Time of Opportunity and Challenge for the Philippine Real Estate Industry

18 October 2012

Speech-CREBA-PalawanSpeech of Senator Ferdinand "Bongbong" R. Marcos
21st National Convention Chamber of Real Estate and Builders Association (CREBA)
Puerto Princesa City

Thank you for the kind introduction.
And thank you, ladies and gentlemen of the Chamber of Real Estate and Builders Association for inviting me to address your 2012 national convention here in Puerto Princesa City and the province of Palawan.

Snapshot of the Philippine Property Sector

Let me look at a brief snapshot of the Philippine Real Estate Industry and where it is today. Between 1997 and 2004, the Philippines experienced the biggest property crash of all economies affected by the 1997 Asian Financial Crisis, as luxury condominium prices dropped 30.4% (53.7% in real terms). As with the present housing crisis in the US and Europe, a speculative bubble had formed in the 1990s after financial liberalization and economic reforms, pushing luxury condominium prices up 63% (35.3% in real terms) between 1995 and 1997.

As most of you are acutely aware, recovery from the crash has been slow. Although the industry was never lacking of prayers and boosters, the turnaround took a while in coming. Today, to the great relief of everyone – from the biggest developers to homeowners and investors – industry values and prices have picked up speed. Nominal prices are now back above 1997 levels, but prices are still 46% below pre-Asian crisis peak levels in real terms – a reminder of how much the crash cost.

Despite the recent floods which submerged Metro Manila, an optimistic change of mood has arisen in the Philippines. There is a sense of a new beginning. Foreign investments have been on the uptrend. As an English-speaking country, we are ideally positioned to take advantage of the global outsourcing boom.

As always happens in countries enjoying economic growth and fundamental structural reform, prices of homes are rising sharply. In the first quarter of 2012, the average price of a luxury 3-bedroom condominium in Makati CBD rose 4.8% to PHP 114,000 (USD 2,727.53) per sq. m. (q-o-q), or by 10.68% during the year to Q1 2012 (7.34% when adjusted for inflation). In addition, high-end residential real estate prices are likely to rise by another 9.9% during the next twelve months.

This year, property analysts project a significant rise in housing stock, with 8,253 units expected to be added to the Metro Manila supply by end-2012.

According to the World Bank, Three groups – overseas Filipinos, business process outsourcing employees and expatriates – are the ones who are chiefly responsible for powering the increase in demand in the property sector.

Overseas Filipinos’ remittances are powering the low-end to mid-range residential property market. They are snapping up housing projects and mid-scale subdivisions in regions near Metro Manila such as Cavite, Batangas and Laguna Provinces, while the expansion of the upper residential market, including the luxury market, is due to increased housing demand from BPO employees and expatriates.

•Housing projects and mid-scale subdivisions in Metro Manila and nearby provinces are sustained by OFW remittances.
•The expanding business-process outsourcing (BPO) industry (primarily call centers), is said to be responsible for growth in higher-end demand .

In recent years, employees of new IT-related firms such as call centers and other BPO firms have boosted demand for rental housing, with a ripple effect on the construction, retail, and telecommunications sectors, resulting in property price increases of 59.3% (16.2% in real terms) from 2005 to 2008. In 2009, luxury condo price growth slowed down to a
meagre 0.2% (-3.81% in real terms). But the noted economic recovery of the Philippines that started in 2010 is now propelling prices up again, with 5.5% price rises in 2011 (0.72% in real terms).

There are approximately 9 million Overseas Filipinos (OFW) worldwide, or around 10% of the Philippine population. Of all OFWs, 46.8% are permanent residents abroad. Employment in the Philippine Information Technology and Business Process Outsourcing (IT-BPO) industry grew by 22% to 638,000 in 2011, according to the Business Processing Association of the Philippines. The BPO industry had USD 10.9 billion in revenues in 2011, and is expected to employ 1.3 million workers and generate USD 25 billion in revenues by 2016.

Remittances from OFWs reached USD 20.1 billion in 2011, around 9.4% of GDP, up 7.2% on 2010. It is estimated that 60% of these remittances go directly or indirectly to the real estate sector.
Remittances are expected to grow at a diminished rate of only 5% in 2012. The World Bank believes the remittances slowdown is due to:

•Stricter Implementation of the migrant workers’ bill of rights;
•Political uncertainties in host countries; and
•The slowdown in the advanced economies.

Significantly, this perceived housing industry surge is happening despite a problematic mortgage market.

Most houses in the Philippines are sold for cash or pre-sold, due to an underdeveloped mortgage market. Property buyers also face high transaction costs, corruption and red tape, fake land titles and substandard building practices.
These are real problems. Few major banks offer housing loans. Different banks’ loans have strangely similar terms and conditions, and approval of loan applications is known to be a long and tedious process. Land titling and registration problems are prevalent, as are delays in the foreclosure process. Because of these factors, the ratio of housing loans to GDP remains small, at around 2.3% in 2011. Clearly, we need to correct these glitches in order to keep the observed boom going.
Outstanding real estate loans for acquisition of residential property grew by 17.3% in 2011, and by an average of 16% annually from 2001 to 2007, to PHP 220.8 (USD 5.28) billion.

