Philippines: Real estate loans rising

A surge in bank lending to the Philippines’ real estate sector is indicative of the market’s potential in a favourable environment of low interest rates and strong economic growth. The central bank is keeping a watchful eye on the market, and may move to tighten regulations if it feels an asset bubble is forming. However, real demand seems strong enough to maintain momentum despite an increase in speculation.

According to a report released at the end of September by Bangko Sentral ng Pilipinas (BSP), the central bank, lending to the real estate sector hit an all-time high in June. Banks’ exposure to the sector reached P561.6bn ($13.55bn) at the end of the second quarter, up 18.9% on 2011 and 4.4% higher than the end of the first quarter in 2012.

The BSP said the country’s 38 universal and commercial banks accounted for P434bn ($10.47bn), or 77.3%, of overall exposure, while 71 thrift banks accounted for the remaining 22.7%, worth P127.6bn ($3.08bn). Thrift banks are institutions offering basic banking services, focusing on deposits and mortgage financing, which play an important role in the Philippines’ banking system.

The lion’s share of exposure, some 97.3%, or P546.5bn ($13.18bn), consists of real estate loans, with the remaining 2.7% (P1.2bn, $28.94m) accounted for by securities issued by property companies. These segments grew 4.3% and 8.4%, respectively, during the second quarter of 2012.

The P22.3bn ($537.89m) of new loans issued in the second quarter was split between P11.9bn ($287.04m) of residential lending and P10.4bn ($250.85m) in the commercial segment. Investment in real estate securities included P12.1bn ($291.86m) in debt and P3bn ($72.36m) in equity.

The real estate market is benefitting from several factors, not least the Phillipines’ economic growth, which is expected to reach 5% in 2012, and remain roughly steady in 2013, according to the World Bank. In early October, the World Bank raised its growth forecast for 2012 from 4.6%, even as it lowered its predictions for neighbouring countries. The Asian Development Bank is even more confident, raising its forecast to 5.5% from 4.8%.

Low interest rates – which the BSP says are likely to remain the same or even be reduced further in the immediate future – are also an important factor, as the international press has reported. In September the BSP kept its overnight borrowing rate at a record-low 3.75% after inflation fell to 3.6% the previous month.

Demand is also being affected by increasing interest from expatriate buyers, many of whom are moving to the Philippines to work with the country’s burgeoning business process outsourcing (BPO) sector, as real estate firm CB Richard Ellis (CBRE) noted recently. Rising remittances from the many Filipinos living abroad are also contributing to inflows of investment in property. Despite new projects coming onto the market, supply of top-end condominium units remains quite tight, which is bolstering values and rents to the benefit of owner-investors.

However, it is the country’s large population of around 95m, which is growing at between 1.5% and 2%, according to various sources, that will be vitally important to the sector in the long term. There is already a housing backlog of several million units; estimates vary widely, but official sources suggest that it was 3.6m units at the end of 2011. Much of this unmet demand falls into the low-income category, which is poorly served by private investment in many emerging markets, due to the difficulty of making low-cost housing profitable.

CBRE also reports strong demand in the office segment, including from BPO companies seeking purpose-built space. Since 2011, the occupancy rates in Manila’s five main business districts have not dipped below 95%, with most somewhat higher. Despite such strong demand, the BSP is wary of allowing a housing bubble to build up, as has happened in recent years in other fast-growing emerging markets and the developed world. In October the local press reported that the BSP was considering tightening regulations on banks’ real estate exposure next year. Currently, lenders must limit loans to developers of residential and commercial real estate to 20% of their loan portfolios. This does not include mortgage lending, loans to organisations involved in social housing construction or investments in real estate securities. However, Nestor Espenilla Jr, the deputy governor of the BSP, emphasised that the plans were only under consideration and that a decision would only be made based on data.

Indeed, figures do not suggest a dangerous over-exposure to real estate. Broader banking growth is also very strong; the proportion of banks’ total loan portfolio accounted for by property actually fell slightly in the first quarter, from 15.2% to 15%. Additionally, lenders currently have a manageable level of non-performing loans in the real estate segment, averaging 4%, down from 4.8% in March.

In other emerging markets, the nearing of saturation in the high-margin, top-end property segment has seen developers shift their attention towards middle-income and affordable housing. This trend may now be taking shape in the Philippines, which will help the country meet demand in these segments and lower the worrying housing deficit.

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