While there is only a “remote” possibility the Philippine property sector will overheat, banks, investors and real estate developers are warned not be too exuberant in their expansion plans.

 

Philippine central bank deputy governor Diwa C. Guinigundo notes there are no signs of asset price pressures or even a threat of a real estate market bubble yet in the country, adding that valuations are at sustainable levels coming from real demand.

 

 “On the basis of the numbers alone, I think the likelihood of overheating in the real estate sector is still quite remote,” he says in an interview at the sidelines of The Asset and BDO Unibank Inc.’s Philippine real estate industry forum in Manila recently. “But it’s important for all players – the banks, the investors, the developers – to be more vigilant, to be more circumspect in terms of their decisions. It’s better to consolidate your gains today rather than expand in a very big way, especially now that you have the threat of possible interest rate normalization in the US which could also be felt in the domestic economy.”

 

Guinigundo in his keynote message during the forum reiterates the Bangko Sentral ng Pilipinas’ (BSP) consistent assessment that there is still no definite evidence of asset price bubble since property development and prices are supported by economic and market forces. “I guess the takeaway from this forum is that getting to the bubble act can only be done if people are behaving madly. Please don’t do it,” he implores his audience. “Yes, there are gains but they can be transitory.”

 

Guinigundo advises investors to “take it easy”. “As long as there are fundamental bases (for expansion), they should go for it. Is there demand for their services and products? If there is, then go for it. But you have to be very, very cautious at this time,” he says.

 

The BSP deputy governor does acknowledge that the local property market has matured and has wisely taken note of the benefit of hindsight and used their experience during the 1997 Asian financial crisis. “The past tells them that they have to be careful in terms of their financing. In fact, some of them are not doing landbanking because that can also impose some negative carry on the part of the developers.”

 

The central bank’s monitoring of the local property market reconfirms that the incidence of investors going into the real estate sector as speculators is few. “Not everyone go into the real estate market as a speculator, for some these are investments, and for some they are end-users, or buying their first home.”

 

A real estate or property bubble occurs periodically in both local and global real estate markets, explains Guinigundo. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels and then decline. The 2007-2010 financial crisis was related to the bursting of real estate bubbles around the world which began in the early 2000s.

 

No signs of asset bubble

 

During his presentation, Guinigundo says one of the first signs of a real estate bubble is when values begin to increase and reach a point where they “outstrip the collective incomes of potential homebuyers”. This then causes drastic stalls in lending and sends values down.

 

For regulators such as central banks, spotting a bubble becomes easier when monitoring lending, spending and employment. Using these three indicators, the BSP finds no signs of an asset bubble.

 

While banks and the financial sector are exposed to risks in the property sector, Guinigundo says the risk factors are so far benign because housing for one, has the potential to further gross domestic product growth, along with industrial and manufacturing sectors.

 

Currently, there’s even a shortage in housing especially in the low-cost segment. The real estate sector is also vital to GDP-enhancing sectors such as the business process outsourcing sector.

 

Funding the real estate sector is sourced mostly from the private sector through the banks, or bond issuances or the equity market. “So there’s sufficient financing from banks and financial companies are supporting the property industry,” comments Guinigundo.

 

Besides, the Philippines’ new investment grade status from the “Big 3” Fitch, Standard & Poor’s and Moody’s will only benefit the industry as it will fuel more demand especially in office spaces, he adds.

 

Based on the latest BSP data on banks’ real estate exposure, the number remains manageable as far as the non-performing loan portion is concern, this being only 4% of residential real loans as of end of the first quarter.

 

As of end-March, the country’s 36 commercial banks’ real estate exposures were up 2.5% to US$19.5 billion from end-2012. About 85% of total industry real estate exposure is contributed by real estate loans and of these, 78% are from the residential segment for the acquisition, construction and improvement of housing units.

 

Guinigundo assures banks, investors and property developers that prices and demand continue to be supported by industry growth and that this will further drive up demand in the next years.

 

“There is stability in property prices and demand,” he remarks. “(And) financing in the Philippines is not a problem with low interest rate and ample liquidity. Our potential capacity to grow has increased so in other words, we can expect higher growth without overheating.”