No property ‘bubble’

PROPERTY MARKET growth in the Philippines has so far been healthy, Moody’s Investors Service said, with no reason to believe a bubble is forming.

Record-low interest rates have set the stage for a real estate boom but the Bangko Sentral ng Pilipinas (BSP) is keeping close watch to make sure these don’t allow speculation, noted Jean-Francois Tremblay, Moody’s Associate Managing Director for Financial Institutions.

“We see positively the BSP’s pro-active monitoring of the asset quality risks that could result from the current accommodative environment, including those related to real estate,” he said in an e-mail to BusinessWorld.

At the same time, “we are confident that the property market in the Philippines has so far grown on the back of good fundamentals,” Mr. Tremblay added.

While prices of property have been climbing, this has been “modest” and aligned with increases in rentals and average income in the country.

Real estate has again become a hot-button topic after banks saw their exposure to the industry breach regulatory limits in 2012. At P821.7 billion and comprising 20.9% of their total loan portfolio, the amount exceeded the BSP-mandated 20% cap.

The breach, though, was due to a new definition of “exposure.” Banks were required to report not just real estate loans but also investments in debt and equity securities that finance real estate activities. These activities range from the acquisition, construction and development of properties, as well as buying and selling, rental and management.

Banks also had include loans for socialized and low-cost housing developments, which were previously exempted from the reportorial requirements.

Mr. Tremblay said the figure was no cause for alarm, noting: “The new definition of ‘exposure’ includes loans to low-cost and socialized housing and these segments tend to be less susceptible to speculation.”

The BSP is mulling raising the 20% cap to accommodate the new definition as well as property market growth since 1997, when the limit was first introduced.

“Prospectively, we are not too fixated on any specific numerical cap. There is no magic number that can determine the point beyond which real estate exposure becomes a credit concern,” Mr. Tremblay said.

The focus, instead, should be on factors such as demand and supply, underwriting standards, loan-to-value ratios and the leverage of households and firms. These can more accurately show whether the appreciation of prices and borrowers’ behavior is driven by fundamentals or speculation, he pointed out.

“So far, trends in these areas have remained within reasonable limits,” Mr. Tremblay claimed.

The BSP maintains the same position, noting that a robust economy and steady inflation, coupled with the cheap cost of borrowing, has allowed more people to snap up property in the past few years. While there is some oversupply in the luxury residential segment, the BSP sees ample demand elsewhere, driven by overseas remittances and receipts from business process outsourcing.

Banks have also been prudent in their real estate lending, authorities have noted. Nonperforming real estate loans — unpaid at least 30 days after due date — made up only 3.7% of banks’ total loan portfolio last year.

Moreover, stress tests have shown that banks can withstand a default of 50% of their real estate loans. Their capital adequacy ratio would still stand at 15.77%, well above the BSP’s minimum 10% requirement and the international norm of 8%. –Diane Claire J. Jiao, Senior Reporter
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