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JPRE 1H2024 Residential Property Report
July 30, 2024
So, the first half of 2024 has passed, and we’ll tackle clients’ favorite question: How’s the Market?
I think most real estate brokers would agree that the general theme for the first half of 2024 is that it is getting harder to sell properties. The slowdown is becoming more pronounced as evidenced by more sellers slashing asking prices. To understand what’s happening, we need to take a look back at what transpired in the last three decades.
Disclaimer: This write-up seeks to temper buyers' profit expectations, particularly as many prospective investors continue to foresee double-digit returns from real estate. I have deliberately avoided naming developers to prevent causing offense. The opinions expressed herein are solely mine and do not represent the views of RE/MAX Capital or any other RE/MAX franchise.
POST ASIAN FINANCIAL CRISIS (1997-2008)
In the aftermath of the Asian Financial Crisis, from 1997 to 2003, property values in the Philippines fell by approximately 30% to 50% from their 1997 peak. For example, One Roxas Triangle, a luxury residential condominium in Makati, was launched in 1996 and was only completed in September 2001. As of end-June 2003, the sales take-up of the building was only at 68%.[1]
Since prices were on a downward trend, the BIR halted revising its zonal values as prices. Figure 1 demonstrates the BIR's limited updates in major business districts between 1999 and 2009—a significant detail that we'll explore later.
Figure 1. BIR Zonal Value Revision Schedule
Source: Bureau of Internal Revenue
Between 2003 and 2007, condominium prices gradually recovered, driven by robust demand from OFW remittances and the burgeoning Business Process Outsourcing (BPO) sector. Macquarie Research attributes 40% of total residential sales to OFW remittances. By 2008, property prices had returned to their historic peaks (Figure 2).
Figure 2. Historical Condominium Prices in Metro Manila
Source: Source: Colliers, Macquarie Research, September 2012
RE Sector Rally (2008-2020)
The rally in real estate prices from 2010 to 2020 was fueled by four key factors: property flipping, low interest rates, zonal value revisions, and the POGO sector.
1. Property Flipping
As the market rebounded from the Asian Financial Crisis, developers accelerated project launches to address the housing backlog. For instance, Ayala Land's Nuvali development went into full swing with its grand launch in 2008. Sales reservations for Ayala Land surged from Php18.4 billion in 2008 to Php33.1 billion in 2010, peaking at Php145.9 billion in 2019 (Figure 3).
Figure 3. Ayala Land Residential Sales Reservations
Source: Ayala Land Financial Reports
Between 2010 and 2018, luxury condominium pre-selling prices increased by up to 9% annually due to strong demand. Newer projects were positioned to be grander than the previous offerings (or that of their competitors’), leading to consistent price hikes between projects. Developers softened the impact to buyers’ finances by reducing unit sizes and offering more lenient payment terms (i.e., removing the downpayment requirement and extending the turnover date to as high as 8 years from the project launch).
Luxury condominiums was an easy sell as they offered attractive rental yields of 6.7% to 8.5% (vs. a 10-year Ayala Land bond with a 5% coupon), annual capital appreciation of 5% to 9%, and utility value to owners.
As units began to turn over around 2015, property flipping emerged as a lucrative opportunity. For example, a client who purchased a condo unit in Makati for Php16.4 million in 2013 resold it for Php22.6 million prior to turnover, realizing a 31% annual return on the 30% he initially paid. For as long as developers enjoyed a healthy take-up, and introduced price increases rapidly, investors were sure to book double digit profits. Worst case, losses are capped to 50% of all payments made, thanks to the Maceda Law. The arbitrage opportunity attracted all kinds of investors including those who used their businesses’ cash flows, those who pooled funds to participate in pre-selling launches, and foreign investors.
The success of pre-selling condominiums in business districts extended to adjacent areas, with secondary market prices for lots in gated villages rising in tandem with condominium prices (Figure 4). For example, “done” prices in West Triangle Homes increased from Php35,000/sqm in 2011 to Php70,000/sqm in 2017, largely due to the development of Ayala Land's Vertis North, which broke ground in 2012.
Figure 4. Price/Sqm of Gated Villages in Metro Manila
Source: JPRE
2. Low Interest Rates
Data from the Philippine central bank indicates that mortgage rates ranged from 5.525% to 7.087% between 2011 and 2020—the lowest in 47 years (Figure 5). Although not globally competitive, these rates were historically low for local buyers.
