Philippine’s real<br> estate boom is

weakening
October 03, 2008

The global financial turmoil and high inflation have slowed down the
Philippines raging real estate boom. Although luxury condominium prices
continue to rise, the residential sector is definitely slowing.

The average price of a luxury 3 bedroom condominium in Metro Manila rose

13.35% to Q2 2008 from a year earlier. Adjusted for inflation, residential
prices increased only 3.3% over the year.

The slowdown comes on the heels of a recovery from the Asian Crisis. Condo
prices rose by an average of 14.2% (11.2% in real terms) in 2007, following a
rise of 9.3% in 2005 and 2006, (around 2% in real terms), according to data
from Colliers International.

Demand from Overseas Filipinos, which contributed strongly to the rise in

residential real estate prices, is now weakening due to exchange rate
movements and the global financial turmoil. A slight slowdown in economic
growth and higher interest rates are also pulling housing demand down.
 It was in 2004 that the Philippine real estate sector
started recovering from the slump brought on by the 1997 Asian Crisis. But
condominium projects are now rising all over Manila, so prices and rents will
likely stabilize in the second half of 2008, and inflation-adjusted prices are
likely to fall.

If the global financial situation continues to deteriorate, nominal price falls in

2009 can be expected.

Memories of the Asian Crisis

Among all the economies affected by the 1997 Asian Crisis, it was the
Philippines which experienced the biggest property price falls. A speculative
bubble had formed in the 1990s after financial liberalization and economic
reforms had attracted capital inflows. Luxury condominium prices rose 63%
(46% in real terms) between 1995 and 1997.

During the Asian crisis, Philippine luxury condominium prices dropped 18%
(25.3% in real terms) from 1997 to 1998. Between 1997 and 2004, luxury
condominium prices dropped 56.2% in real terms (34.36% nominal). Despite
gains from 2005 to 2007, property prices are now still 50% below their 1995
peak, in real terms.

Demand for office space for information and communications technology

(ICT) related firms such as call centers and other business process outsourcing
(BPO) firms have provided the spark to revive the slumbering real estate
sector. BPO employees have boosted the demand for rental housing and other
products, creating a ripple effect on the construction, retail, and
telecommunications industries.

Overseas Filipino demand down

A law passed in 2003 allowed Filipinos who have acquired foreign citizenship
to become dual citizens, in turn permitting them to acquire land in the
Philippines. The new law also affected the mix between foreign and local
ownership allowed in condominiums.

More Global Property Guide pages:

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From 2006 to 2007, most real estate developers reported that demand from
Overseas Filipinos (OFs) comprised the bulk of their buyers. Around 70 to
80% of new condominiums in Metro Manila and subdivisions in Cavite,
Laguna, Rizal and Bulacan were bought or reserved by an Overseas Filipino or
their family.

However demand from OFs is now starting to wane. Developers have recently
revealed that only about 20 to 30% of their buyers are now OFs.
Foreign exchange movements have played a significant role. Against the
dollar, the peso has appreciated from around PHP55 (2003-2005), to an
average of PhP51 in 2006 and PHP46 in 2007. Because of this, Overseas
Filipinos’ foreign earnings buy less and less in the Philippines.

Although the peso has depreciated to around PHP46 in September from

PHP40.67 in Feb 2008, the change is barely enough to cover the increase in
the cost food and fuel prices in the Philippines.

Around 70% of Permanent Overseas Filipinos are in the US, 11% are in Canada
with some in Australia (6%), Europe (6%) and Japan (3%). These countries
are seriously affected by the global economic slowdown, with recession
looming in the US and much of Europe. The financial meltdown has seriously
affected the desire for more investments, especially as property plays such a
significant role in the crisis.

Overseas Filipino Workers (OFWs) are also experiencing problems. About half
the OFWs work in the Middle East, where soaring house rents and food prices
are fuelling runaway inflation.

About 30% of the OFW’s income is spent on housing, whether to buy a new
house, fix present homes, or pay rent. OFW remittances reached US$14.45
billion in 2007 and are expected to reach US$16 billion in 2008. A squeeze on
OFW resources could have a significant impact on the Philippine property
market.
Limited mortgage options

For the real estate mortgage market to grow, demand from local buyers needs
to strengthen. In other countries, a housing market boom is usually
accompanied by a mortgage boom, i.e. most property purchases are financed
by loans. In the Philippines, most buyers pay cash, or finance by pre-selling.

The ratio of real estate loans to GDP has dropped continuously since 1999. In
2007, real estate loans from the banking system were only 4.3% of GDP, down
from 7.5% of GDP in 1999, though in nominal terms real estate loans have
risen from PHP240 (US$ 5.6) billion in 2004, to PHP 281 (US$6.5) billion in
2007.

In December 2007, the BSP relaxed rules on real estate lending to support the
property industry, following mortgage loan growth of a mere 1.4% in 2007,
significantly down on the 10.45% increase in 2006.

Housing loan rates charged by banks remain high, despite falling base interest
rates. Mortgage rates from major commercial banks are around 9.75% for
loans fixed for one year and 11% or more for mortgages with rates fixed for five
years or more. Developers charge yet higher mortgage interest rates, ranging
from 12% to 18%.

While the government-owned Pag-ibig Fund (Home Development Mutual

Fund) offers a much lower interest rate, at 6% to 7%, and better loan
conditions (longer payment periods and higher loan-to-value ratios), the
amount that can be borrowed is much lower and there are certain membership
requirements. The coverage of government housing loan programs is
extremely limited.

Oversupply looms

Condominiums are now rising all over Metro Manila. In contrast, the impact
of the previous pre-Asian Crisis boom was only visible in the central business
districts of Makati and Ortigas. Currently, instead of just pockets of
developments, condominiums are being planned and built along the entire
stretch of EDSA, along major highways and the different lines of the mass
transport system. Several subdivisions are also being developed in nearby
provinces such as Rizal, Bulacan, Cavite and Laguna.

With demand waning and the economy weakening, the market could see
significant oversupply when these projects are completed. Around 10,500 new
residential condo units are expected to be completed in 2009-2010, according
to Collier International. This is on top of the more than 6,300 units to be
completed in 2008.

Potential buyers should also be wary of the problems involved in buying in the
Philippines. Potential problems include fraudulent titles, inconsistent
property valuation, cumbersome land administration and lengthy property
registration processes. High transaction costs and the lack of information also
hamper the real estate market.
Economic slowdown

The recent real estate boom was supported by strong economic growth. After
growing by an average of 5.2% from 2002 to 2005, the economy expanded by
5.45% in 2006 and 7.2% in 2007, its highest growth rate in more than two
decades.

GDP growth in 2008 is expected to slow to just 4.2% - 4.5%, pushed down by a
combination of higher interest rates and inflation, slower remittance growth
and falling business and consumer confidence.

In August 2008, inflation reached 12.5%, the highest rate in 17 years. Overall
inflation in 2008 is expected to be around 9.7%, in sharp contrast to the 2.7%
inflation in 2007.

Rising prices of steel and cement in the world market have also pushed
construction costs. In mid-2008, property developers raised the selling price
of their projects by 10% to 20%.

The Bangko Sentral ng Pilipinas, the central bank, raised key policy rates in
2008 to rein in inflation. The overnight borrowing rate was raised by a total of
100 basis points in just three months, to 6.1% in August 2008.

With the economy slowing down combined with higher interest rates and a
looming housing oversupply, the housing market is expected to slow down
further in the future. While a repeat of house price falls similar to that of Asian
Crisis is highly unlikely, the Philippines housing market remains fragile, as
ever.