Why the property sector remains strong

UNDERSTANDABLY, recent reports about global oil and food crises, as well as the subprime-led slowdown in the United States, have dampened growth forecasts for the Philippines.

I said understandably because the unexpected 7.3-percent growth in our gross domestic product (GDP) last year probably conditioned the minds of many that we would or should grow at the same rate this year.

We forgot that our GDP increased by 5.4 percent in 2006, which was not so bad. Recent forecasts place GDP growth in 2008 at a range of 5 percent to 6 percent, which means that we may just go back to the 2006 growth level.

I am inclined toward the high end of the 2008 forecasts because I think we have a good chance of beating even the 6-percent estimate. Remember, nobody expected the Philippine economy to grow by 7.3 percent in 2007.

That’s also the way I look at forecasts by some analysts about a slowdown in the housing sector. They said the real-estate industry would experience a slowdown this year because of rising inflation and higher interest rates.

The Bangko Sentral ng Pilipinas has forecast that average inflation may reach 5.5 percent to 6.5 percent this year, up from its target range of 3 percent to 5 percent, before coming down to 2.5 percent to 4.5 percent in 2009.

The higher forecast followed the increase in inflation to 8.3 percent in April, which brought the January-to- April inflation rate to 6.2 percent.

This has raised expectations that the central bank may raise interest rates at its next policy meeting in June, despite the need to pump-prime the economy given a looming US-led global slowdown.

Up to a certain degree, I think higher inflation even induces demand because there’s a tendency for people to buy now to avoid higher prices in the future.

On higher interest rates, one factor that could discourage banks from increasing their interest rates is the fact that companies have been tapping the capital markets to increase funding for their projects. That’s why we see a growing number of companies launching initial public offerings.

I would concede a slight dip in growth, but not a significant slowdown, to reflect inflation and interest rates.

On the other hand, I believe our macro fundamentals remain strong enough to cope with the projected higher inflation and interest rates, as well as the oil and food crises and the US slowdown.

The major factors that have been fueling the real-estate boom—remittances from overseas Filipino workers (OFWs), business-process outsourcing (BPO), tourism and pent-up demand—have not abated, and, in fact, are still growing strong.

Remittances from OFWs increased by 9.4 percent to $1.4 billion in March 2008, the biggest monthly level recorded thus far. The March inflow brought the total amount of remittances for the first three months of 2008 to $4 billion, reflecting a 13.3-percent growth from the $3.5-billion remittances for the same period in 2007.

That means remittances will likely meet, or even exceed, the Bangko Sentral’s target of $16 billion for 2008, compared with $14 billion last year.

The continuing deployment of Filipino workers abroad has already erased concerns that the global economic slowdown will reduce demand for our workers.

As a matter of fact, the quality of OFWs is changing for the better. Instead of lowly paid workers like domestic helps, the OFWs now leaving to work abroad consist of professionals like engineers, architects, medical workers and accountants. These are the people who are more likely to purchase houses.

Another positive point is the pent-up demand that came from the housing slump in the late ’90s, after the 1997 Asian crisis. Now the demand comes from end-users—people who buy houses to live in them—rather than speculators, who buy and sell.

The BPO industry is also growing strong.

Actually, the slowdown in the US and other developed countries is pushing businesses in these countries to outsource many of their activities to low-cost countries like the Philippines. That’s why we continue to see reports about BPO companies setting up shop here, and developers still in high gear in constructing office spaces to accommodate them.

In tourism we breached the three-million mark last year, but we still have a lot of room for growth. The number of visitors coming from China and Korea are still a drop in the bucket compared with their people visiting other places. Our key advantage is that we are close to both countries.

And that’s the reason why the major players in the property sector continue to build malls, hotels and resort complexes.

So, while I want to be cautious because of the inflation and interest-rate outlook, I feel it would not significantly slow down the housing sector. The numbers coming out of the first-quarter reports of some major players are showing double-digit growth rates in both revenue and profit, in contrast to lower profits for banks.

Oh, incidentally, the loss of trading gains, which the banks have cited as the main reason why their profits shrunk during the first quarter of 2008, has encouraged banks to increase focus on lending (including housing loans), which should discourage them from raising interest rates this year.

These reports are more concrete indications of the prospects for the property industry than projections. They clearly show where the real-estate industry is going—up.

Did they say a slowdown in housing? Well, maybe a little bit, but not significantly so! 

You may send your comments/feedback to mbvillar_comments@yahoo.com.

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