February 04, 2014

BSP still sees no property bubble yet but prepares contingency rules

The central bank is still comfortable with the level of banks’ lending to the property sector but is looking to implement several measures in the event that a bubble forms in the sector. Among these measures are possible higher provisioning by banks, a review of loan concentration limits, capital charges, and reductions on the valuation of assets to be used as collateral by the buyer.

However, according to a Philippine Daily Inquirer report, the central bank governor said that the real estate boom is still supported by real demand, underpinned by better-compensated young professionals as well as domestic and foreign investments. He traced the perception of a possible bubble to the impression created by the completion of more buildings that were previously sold as well as the aggressive marketing by property companies.

Our Take: While the aggressive marketing and down payment schemes by property companies raise concerns on the sector, we believe that the central bank’s policy announcements, string monitoring and occasional warnings have spurred a series of moves by the more aggressive property sector players aimed at more prudent inventory and price management.

Over the past 18 months, we take note that certain aggressive players have tempered their project launches, raised their down payment requirements, and resorted to measures to manage their unsold inventories. There is also a conscious effort among the big players to keep their inventory levels below the ratio during the crisis years.

Price increases have so far been limited to an average of 5-10%, except for projects at or with exceptional locations or features. The economic recovery in developed countries with a good concentration of overseas Filipino workers (such as the US and Europe) as well as the increased purchasing power of remittance recipients that comes with a weakened peso should also bode well for demand.

Any increases in mortgage rates and the ongoing inventory management measures by the bigger players should also help take off some more steam from the residential property market.

At any rate, we reckon that there is enough unbilled revenues from the projects sold between 2010 to 2013 to support earnings growth over the next three to four years just by progress completion on these projects.

In this light, we continue to prefer property companies with diversified operations such as Ayala Land Inc and Robinsons Land Corp given that their extensive recurring income from mall and office leasing operations should help cushion the impact of any volatility in the residential market. – WealthSec