Figure 5. Philippine Bank Average Lending Rate (in %)
Source: Bangko Sentral ng Pilipinas
3. Zonal Value Revisions
The country’s largest property appraiser, the Bureau of Internal Revenue (BIR), was aware that prices have recovered from their historic highs and resumed its appraisal of properties in 2010.
In determining zonal values, the BIR uses the average of the two highest recommended values or best data/documents available to them.[2] So, if say, two interior-designed units were sold, zonal values will reflect prices of those two-interior designed units. For this reason, zonal values are possibly overstated. In the property flipping example mentioned earlier, where the flipper sold a condo unit for Php22.6 Mn (or equivalently Php219,000/sqm), the BIR released zonal values that were 20% higher than how much the flipper sold it for (Php250,000/sqm), a year after its sale.
Whenever zonal values exceeded market values, the automatic reaction of sellers would be to increase selling prices higher than zonal values. This reaction is because a) market values had always exceeded zonal values, and b) taxes are based on the selling below the zonal value is perceived as selling at a loss. So, whenever new zonal values were released, sellers unanimously increased their asking prices all at the same time–creating a price cartel effect. Zonal value revisions, therefore, acted as a basis that sellers in the secondary market used in pricing properties.
4. POGO/Gaming
In 2018, POGO operations in the country boomed, leasing as much as 312,000 sqm of office space in Metro Manila by 2018. The birth of this industry in the Philippines attracted Mainland Chinese (MLC) buyers to participate in the pre-selling market and absorbed unsold inventory.
Stories of MLCs going into a showroom and buying units by the floor were common. These people were actually brokers who paid the minimum reservation amount and went back to China to sell the units to their fellow Chinese. During that period, foreign allocations of certain condominium projects in the Bay Area and Makati were immediately maxed out.
Investments in the gaming sector likewise poured in and new casinos were built: Solaire, City of Dreams, and Okada Manila. The development of these casinos, likewise, propelled prices of Marina Baytown Subdivision in Paranaque from Php120,000/sqm in 2019 to Php230,000/sqm in 2021.
Interestingly, the Philippine central bank suspected that real estate was used to launder money. In 2020, they included real estate brokers in their list of “covered persons”, mandating transaction reporting.
COVID-19 (2020-2022)
Initial signs of a market slowdown appeared in 2019 (Figure 6), as pre-selling condo prices reached approximately Php350,000/sqm, straining buyer affordability. Moreover, rental yields had dropped to 3.5% to 4.5%.
Figure 6. Pre-selling vs. Mortgage Rates
Source: Colliers
The pandemic-induced movement of assets concealed the underlying slowdown. Families with children and a helper found that 100 sqm units became too cramped under work-from-home arrangements, prompting moves to larger homes. Single individuals found living with parents during remote work untenable and moved out. Some, reminded of life's brevity, used spare funds to purchase second homes outside the city. This resulted in a mixed real estate landscape, with some segments flourishing and others struggling. It’s understandable why some might misinterpret localized strength as indicative of a bullish market overall.
WHERE WE ARE TODAY
As the dust from pandemic-induced asset movements settles, the slowdown in the market is becoming more evident. The factors that previously drove prices up have now faded.
1. Property Flipping
Projects delayed during the pandemic are now reaching completion, prompting property flippers to quickly liquidate their holdings, with some sellers willing to settle for just breaking even. A quick Google search for a particular condominium complex in BGC reveals 410 listings in the secondary market, all competing with the developer’s pricier inventory.
As more units flood the secondary market, competing with the higher-priced offerings from developers, stricter rules on property flipping (“re-assignments”) have been implemented. Some developers have even outright banned re-assignments.
Additionally, the Bureau of Internal Revenue (BIR) has intensified its scrutiny of property flippers, subjecting these re-assignments to taxes.[3] The BIR has issued assessments for transactions dating back to 2019, applying Capital Gains Tax, Documentary Stamp Tax, and penalties.
