Property sector remains bullish, says UBS

The Philippine property market is on a roll, with land values already exceeding peak levels prior to the 1997 Asian financial crisis for the first time, but have yet to reach worrisome levels, an economist from investment bank UBS said.

In his Dec. 18 research note “Philippines By the Numbers (2014),” UBS economist Edward Teather said that in the local asset market, the property sector had picked up and had yet to show signs of stopping.

“Real price gains in Manila property prices have been less buoyant than those on the equity market and real Manila property prices do not look stretched,” Teather said.

He also noted that the local equity market had held up well relative to peers even as the global markets deteriorated in late 2014. The Philippine Stock Exchange index rose by 22.8 percent to close at 7,230.57 this year.

Teather said stock markets and other asset prices were among the best forward-looking indicators for economic growth and profits. He noted that a sustained rise in stock markets could also have significant effects on consumption and investment, given its wealth effects on consumers and the lowering of the cost of capital for listed firms.

Property prices can have a similar effect, with residential property valuations particularly relevant for household balance sheets, he added.

“Philippine financial markets appear to have tempered their expectations of strong growth in the coming quarters as equity markets have stabilized,” Teather said.

Based on an earlier report by property consulting firm Colliers Philippines, land values in the Philippines had already exceeded their peak for the first time since the 1997 Asian financial crisis. This was after the Government Service Insurance System (GSIS) sold two lots in Fort Bonifacio, measuring 1,600 square meters each, to privately held firms Focus Palantier Inc. and Goldenwill Inc.

Focus Palantier won the bidding for the first lot for P500,000 per square meter while the latter bagged the second lot for P458,000/sqm.

Also considering Ayala Land Inc.’s purchase of the abandoned Jaka tower in Makati’s central business district (CBD), Colliers estimated that average prices in Makati and Fort Bonifacio CBDs had appreciated by 18.7 percent and 38.2 percent, respectively, in the third quarter of 2014 compared to the levels in the second quarter.

The property boom in the country in recent years has been supported by a regime of record-low interest rates, rising household income and a stable banking system alongside improved consumer confidence.

Teather said as a sector of the local economy, construction was small. However, he said construction spending by all sectors of the economy meant that construction was an important part of investment expenditure.

“Base effects are likely exaggerating the recent pickup in construction but given that we expect the flow of easy money to continue relatively unabated into early 2015, before US yields start pushing up market rates, there is scope for near term strength to persist,” Teather said.

For overall investment growth, the UBS economist expects the easy credit environment to be supportive this 2015 but less so than in 2012-2013, citing headwinds from the peaking credit cycle.

“The investment to GDP (gross domestic product) ratio has trended higher and we expect that this should continue, reversing the decline of the last decade. The risk is that investment growth has been construction-centric and may prove vulnerable to higher interest rates and when these rise from extraordinarily low levels,” Teather said.