HOMEFRONT column by Victor B. Consunji, Founder and CEO of Victor Consunji Development Corporation
From a global perspective, the Philippines real estate sector is inherently unique, and I would argue is currently undervalued. As our economy returns to the above average pace of growth and the maturation of its internals continues, local and international investors alike should become increasingly intrigued. This is the time to get in because what is reasonably priced now, doesn’t stay that way forever.
It’s a well-known fact that there are significant protective measures built intrinsically into the Philippine real estate market that seek to curb speculation and ensure the long-term affordability for Filipinos. The reality is these policies, as well as the collective resilience and conservative nature of banking institutions, private enterprise, and real estate developers alike, paves the path for growth and stability over time. These policies should be seen as a necessary sacrifice of short-term, unjustifiable price increases, in lieu of longer term, sustainable gains.
There have been many calling for a reduction in these measures (particularly the 60/40 rule) and many of those calls come from outsiders who are not concerned about the permanency in our market, but rather are looking for opportunities to speculate, regardless of the consequences to the local market participants. For both foreign and local investors with longer term horizons, these measures are seen as necessary for risk reduction, and are often applauded.
The sudden contraction of economic activity in the pandemic required the Banko Sentral Pilipinas (BSP) to ease and lower rates to provide support for the financial system. While its mandate of targeting 2% inflation was temporarily exceeded in the short term, the BSP’s credibility of maintaining price stability has been preserved and starkly contrasts its Western counterparts.
During recessionary environments, economies are supposed to effectively reset, the allocation of capital needs to recalibrate to the new realities and the market typically goes lower as the hot money is flushed out. While the support levels given by the government here in the Philippines was criticized by many, they pale in comparison to the extraordinary measures deployed in the West, which are now coming home to roost. There are many reasons for inflation, but monetary policy induced inflation has never ended well for any civilization, and we should be thankful we are not headed down that path.
If we compare our relative economic performance to that of the United States, in 2021, as the global reopening plans started to take place, GDP growth was 6.9% for the United States and 7.1% for the Philippines. Due to their unconventional monetary policies, countries such as the United States, UK and Canada are seeing abnormally high levels of inflationary pressure especially where food, energy and housing is concerned. The United States saw annualized rate of 7.5% inflation in Jan 2022, while Canada, Germany and Spain saw 4.9%, 4.9%, and 6.1% respectively.
Despite higher GDP growth, the Philippines annual pace of headline inflation at 3% in January 2022, which continued the downward trend from December 2021 (3.6%) and November 2021 (4.2%). Astute investors know that the true measure of growth needs to be discounted against inflation, and that’s where the true value of the Philippines begins to emerge.
By initiating massive government spending programs with no accountability, going to zero interest rates, and restarting (or increasing) levels of quantitative easing, the West is pulling forward future demand and risks creating stagflation (such as we see in Japan). In 2021 the United States saw a 19% increase nationally in housing prices, while Canada has seen a massive increase nationally of 26.6%. This has affected home affordability for their citizens and naturally leaves investors looking elsewhere for more attractive value propositions.
The reality is that global demand for everything is being fueled by the availability of cheap money, and that has led to inflation in building materials such as cement, lumber, copper and steel. These increases will affect developers here in the Philippines and will inevitably be passed onto the consumer, whether by prices increases or reduction in cut sizes, a trend that we have long seen in the condo market. We can also expect that homebuyers will continue to shift their purchases from higher priced units in the city centers to lower priced sectors in the suburban and provincial locales.
Developers have already responded by offering more flexible payment terms, to meet affordability and the loss of income. This flexibility will be absorbed in the years to come as income levels in the local market continue to recover. Temporarily, this stabilization may not lead to rapid appreciation of pre-selling and Ready For Occupancy (RFO) units and secondary market prices on the other hand for local buyers will only rebound and grow when demand for rentals and increased employment returns to its trend level.
Foreign buyers are noticing that on many metrics such as price per square meter that Filipino real estate is relatively undervalued, and this will help support developers pricing and create stable income. In the past, many condominium developments in the major city centers have maximized the foreign ownership cap and that should counteract the loss in demand in the local market for now.
If we examine the relative performance in these economies prior to the pandemic, the underlying fundamentals of the Philippines were arguably superior by many measures. As per the Philippines Statistic Authority (PSA), Philippine GDP growth was 6.4% vs. the 2.2% growth seen in the United States in 2019. It’s well known that personal and government debt levels were and are still much lower as percentage of GDP, and our age demographics and potential for wage appreciation, give our economy the ability to outperform once again.
Speculative buyers both local and foreign shouldn’t expect that prices would rise towards unaffordable values because of our protective measures, as well as the key differences in our commercial and central banking practices. In particular, the lower Loan to Value (LTV) ratios, lack of excessive deposit hypothecation and real estate development loan restrictions are more conservative, and for good measure.
We fully expect a return to the pre-pandemic economic norm where growth exceeded beyond inflation, as enterprises again express proper activity, revenues rebound, and employment and profits resume their progression. This increase in demand should rejuvenate the secondary market and create stable price increases.
This is important also given the fact that government units have also revised the zonal values of land to higher levels even though we faced reduction in income and growth in the economy has happened. But this will only happen when enterprises get to their levels of income and can afford rental prices, which is why the reopening of the economy needs to continue. Landlords have done their part to support businesses by discounting rental prices during the pandemic and hopefully this practice will end as tourism and corporate activity returns.
As Filipinos, we should be proud of the fact that the economy still has solid support from local market participants that are working hard to protect the value of capital, their investments and many corporations supported their employees as best as possible during these recent trying times. As the global economy strengthens, we can again look forward to a solid stream of OFW remittances that fuels consumption expenditure which protects the income levels of enterprises and property values.
For foreign investors looking to the Philippines, condominiums are still the go-to choice, given the true ownership of title and the proximity to business centers and major arteries, which leads to more consistent occupancy rates and rental predictability. We fully expect the condominium market to rebound, and surely a rising tide lifts all boats. As discussed in my editorial last month, our view is that especially after the experience of the pandemic, Filipino families will continue looking for homes for their families to grow into. In the grand scheme of things, the ebbs and flows we are seeing is the effect of national development playing out as intended.
Hardworking Micro, Small and Medium Enterprises (MSME’s) and larger enterprises that have been doing their best to protect their businesses while doing their part to support their clients amidst the restrictions should be supported further for recovery to express. What’s crucial as the recovery proceeds is to avoid what happened during the Asian Financial Crisis where property prices declined due after the bursting of the bubble when hot money was withdrawn. The sharp increase in interest rates to levels where firms couldn’t afford to pay their loans was directly a consequence of over speculation in a developing economy, which resulted in catastrophic loss of jobs that created loss of effective demand. As a country, we’ve learned these lessons, and soon the world will recognize the fruits of our labor with regards to economic reform.
Given these factors, the economy should continue to evolve, with enterprises protecting their value chains and capital accumulation to resume the path of longer term, stable growth. We are confident in this happening and therefore the message for both local and international real estate investors is: Although the Philippine housing market may have lagged developed nations, higher real estate prices are expected, for many years to come.