For every 100 residential condominiums around Makati’s commercial business district, the number of unoccupied units is likely to reach 12 this year, among the higher vacancy rates on record and up from around 10 last year, according to real estate services firm Colliers International.
Signs of oversupply? Not really, if you ask the property companies.
Developers serving segments ranging from socialized to high-rise luxury types are upbeat that demand will catch up with supply given the availability of credit, lower borrowing costs, and the benign economic situation in the country.
“We are cautiously optimistic but more on the optimistic side,” said Jose Gabionza, vice president for business planning and special projects at SM Development Corp. “We are aiming for around 10 percent sales growth this year, which is similar to last year. We’re hoping that the environment is [conducive enough] for us to reach it.”
Crisis
Amid Europe’s ongoing sovereign debt crisis, economists from organizations as varied as multilateral lender Asian Development Bank and global ratings firm Standard & Poor’s Corp. are predicting that economic growth will slow in most Asian countries this year. The Philippines is expected to expand at a pace below the 4.7-percent growth trend seen during the nine-year regime of President Arroyo, economists said.
Data from Colliers showed that at the end of 2010, there were 111,313 residential condominiums in Metro Manila. An additional 39,438 units were completed in 2011 and 31,000 units would likely be finished this year. This means there will be a total of 181,751 residential condominium units throughout Metro Manila at the end of 2012.
Reflective of a strong domestic market, there has been a rise in the take-up rates of affordable condominiums in recent years, according to Colliers. There has also been an increase in vacancies.
“This shows that a portion of the market is being taken up by investors and they might be having a hard time leasing out to potential renters because of the affordability of condo units in the market,” said Paul Vincent Chua, associate director for consultancy and valuation services at Colliers. “So does this mean there is an oversupply in the market? I don’t see it at the moment.”
Chua noted that most of the affordable condominiums—which he defined as those priced between P1.25 million and P3 million—are now solving part of the backlog for socialized and low-cost housing in the country.
“Once we see that take-up rates have gone down significantly, then that is the time when we can say that there is an oversupply in the market,” he said.
An oversupply spells stiff competition and limited profitability for developers. If oversupply occurs amid faltering consumer and investor confidence, they face a tougher and longer time to clear inventories, affecting their yearly income.
So far, the demand is meeting the supply. Ayala Land expects to post double-digit growth in earnings this year.
“We expect demand to continue in 2012, given that our outlook is for the market to remain very liquid, thus encouraging the low interest rate scenario to continue for some time,” said Pamela Perez, investment manager at Ayala Land.
Unmet demand
The underlying demand for residential units remains strong, with the housing backlog estimated at about 3.7 million units throughout the country, Perez added. Through its unit Amaia Land Corp, the traditionally high-end developer Ayala Land is now selling homes priced at P1.25 million and below.
Filinvest Land Inc., which focuses on middle-income to socialized housing, managed to sell 6,900 units worth P12.1 billion in new projects launched in 2011—up 17 percent from the value sold in 2010, according to Anabelle Arceo, investor relations officer at Filinvest. She said the company is targeting to match this year the sales growth that it realized last year.
“There are a lot of people who still don’t have their own house. It’s an unmet demand through the years,” said Arceo.
As such, like in previous years, there is room for ample sales growth this year, particularly for one- to three-bedroom condo units. For lower priced smaller condos, typically with unit sizes of 16-20 square meters, it may not be as easy for demand to catch up with the strong increase in supply, she said.
In contrast to the optimism of real estate developers in general, analysts from stock brokerage firms expect the sector’s sales and earnings to grow at a slower pace this year.
In 2011, the property index showed the steepest decline among the sub-indexes in the Philippine Stock Exchange. It fell 6.4 percent on worries about weaker global economic outlook and a possible decline in remittances. The picture that brokers paint for 2012 isn’t much different.
A slowdown in economic growth doesn’t bode well for the country’s real estate sector given that property demand is partly dependent on consumer confidence. Also, a less friendly global economy can potentially weaken overseas workers’ remittances, which have been the lifeblood of the business.
Rotation
“We’re bullish on defensive stocks, such as utilities and power, as well as on construction-related sector and leisure. We’re not so bullish on properties,” said Maria Arlysa Narciso, analyst at AB Capital Securities Inc.
She hastened to add, however, that should they see signs of easing in policy rates and improvement in the economy, then it would be good to look at the stocks of Ayala Land Inc., Filinvest Land Inc., Megaworld Corp., and Robinsons Land Inc. The four showed the biggest gain among property issues in the first few trading days of January.
“Investors are reentering the market and focusing specifically on the large caps. Property seems to be accelerating ahead of the rest of the market but that’s because several of them were big underperformers last year as investors exited the market. Now they are coming back. They are just rotating through sectors that present the best upside potential,” said Jose Mari Lacson, head of research at Campos Lanuza & Co.
“Property stocks were up early in the year because of expectations that interest rates will fall, plus there’s demand for those issues from returning overseas Filipino workers and retirees,” said Astro del Castillo, managing director at First Grade Holdings Inc. He also said that the fall in property stocks in 2011 added to the attraction.
In other segments of the market, demand for office space continues to be supported by the outsourcing business, which remains strong despite the issues in the United States against offshoring call centers. Retail space rented out in shopping malls remains a stable source of recurring earnings for property developers with a broad portfolio range. But this segment may come under pressure if consumer spending declines and drives many retailers out of business. That, however, isn’t most analysts’ base scenario.
In sum, the Philippine property sector may or may not be down, but is definitely not out.