CHILDREN are sometimes afraid that there is a monster hiding in their closet. This comes from the mistaken belief that monsters always hide in closets. It would be relatively simple for children to banish their fear. All they need to do is open the closet and look inside. But children will not open it, because they’re afraid they might be right and actually find a monster hiding there.
“Experts” on the Philippine economy have their own beliefs about monsters hiding in the closet. But they will not open it, because they’re afraid there’s no monster inside and that they might be proven wrong.
If you believe that the Philippines is facing a property bubble, then you probably are also afraid to look inside your closet for fear of monsters.
This is the way the real world works: If property prices are too high, then people will stop buying. The developers have two choices: They can do what the major developers did during the 1997 Asian financial crisis and just sit on the units without lowering prices. Once the economy improves and people are willing to pay the “high” price, sales will increase.
Can the developers afford to sit on unsold units? Can they continue to service their debt payments? Looking at the financial statements of the publically listed property companies, the answer is yes, even if, in the worst case, the banks need to cooperate. But we will get to that in a moment.
Alternatively, the developers could lower prices to stimulate sales. It is an amazing factor of the free market that you can lower the price to attract more customers. The experts may not have heard of this technique, but some say the Babylonian Code of Hammurabi, which reputedly date back to about 1754 B.C., contains a section on “buy one, take one” rules.
Business owners are very smart; experts, not so much. Almost every evening, at virtually every mall in the Philippines, there is a “food bubble”. That is why, at many stalls in the food courts, there is a sign that says something like “25-percent discount after 8 p.m.” Profits are made when business is booming, and the cost of raw materials is recovered by selling at a discount when business is slow.
The same market forces apply to the real-estate industry.
In the November 23 issue of the BusinessMirror, the headline was: “Banks’ property-sector exposure exceeds P1 trillion”. For me, that is good news, as it shows growth in an important part of our economy. For some experts, though, that means there is a monster in the closet.
But let’s open it and look inside.
Of that P1 trillion, 84 percent was for loans, while the remaining 16 percent was for real-estate securities or publically listed stocks. Considering that the top five property developers’ share prices are up between 14 percent and 40 percent in 2014, I would say that the banks’ P172.9-billion investment was pretty smart.
“Land developers, construction companies and other corporate entities obtained 60 percent of the real-estate loans, while borrowers acquiring residential properties received the remaining 40 percent,” the Bangko Sentral ng Pilipinas said in the BusinessMirror report.
Majority of the loans are going to developers that intend to profit from using them, and not loaned to property buyers, whom the experts tell us are dumb to buy real estate during a bubble.
Because the experts have never looked inside a Philippine-property closet, they do not know that Philippine property developers spend very little of their borrowed money until they start selling the units during the preconstruction phase.
In the United States a developer cannot sell until it reaches a certain stage of construction. In the Philippines units can be sold once the Housing and Land Use Regulatory Board’s “Certificate of Registration and License to Sell” has been approved. This allows for less risk to the banks and helps ensure that borrowers can service their debt from ongoing sales.
This system works very well, as evidenced by the fact that the banks’ nonperforming loans are only 2.64 percent of their total real-estate loan portfolio—and it’s decreasing.
If you want to find monsters, go see a movie. Do not bother looking at the Philippine property industry.
Send me an e-mail at mangun@gmail.com. Visit my website at www.mangunonmarkets.com. Follow me on Twitter at @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.