PH RE Risks

Last week, I met with a foreign fund manager (FFM) who had exposure to PH RE stocks. They were interested to know what was happening on the ground.

Here's how the conversation went...

FFM: Is the rise in RE prices sustainable?

JPRE: Generally, the growth in RE prices in the secondary market has slowed. We've been seeing asking prices go down. The ultra-high-end segment, however, remains to be strong.

FFM: But isn't the luxury segment a different kind of asset (i.e., trophy asset)? That's why they continue to increase. Moreover, it represents a small part of the RE market.

What's concerning is that rental yields have decreased to the 3% range with the current prices. That's almost the same as properties in Hongkong.

JPRE: I agree.

FFM: What are the most significant risks to the industry?

JPRE: Regulatory and developer exposure to Mainland Chinese buyers.

Two ongoing regulatory risks would shake up the industry. The first is the Real Property Valuation Reform (RPVAR) which would penalize owners for sitting on unutilized assets...The second is the luxury tax.

FFM: What's the likelihood of those happening?

JPRE: The bill for RPVAR has already been passed last December, so it's a question of implementation. On the other hand, the luxury tax is still on the drawing board, but the president supports it based on an article last month.

FFM: What's the problem you mentioned about Mainland Chinese buyers?

JPRE: There was a surge in sales to them 1-2 years before the pandemic...We've heard many of these buyers have backed out of their purchases...We'll know more about this once these projects turn over and when the payment balance comes due.

FFM: And when is that going to be?

JPRE: 2023-2024.

***

Should investors be worried? Yes, but not to the point of panic. Being cautious and aware of the risks should be in every investor's handbook. You could mitigate these risks through numerous ways (e.g., diversifying to other cities/types of development, not using debt, and reducing capital appreciation expectations). If I were an end-user (as opposed to an investor), I wouldn't be as worried.