THINKING PINOY
By RJ NIETO
RJ Nieto
President Rodrigo Duterte just last night agreed to Chief Presidential Legal Counsel Salvador Panelo’s recommendation to probe the lease contract between the Ayala Group and the University of the Philippines for the UP Ayala TechnoHub.
Panelo’s recommendation came a day after I published “UP Naming Binarat? UP gets only ₱22/sqm monthly from UP-Ayala TechnoHub” where I showed that Ayala paid UP a total of only ₱1.094 billion in rent payments from 2008 to 2018, based on the Commission on Audit (CoA)’s 2018 Annual Audit of the UP System.
UP v. City Treasurer of Quezon City (Supreme Court G.R. No. 214044), meanwhile, shows that the contract involves 380,630 sqm of UP (READ: Public) land, so that the said payments translate to an effective monthly rental rate of just ₱22 (rounded from ₱21.77) per sqm for that period.
The CoA report, in reality, provides more detail as it listed down Ayala’s annual payments per year: ₱107 million up front to cover 2008 to 2010, ₱55 million for 2011, ₱91 million in 2012, ₱96 million in 2013, and anywhere from ₱103 million to ₱111 million annually from 2014 to 2018.
Dividing the exact figures for each payment by the number of months and the total area leased, it’s easy to see that the effective rental rate was ₱7.81 from 2008 to 2010, ₱12.10 in 2011, ₱17.31 in 2012, ₱21.69 in 2013, and ₱26.68 to ₱35.41 from 2014 to 2018.
Considering that this involves a large tract of prime land in central Quezon City, it isn’t difficult to see that such rates are below what an average reasonable person would expect.
Ayala in a press release claimed it pays UP not ₱22 but ₱171 per sqm, saying it’ll pay the state university a total of ₱10.23 billion, or ₱4.23 billion in rentals plus ₱6 billion in “investment value”.
I find this claim problematic on the following grounds:
First, the numbers don’t add up. If UP gets ₱10.23 billion in total compensation for leasing out 380,630 sqm for 25 years, simple arithmetic shows the effective monthly rent is just ₱89.89 per sqm, which still sounds low.
Second, Ayala seems to have failed to consider depreciation. The ₱6 billion figure seemingly refers to the cost of improvements (buildings, roads, etc.) Ayala would have made to the leased land, improvements that UP will own after the contract expires in 2031.
I don’t understand how Ayala could expect us to believe that ₱6 billion of mostly technological buildings will still be worth ₱6 billion after 25 years of use. That’s just like Ayala telling UP, “I’ll buy a bucket and use it to sell water from your well for 25 years. I will give you just 10% of earnings, but you get to keep the bucket.”
Third, ₱6 billion for improvements sound a tad too high.
I looked at the Audited Annual Financial Statements of UP North Property Holdings, Inc. (UP North) from 2007 to 2018. UP North is the Ayala Land subsidiary that handles the project.
Based on these documents, Ayala has invested a total of ₱3.89 billion Investment Properties by the end of 2018, with the average annual cost of additional improvements at around ₱30 million.
If Ayala spends ₱30 million annually for the 12 years from 2019 to 2031, the total investments will translate to just ₱4.25 billion by the time the lease contract expires.
Thus, Ayala will need to inject massive capital to reach ₱6 billion by 2031, but this may be a severe challenge because a Google satellite view of the TechnoHub shows there’s little space left for building construction.
Fourth, is a 10% revenue share for UP fair?
Per CoA, UP’s earnings from the property come from around 10% share of lease revenues while Ayala gets the rest, which sounds unfair to UP when taken at face value. What’s more disturbing, however, is when we compare UP’s earnings to Ayala’s annual net profit.
Based on the same UP North filings, Ayala’s net profits are about five times what it pays UP in rent. For example, UP in 2018 got ₱112 million while Ayala got ₱660 million in net profit. In 2017, it was ₱116 million for UP and ₱634 million for Ayala.
Is this effective income sharing ratio fair? Malacañang should check that.
Fifth, Ayala’s net profits dwarf UP’s share. The same filings show Ayala posted a total of ₱3.683 billion in net profits on the property for the past 11 years, with an average annual net profit of ₱506.4 million for the five years spanning 2014 to 2018.
Modestly assuming Ayala posts a constant ₱500 million in annual net profits until 2031, then that’s an additional ₱6 billion on top of the ₱3.683 billion it already earned.
We are talking about net profits here, i.e., what Ayala gets after deducting all business expenses, including payments made to UP. Also note that land prices in Metro Manila are skyrocketing because of the POGO phenomenon and the metro’s rapid economic growth, so Ayala is likely to earn far more than just this.
Will this Ayala venture go broke if UP gets an extra billion or two on top of what little it currently receives?
I don’t think so.
We are talking about funding for Public Education here. We are talking about this Nation’s future in an increasingly knowledge-driven global economy. So why shouldn’t we fight to give our state colleges and universities the best deal possible?
In the first place, isn’t that primarily what the UP Ayala TechnoHub is for?
For reactions, please email TP(at)ThinkingPinoy.net or leave a comment on Facebook.com/TheThinkingPinoy.