Pogos carriers of risks for banking, property sectors, says Fitch report

Rising prices of real property in the country—especially condominium units being rented by mostly Chinese workers in Philippine online gaming operators (Pogos)—pose risks not only to the property sector but also to the banking industry, debt watcher Fitch Ratings said.

In a report titled “Philippine Property Price Surge Heightens Banking Risks” released Wednesday (Jan. 8), Fitch said the three straight quarters of surging property prices in 2019 “point to speculative activity that could affect market stability if unchecked.”

“To the extent that the increase in prices has been driven by a boom in the Pogo sector, it may also expose banks and the property industry to greater policy risk,” Fitch added.

Fitch noted that residential properties in the country are becoming more expensive at the fastest pace in any major real-estate market since 2010, adding that “in recent months the pace of increase has accelerated.”

For instance, while prices of residential units nationwide climbed by a tenth during the third quarter of last year, condominium prices in Metro Manila jumped by an “unsustainable” 34 percent year-on-year, Fitch said.

“The surge partly reflects a 75-basis point decline in Philippine policy interest rates since April 2019, but also strong demand from the Pogo sector,” Fitch said.

It said “anecdotal reports” suggested that Pogos “accounted for around 30 percent of Metro Manila office demand over 2018 to the third quarter of 2019.”

“Fitch believes this activity is likely to have had spillover effects on nearby residential property prices,” it said.

Fitch pointed out that “prolonged rapid house price inflation tends to spur borrowers to take on more debt to afford increasingly expensive homes, particularly if the trend stimulates further speculative price appreciation.”

“It could also lead developers to over-invest in future supply, risking an inventory overhang if demand weakens,” the report said.

“Both trends have a tendency to raise private-sector leverage, making the economy more susceptible to downside risks. Studies show that asset bubbles fuelled by credit booms typically lead to deeper and longer downturns,” according to Fitch.

Fitch said that “a higher reliance on the Pogo sector to drive real-estate demand exposes banks and property firms to greater policy risks.”

“In July 2019, the Chinese authorities signalled an intention to crack down on Philippine Pogos, which are reported to employ many Chinese nationals and provide services to Chinese clients,” said Fitch.

“Increased scrutiny or a clampdown on the sector by Chinese or Philippine authorities could call into question the growth and viability of the industry and may ultimately lead to knock-on effects on domestic property demand and the broader economy,” it said.

“However, some major property developers have placed internal limits on their direct exposure to Pogo operators, which should help mitigate downside risks to the sector,” Fitch added.

Edited by TSB