Silver linings abound as inflation begins to temper

Published August 8, 2022, 9:00 AM

by MB Business

Higher interest rates have lowered commodity prices, but what’s next for Philippine real estate?

HOMEFRONT Column by Victor Consunji, founder and CEO of Victor Consunji Development Corporation (VCDC)

Victor Consunji, founder and CEO of Victor Consunji Development Corporation (VCDC)

After the 0.75% rate hike by the United States Federal Reserve and Banko Sentral Pilipinas (BSP) last month, stock markets globally have rebounded as hope has emerged that the rampant inflation we’ve seen in the last 12 months is peaking, and the central bank policy “pivot” I alluded to in my June column is fast approaching.

A quick glance at the commodity markets gives us a precursory indication that the Consumer Price Inflation (CPI) numbers are likely to improve going forward. Due to the fact that nearly all goods rely on energy in one way or another, the impact of crude oil and natural gas futures being down about 20% will have an outsized effect on the numbers in the coming months, as these price discounts are transmitted through the economy. Additionally, we are witnessing steel, copper and agricultural prices start to ease, so there’s an even larger potential tailwind that could manifest itself in the key inflation indexes as soon as the July and August prints.

For now we can envision one or two more 50 to 75 basis rate hikes in the near future from the Fed and very similar corresponding actions from the BSP. As these moves are communicated I foresee a united chorus of “wait and see” commentary from central bankers around the world when it comes to further rate increases. 

As we witness the lower input prices filtering though and the numbers reflect inflation abating, expect the focus of the markets to shift from preoccupation with inflation, to whether or not the central bankers are able to achieve a “soft landing” and avoid sending the global economy into a deep recession. For reasons previously discussed in detail, while the central bankers will continue to talk tough about taming inflation to anchor inflation expectations, don’t be fooled by the attempts to mask the fact that a policy pivot is inevitable.

If we were to blindly follow the doom and gloom pundits or focus solely on the global macro environment, we would miss the significant growth prospects piling up for the Philippines and risk missing the forest for the trees. While I am remiss to sound like a broken record, I continue to advocate the best path forward is sticking to the tried and true formula that continues to withstand the test of time. 

It’s paid off for Filipino home buyers to invest strategically in homes that our families can enjoy for the longer term, buying along the development curve of where major infrastructure is being built and expanded, knowing full well it will trigger sustained land value appreciation. The market has learned to buy from reputable developers, whose quality holds up against the wear and tear, and lowers the cost of ownership over time. Lastly, seasoned market participants have witnessed time and time again that owning actual land, instead of mass produced condominiums, continues to be the outperforming real estate investment in practically every economic environment.

When the dust settles in the current tightening cycle, I truly believe that the Philippines will be recognized increasingly by global investors as the market with arguably the best long term fundamentals of all the ASEAN economies. It’s important to note that while the developed nations in the west continue to suffer from stagflation, the Philippines economy is underpinned by long term demographics and will be a beneficiary from natural inflation, as opposed the paper inflation resulting from loose monetary policy and unsustainable consumer credit expansion.

Digging a bit into the recent data, a simple comparison of the inflation and GDP growth forecasts tells the tale of our growth potential playing out as expected. The United States reported a 9.1% year over year inflation in June 2022, while its economy shrank an annualized 1.6% and 0.9% over the first two quarters, technically putting the US in recession. Conversely, the Philippines Statistic Authority reported inflation 6.1% year over year from June 2021 to 2022, and our economy grew 8.3% in the first quarter and most analysts having our 2022 GDP growth between 5.7% and 7.5%. Looking at the numbers, it’s easy to understand why I am not the only one who is bullish on Philippine real estate.

The most recent Q2 2022 Colliers report gave some valuable insights to our market; as it noted that the high office and residential vacancies that have plagued the prices of CBD property values may soon see some amelioration, as most IT-BPM companies to end hybrid work scheme by Sept 2022. Additionally, the potential impact of POGO’s returning could lower the vacancy rates from 15.5% to 11.2% in the year 2025. Naturally, as we expect to business in the city return to normal and the pace of new inventory coming to market to slow, condo prices should see a resumption in price appreciation by mid to late 2023.

In line with our repeated investment thesis, we would expect that when the BSP recently surveyed the 5.6% of Filipino households who intend to buy properties in the next 12 months, single detached units remain the most sought after property type. However, what was shocking to learn is the magnitude of the preferential bias, with single detached being favored by a whopping 33.4% of respondents, while only 1.5% that indicated they intend to buy condominiums.

Of course, the oversupply issues in the CBD’s will eventually work themselves and foreign investment will return, sustaining the demand for condominiums. However, the data would suggest that locals on balance are still in the heavy throws of a sustained land grab and there are few signs of that abating.  Anecdotally, in my dealings with the existing and aspiring home owners of VCDCI get daily reminders that the continued upwardly mobility of Filipino homebuyers is leading to a profound desire to build generational homes that will grow with their families.

Another silver lining in the stormy clouds, interestingly enough, is an unintended consequence of the recent Peso slide against the US dollar. OFW Remittances have been bolstered by the weaker PHP/USD, and as long as the economies worldwide continue to reopen and remain open, it’s logical to expect that remittances remain strong throughout 2022.  Based on the aforementioned evidence, I would argue this will translate to continued demand for suburban properties and even vacation homes.

The SONA of President Marcos conveyed strong indications of the priorities of this administration. It’s welcome news to hear the President’s promises that we have seen the end of draconian lockdowns, that we can expect a concerted effort to build even more than his predecessor and a renewed focus on improving the education system, especially in the areas of STEM and English. It will be important to provide the next generation the tools to become the workforce of the future, especially if we wish to achieve and maintain upper middle income status.

I know I am not alone in realizing there’s a ton potential efficiencies in the economy that can be unleashed with policy reforms, reducing red tape and lowering costs would lead to further improvement the baseline case for Filipino real estate. For example, we have yet to see the full effect of the recent decisions to allow 100% foreign ownership of Telecoms, Airlines, Railways & Subways, which will drive investments in mass public transit and further lower the costs to consumers.

Other modernizations centering around the digitization of our economy is another catalyst for the economy that we should pay attention to. If we could pass the Retail Trade Liberalization Act, DTI projects that change alone could lead to P56 billion worth of additional foreign investment, creating hundreds of thousands of jobs over the next five years. These are just two of the possible reforms that further add to the tailwinds we are seeing developing in the economic picture.

While there will be some short term noise over the next one to two years as the central banks calibrate the right interest rate levels, silver linings can now be seen emerging amongst the inflationary clouds. Let us not forget that real estate is a marathon, not a race and no two markets are built the same. 

The central bankers will undoubtedly talk tough on inflation in order to try to anchor inflation expectations, but when the pivot comes towards end of the year, watch out to upside. The underlying fundamentals that have created this resilience and outperformance in the Philippines real estate market through the tough times, will lead to a sustained rally that will surprise for many years to come.