“I understand the concept of optimism. But I think with me what you get is a lack of cynicism.”
– Tom Hanks, Two-time Academy Award Winner
Yesterday we read about another welcome development which further cemented the country’s status as a viable investment destination.
The Philippines received another upgrade from Japan Credit Rating Agency Ltd. (JCR). And given its recent attainment of an investment grade and the bullish growth projections for its economy, the Philippines is highly attractive to portfolio and real-estate investors at this time.
Hence, we should expect that foreign money will continue to push the Philippine Stock Exchange Index to new highs in the coming weeks ahead. Although developments indicating that the capital markets will remain vibrant are welcome, the Bangko Sentral ng Pilipinas (BSP) is still mindful of the need to temper asset price inflation to ensure that the country’s favourable economic performance would not be disrupted.
While foreign investments are welcome, economists said excessive demand for securities and real estate could cause prices to rise steeply.
At present, the BSP is reviewing the exposure of banks to various assets – both real estate and financial instruments that are deemed risky.
In the article I wrote the other day, the BSP is considering to impose stricter underwriting standards and higher capital requirements to cover risky assets held by banks to mitigate the impact of “hot money” coming in to the stock market.
Monetary officials have been worried the low interest environment has driven banks to take on risks, such as granting of loans, beyond their capacities and without carefully evaluating borrowers.
This, in turn, could result in more bad loans and put pressure on their balance sheets, affecting their ability to finance economic activity.
Another reason for this cautious stand of the BSP is in response to concerns that tightening real-estate regulations in neighbouring economies could be pushing speculative demand to the Philippines.
In her article in the Philippine Daily Inquirer entitled “Philippines to Tighten Property Regulations,” Michelle V. Remo reported this:
“In neighbouring economies like China, Singapore and Hong Kong, tougher real-estate regulations have been issued recently in the wake of risks of asset price bubbles. The regulations ranged from higher taxes to limits on the number of properties individuals could buy.
“Risks of a bubble are a result partly of stimulus measures implemented in advanced economies. In particular, portions of the funds being injected by the US Federal Reserve, the European Central Bank and the Bank of Japan to stimulate their lacklustre economies were believed to be going to robustly growing Asian economies in the form of investments in real estate and portfolio assets.
“Economists said that at a time when real-estate regulations were becoming tighter abroad, speculative demand in real estate (that is, demand from people buying properties for investments rather than for their own use) was poised to go to locations where the regulatory environment was more relaxed. This was the reason the Philippines should seriously consider adjusting its regulations, they said.”
Under existing regulations, banks in the country are required to limit their real-estate exposure to 20 percent of their total loan portfolio. The term “real estate exposure,” however, is limited to loans extended by banks to commercial real-estate developers.
However, the BSP is readying a new directive that would further limit the exposure of banks to the property sector so that threats of an asset price bubble would not materialize.
The BSP is considering adjusting the 20 percent limit of banks’ real estate loans and investments to a certain percentage of their capital and expanding the coverage of real estate exposure to also include housing loans to individuals, loans to developers of socialized houses and banks’ holdings of securities issued by real estate firms.
This proposed regulation would follow observations that supply of residential properties for the high-income segment was starting to become excessive. BSP Assistant Governor Ma. Cyd Tuaño-Amador has said “pockets of concern” have been noted on high-end commercial properties, but clarified these are no cause to be alarmed yet.
BSP Governor Amando Tetangco Jr. acknowledged as valid the observations that supply of real properties in the high-income market could now be exceeding demand.
He said, however, that overall market supply remained below total demand as evidenced by the huge backlog in housing units, estimated at more than three million units, for the low-income segment.
What is our takeaway on this report coming from the BSP? Opportunities still abound the low to middle-income segment of the real estate market. Townhouses and duplex are still in demand.
When the new BSP regulation comes out, real estate investors and small-scale developers must find new sources of financing their real estate projects. Hard-money lenders may be an option if banks become stricter in lending its funds.
In the end, this may encourage the owners of the almost 3 trillion pesos now parked in the special deposit account (SDA) of the BSP to pull out their funds and lend it real estate entrepreneurs to generate economic activity and address the backlog of housing units in the country.
The real estate industry is indeed robust. We could only hope that any artificial rise in property prices will be tempered. The good times never last. It is always best to be cautiously optimistic as we continue to experience this boom cycle in our real estate market.