Philippine Markets Daily

MONDAY MACRO: Uniform Accounting shows why real estate prices remain higher despite current economic contraction.

July 6, 2020

All-time high unemployment as a result of over 100 days of community quarantine has impacted consumers’ capability to spend on daily basic necessities. It has also caused concerns about borrowers’ ability to repay their debt.

This industry is particularly affected by consumers’ current lower income levels, as well as in the near future. Consumers might be currently unable to repay the bank loans they took out just to purchase this industry’s offering. In the near future, there might not even be enough consumers who can afford this industry’s offerings.

To understand how much risk there is for this industry, Uniform Accounting explains whether or not this industry can continue to generate enough profit to keep it from falling victim to more than just foreclosures.

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In our June 22nd report, we talked about how Philippine unemployment rate was at an all-time high in April 2020 at 18%. Around 7.3 million people were left jobless because of the pandemic, effectively lowering aggregate consumer spending power.

The lower available total income meant that consumers had to postpone any spending on less urgent or less essential items. Understandably, the travel, entertainment, hotel, and restaurant industries were the first to immediately feel the pains of the mandated community quarantine.

The residential real estate industry, however, appeared to have done better in Q1 2020 even when the Philippine economy reported a 0.2% economic contraction. This industry registered its third consecutive quarter of double-digit growth in real estate prices. It reached an all-time high of 12.4% in Q1 2020 versus the previous year.

The higher growth rate can be attributed to the rapid increase in condominium prices in the National Capital Region. The rise in prices has been largely credited to the growing number of Chinese nationals employed by Philippine Online Gaming Operators (POGOs) in the Philippines.

POGOs have been aggressively expanding office demand across Metro Manila. We mentioned in our May 18th report that they have driven more than a third of the demand for office space in Metro Manila. Now that they have resumed operations and the Philippine government has relaxed operating and tax requirements for these POGOs, it would not be surprising if residential real estate prices were to continue their upward trajectory.

A more concerning matter here, however, is the ability of other consumers to keep up with rising residential prices, particularly condominium units. Condominium prices have already risen by 23.6% in Q1 2020, compared to the year before.

In the same period, residential real estate loans (RREL) have risen by 11%. Nearly half of all the RRELs granted in Q1 2020 is accounted for in the Metro Manila area. Of the RRELs granted in Q1 2020, 54% was for the purchase of new condominium units. This means that half of Filipinos who took on RRELs did it to purchase a new condo unit, which has seen increasingly high prices each quarter.

All of that happened before the coronavirus pandemic and the subsequent 100-plus-day community quarantine period. It happened before the April 2020 report of 7.8 million Filipinos who have become jobless because of the pandemic.

The question now is, will those who took on these RRELs still be able to fulfill their obligations? If they default on their loans, how will this impact the developers of these recently-bought condominium units?.

Performance and Valuation Prime Chart: Philippine Real Estate Aggregate

The Philippine Performance and Valuation (PVP) chart for the largest Philippine real estate companies shows that analysts still believe that returns will drop back to 2016-2018 levels of 6%. On the other hand, on a Uniform Accounting basis, these companies are expected to maintain their current profitability levels.

With expectations that the pandemic will hopefully be under control in the next few months, remittance weakness is expected to just be a near-term issue. Despite the risks arising from the uncertainty of how long the POGOs will remain in the country, rising condominium prices will be favorable for the local residential property developers. However, this needs to be closely monitored due to the unpredictable nature of the local regulatory environment.

Furthermore, as soon as the economy is on the path to recovery, residential real estate demand should be revitalized as it would be supported by the low interest rate environment.

As we have mentioned in our previous articles, this recession is not a credit-driven event, implying that a faster-than-expected economic recovery is likely. Credit-driven recessions historically have a lot more inherent problems that need to be resolved before economic growth kicks back in.

About the Philippine Markets Daily
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!

Regards,

Angelica Lim
Research Director
Philippine Markets Daily
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