Property sector takes high road despite looming rate hike

A LOOMING interest rate hike brought on by higher inflation is threatening to cut short the bull run in the Philippine property sector.

Last week, China’s central bank raised interest rates—its second in over a month—and sent Asian bourses into a tailspin, with the Philippine Stock Exchange (PSE) main index suffering its biggest drop so far this year.

Closer to home, the Bangko Sentral ng Pilipinas (BSP) raised its inflation forecast for this year and 2012. From 3.6 percent earlier, the BSP lifted this year’s forecast to 4.4 percent, or above the mid-point of its three to five percent target range.

While its policy-making Monetary Board kept key interest rates at record lows of 4 percent and 6 percent for the overnight borrowing and lending windows during its first meeting for the year, pundits have warned of a 25 basis points increase as early as the second quarter amid surging global food and commodity prices.

In fact, the BSP’s language has shifted from concerns over economic growth to worries over the possible second-round effects of imported inflation.

Amid the threat of inflation, the financial and property indices of the local stock market have suffered the sharpest declines so far this year. The property index has lost nearly 10 percent since the end of last year.

Astro del Castillo of First Grade Hold¬ings Inc. said one reason the property sector boomed in the last two years is that Philippine interest rates have dropped to record lows.

“The property sector got a lift from the low interest rate environment and the affordable payment terms, encouraging people to buy residential units and borrow for properties,” said the market analyst.

Demand mostly came from overseas Filipinos, who invested in high-rise developments or sought temporary shelter when they returned to the country, he said.

As a testament to this, the country’s leading property developers last week reported robust earnings for 2010. Ayala Land Inc. (ALI) said its bottom-line rose by more than a third to a record P5.46 billion from the previous year’s P4.04 billion. SM Development Corp. (SMDC) said its profit came in at P3 billion, or 62 percent higher than the P1.9 billion in 2009.

Both companies’ stocks haven’t been spared from the wider market drubbing. ALI has been down more than 11 percent, while SMDC has lost at least 20 percent since the end of 2010.

But despite this setback, the two industry leaders have unveiled aggressive expansion plans for this year.

Jaime Ysmael, ALI chief finance officer, said the company would spend P33 billion this year, or 65 percent higher than the P20 billion spent in 2010. Bulk of its capex, or 46 percent will be spent on housing, 27 percent on leasing, 21 percent on land banking and other acquisitions, and the balance of 6 percent on its hotel venture.

The company plans to expand its residential business, doubling its unit launches to 20,000 this year from 10,115 in the previous year. Of the total number set for this year, more than half would pertain to its middle-income and affordable brands, Alveo Land and Amaia Land.

“Those are the more resilient markets because they are catering to the end-user market, affordable economic housing. I think that is why we’d like to be there,” Antonino Aquino, ALI chief executive, said.

Henry Sy Jr., SMDC chief executive, said the company is eyeing sales of P25 billion to P30 billion and a profit of at least P4 billion. This is higher than the company’s earlier projection of about P23 billion to P24 billion in sales and P4 billion in earnings.

“The strong results achieved by SMDC in 2010 attest to the proven viability of its business model, which is to provide high quality residences in strategic locations at affordable price points,” said Sy.

The housing arm of the SM group plans to launch five new projects, adding to its current portfolio of 14 residential ventures, 13 of which are in Metro Manila and one in Tagaytay, the so-called second summer capital of the Philippines.

“Somehow, there continues to be pent-up demand for housing and all types of property products,” said del Castillo.

April Lee-Tan, head of research at CitisecOnline.com, said the real estate industry remains bullish this year on the back of strong demand, driven by a huge backlog and the fresh availability of accessible payment terms.

Despite a looming interest rate hike in the middle of the year, analysts expect a minimal or no effect at all on the property industry, especially given the attractive payment terms.

Even without the promised stimulus from the passage of the Real Estate Investment Trust law, property firms can grow their businesses since most of them already raised their capital last year to finance this year’s expansion, Tan said. –KRISTA ANGELA M. MONTEALEGRE REPORTER, Manila Times

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