’s just a question of how much.”