Real-estate industry showing signs of oversupply; ‘careful monitoring’ needed

THE World Bank is urging the national government to “carefully monitor” the real-estate industry as the country’s real-estate market may be showing signs of oversupply, which could jack up vacancy rates and mute rental growth starting this year until 2014.

In a special section in the Philippine Quarterly Update (PQU), the World Bank said that this year until 2014, an average of 470,000 sq m of new office spaces are lined up. However, only around 250,000 to 300,000 sq m are expected to be taken up and will cause higher vacancies and lower rental rate growth.

“The Philippine real-estate market today is largely driven by BPOs [business-process outsourcing firms] and remittances and less on investors seeking higher returns. Borrower leverage is low and banks have more prudential measures in place. Overall, systemic risks are fairly low, although the residential segment may face downside risks arising from oversupply, hence, the need for careful monitoring,” said the World Bank.

The World Bank also said the average new condominium supply for 2011 to 2015 is around 26,000 units. This is more than five times the average in the period covering 1999 to 2010. Last year alone, the rental space supply in major residential districts in Metro Manila increased by about 53 percent to 6,000 units.

With this, some real-estate developers are offering discount rates of up to 40 percent on selected units, which narrows the profit margins of developers. In 2011, the bank noted, the average price of luxury three-bedroom condominiums in the Makati Business District posted a growth of only 4 percent.

While growth in the BPO industry’s demand for space will continue, the World Bank warned that other factors like the unrest in the Middle East, reduced overseas Filipino worker (OFW) deployment to Saudi Arabia, the crisis in the US and Europe, and reduced private spending due to higher oil prices could slow real-estate demand.

However, the World Bank said the real-estate industry does not yet “pose systemic financial risks at the moment.” It explained that the commercial property sector, as of September 2011, only accounts for two-thirds of the bank’s outstanding loans and the residential sector accounts for the balance and are lower than during the global financial crisis.

It can be noted that the 2009 global financial crisis, which stemmed from subprime loans in the US, was deemed the worst global economic crisis since World War II. The 1997 Asian financial crisis also stemmed from problems in the real-estate sector in Thailand.

“Given the limited leverage, the property sector on the aggregate does not pose systemic financial risks at the moment,” said the World Bank.

Meanwhile, the World Bank said the Philippine government needs to increase its revenues. It reiterated its call to strengthen tax administration and push for the immediate passage of the tobacco and alcohol excise, and fiscal incentives bills are steps in the right direction.

External risks such as slow global economic growth due to the crisis in the US and Europe and a possibility of slower domestic demand due to lower remittances will make higher public spending necessary to meet the growth objectives of the government this year and in the coming years.

“Accelerating structural reforms to enhance global competitiveness will improve the level and quality of employment in the country,” said Karl Kendrick Chua, World Bank country economist and main author of the report. “Moreover, successful implementation of these reforms would allow the country to take advantage of new opportunities arising from the global economic rebalancing and attract more investments as multinational companies relocate to other countries given rising production costs in China and other middle-income countries.”

The bank said appropriate fiscal and monetary policy responses are expected to boost growth to 4.2 percent and 5 percent in 2012 and 2013, respectively.

This, the bank said, assumes sustained growth in consumption and some improvement in investments and exports.

World Bank lead economist Rogier J.E. van den Brink said employment prospects this year will see some improvements, given higher public spending and continued growth in some industries.

“Higher infrastructure spending is expected to create tens of thousands of new jobs in the construction and trade subsectors, while continuous growth of the BPO industry is expected to generate 100,000 new jobs this year. However, structural reforms are needed to create more and better jobs in the year ahead,” said Van den Brink.

Prepared by the World Bank’s Poverty and Economic Management (PREM) team, the PQU provides updates on key economic and social developments as well as policies in the Philippines. It also presents findings from recent World Bank studies on the country.  –Jennifer A. Ng, Businessmirror