Property stocks have rallied significantly in the past few months, with the Philippine Stock Exchange, Inc. (PSE) property index up by 17 percent since the start of the third quarter. This materialized as property companies are expected to be the main beneficiaries of falling interest rates.
However, it will take more than lower interest rates to boost the short-term outlook of property companies, making it difficult for property stocks to continue moving higher in a straight line.
Earlier this month, Leechiu Property Consultants came out with its third quarter property market report showing that net take-up of offices for lease in the third quarter dropped by 48 percent year-on-year to 68,000 square meters (sq m). This took place as gross take-up fell by 15.7 percent to 215,000 sq m while leasing contractions increased by 19.5 percent to 147,000 sq m.
As a result, the office vacancy rate in the Philippines stayed elevated at 17 percent.
The high vacancy rate will continue to put downward pressure on office lease rates.
Although lower interest rates will help boost economic activity and encourage companies to expand, it will take time for businesses to become strong enough or companies to gain enough confidence to expand their office footprint more aggressively.
Meanwhile, according to the same report, demand for residential condominiums was stable at 6,885 units in the third quarter.
However, the bad news is, the current inventory level is at its highest, with a total of 67,600 units being actively sold.
Based on Leechiu Property Consultant’s estimates, the current inventory is equivalent to 29 months or almost two and a half years’ worth of sales.
Colliers is even more pessimistic with its head of research Joey Bondoc saying that it could take up to five years for the market to fully absorb the ready-for-occupancy condominium units.
Admittedly, lower interest rates will help increase affordability and boost sales.
However, the oversupply of condominium units will discourage property developers from aggressively launching new projects and increase selling prices.
This in turn will hurt their ability to grow their profits in the short-term.
Because of the challenges facing property companies’ office leasing and residential segments, it will be difficult for property stocks to sustain their strong performance in the next few months.
Share prices will most likely be volatile as the earnings performance of property companies might not be strong enough to justify a continuous increase.