2. Interest Rates
From 2022 to the present, the Philippine central bank implemented 10 rate hikes, increasing the lending rate from 2.0% to 6.5% in an effort to combat inflation. As shown in Figure 7, average lending rates among Philippine banks rose from 5.99% in 2021 to 8.13% by May 2024. Many borrowers have yet to experience the full impact of these higher interest rates once their teaser rates expire. Consequently, this high-interest rate environment has significantly dampened demand among local buyers.
Figure 7. Philippine Bank Average Lending Rates
Source: Bangko Sentral ng Pilipinas
3. Zonal Value Revisions
Starting in 2022, increasing skepticism among buyers about elevated property prices became evident as "done" prices of condos fell below zonal values. For instance, Figure 8 demonstrates how zonal value revisions have surpassed the "done" prices of a luxury condominium in Makati. Similarly, survey data indicates that 52% of the 44 condo transactions recorded in Makati, Taguig, Pasig, and Quezon City were closed below the BIR’s zonal values in the first half of 2024. This suggests that people are increasingly unconvinced by the inflated prices in the metro.
Figure 8. Comparison of Secondary Market Price/Sqm and Zonal Value
Source: JPRE Survey
Figure 9. 1H2024 Count of Transactions below or above Zonal Values
City | Total No. of Transactions | Less than ZV | Greater than ZV |
Makati | 25 | 16 | 9 |
Taguig | 11 | 5 | 6 |
Pasig | 5 | 1 | 4 |
Quezon City | 3 | 1 | 2 |
Total | 44 | 23 | 21 |
Source: JPRE Survey
4. POGO
Between 2022 and the present, POGO operations have dwindled due to the government's imposition of the gaming revenue tax and stricter compliance laws. Units previously rented by POGO employees are now vacant and being put up for sale by their owners. Many MLC buyers have withdrawn from their pre-selling contracts. For instance, DMCI reported a 24% increase in sales cancellations, reaching 3.41 billion in 2023, as "buyers from ML China backed out." No other developer has reported a similar revenue reversal, suggesting that DMCI’s situation might just be the tip of the iceberg.
Looking Ahead
Will the market crash? Most indicators suggest otherwise. Although high property prices often signal a potential crisis, key metrics remain stable, including bank non-performing ratios and equity prices. Developers' past due receivables are trending downward, further alleviating concerns.[4]
Price declines in the condominium sector cited by market players are mostly “asking” prices previously inflated by zonal value revisions. In contrast, “done” prices have remained “generally” flat (Figure 10).
Figure 10. Makati, Taguig, Pasig Average Done Price/Sqm of Condominiums
Source: JPRE Survey
I use the word “general” because there are still segments in the market in which prices continue to rise such as the luxury/ultra-luxury segments in BGC/Makati. The “done” prices for these projects continue to rise because their owners can afford to sit on their properties and wait for someone willing to pay their asking price. Moreover, I expect prices of certain luxury condominiums in Makati to rise after the BIR revises zonal values in late 2024 and early 2025, aligning closer to the new zonal figures. Additionally, lots in Metro Manila's gated communities remain limited and are expected to see price increases of 10% to 15%, which is consistent with their historic norms.
Take aways
In the absence of any catalyst that would re-ignite demand, I expect real estate prices (with the exception of gated villages and luxury condominiums) to remain flat in the next 3 years. Income would simply have to catch up for local buyers to afford current prices. I see this slowdown as a well-needed correction that would put real estate back in a manageable track.
So, if you're looking to buy and flip pre-selling units, don’t; the quick-profit era of property flipping has passed. On the other hand, if you're willing to wait 10 to 15 years, real estate continues to be a sound investment. Even the Php 400,000/sqm prices will seem attractive today. This is usually the case if the property asset is ultimately for end-use. So, pick properties (from top developers) you can envision your future self or family happily living in.
You may download the PDF file of this report here.
References:
[1] Ayala Land, Inc. Fixed Rate Bonds P1,000,000,000 10.75% Fixed Rate Bonds due 2008 Prospectus
[2] Bureau of Internal Revenue (2010, April 23). Revenue Memorandum Order No. 41-2010. Retrieved from https://www.bir.gov.ph/
[3] There are differing opinions on whether taxes should be paid for property re-assignments. Some experts believe that no taxes should be paid since the assignor simply had a “right” to a property that has yet to be built.
[4] Certain developers had sold receivables related to residential development to banks to bring this number down.
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