Housing loan demand has been increasing because of lower interest rates, and the banks’ more attractive financing terms. Credit standards for housing loans somewhat eased in Q1 2012, according to the Senior Bank Loan Officers’ Survey, conducted by the Banko Sentral ng Pilipinas (BSP). Further growth seems likely.

In July 2012, the BSP cut its key policy rates by 25 basis points to 3.75% for the overnight borrowing or reverse repurchase (RRP) facility, and 5.75 percent for the overnight lending and repurchase facility (RF). Despite that, housing loan rates charged by major commercial banks has remained high at 7.1% for one-year fixed loans, and at least 8.75% for mortgages with fixed rates for five years or more.

The government-owned Pag-ibig Fund (Home Development Mutual Fund) offers lower interest rates ranging from 6% to 11.5%, depending on the amount borrowed and loan conditions. Compared to bank loans, the amount that can be borrowed is lower (maximum loanable is in the amount of P3M, but the payment periods granted are longer and loan-to-value ratios are higher (80% LTV ratio). Fulltime membership requirements have to be fulfilled to get a loan.

No housing glut

With all these salutary developments happening in our property sector, many are naturally apprehensive whether there will emerge another housing bubble, like the one that enveloped us in 1997. Many speak with dread about a housing glut, which hopefully will not happen.

What’s the real score? We must ask.

The accumulated supply of high-end and mid-end residential condominiums from 1999 to 2011 was 118,230 units.

•97% of these are mid-end range (priced PHP 1.5 million to PHP 10 million with an average unit size of 150 sq. m., or PHP 50,000 to PHP 110,000 per sq. m.),
•3% (around 3,690) are high-end units (priced PHP 10 million above with an average size of 160 sq. m. up, or PHP 120,000 above per sq. m.).

A sharp increase in new supply began in 2005. Since then, supply growth has averaged more than 30% annually. The total stock of condominiums jumped from 7,000 at the beginning of the millennium, to around 90,000 units by end of 2011, we see no glut,

Around 48% of condominiums built between 2004 and 2008 were in CALABARZON, a fast-growing region just beside Metro Manila. The Metro Manila region only placed fourth in the ranking of most residential properties built among the eight regions from 2004 to 2008, 17% of the total condo new builds were in Metro Manila. In addition, 11% of total single house constructions were in Metro Manila.

A noticeable increase of new condominiums is also obvious in cities such as Davao, Cebu and Iloilo. Cebu, for example, has shown to have a strong demand, with a take-up rate of 434 units a month.

Quezon City heads the surge with 24% of upcoming supply in Metro Manila. It is followed by Makati (18%), Mandaluyong (15%), and Manila (12%). These four cities alone comprise two-thirds of total upcoming supply in Metro Manila.

Around 33,000 units were completed in 2011, while over 50,000 units were launched, a 48% rise in completions during the year to Q1 2012. An estimate of 8,253 units of new residential supply in Metro Manila’s key districts are expected to be added in 2012, while around 5,028 more completed units will be added in 2013.

The prospects for the near future would be considered brighter if the projected overall improved outlook for the Philippine economy will materialize!

Role of Policy-Making and Legislative Priorities

It is in this light and with that objective in mind that we in the Senate, particularly our Senate Committee on Urban Planning, Housing and Resettlement, approach the task of shaping public policy and legislation to speed up housing and urban development in our country.

Like you, we are most anxious that government should have the right policy framework and strategies to (1) assist the private sector in ensuring the growth of the real estate industry, and (2) to come up with sustainable solutions to outstanding problems in your sector.

Among the issues we have identified that have to be addressed are the following:

1.Creating the most sound institutional setup for addressing problems and concerns in housing and urban development. Should we have a distinct Department of Housing and Urban Development? Or should we stay with the status quo of multiple agencies and Corporations, and disparate jurisdictions?
2.The adoption of a National Involuntary Settlement Policy and adoption of a resettlement action plan, to address the problems of informal settlers, slum colonies and professional squatting
3.The inclusion of a Resettlement Action Plan in major government projects
4.The development of more rental housing for the lower income groups as a key to relieving the massive housing backlog

Creating the Department of Housing and Urban Development
As you meet today for your national convention, I am pleased to report to you that The 15th Congress is poised to pass soon the long-awaited law for the establishment of a Department of Housing and Urban Development.

Last July 24, the Senate Plenary passed on third and final reading Senate Bill 3199, which creates a Department of Housing and Urban Development in our executive branch.

I understand that the House version of this bill is still awaiting approval at the House of Representatives. But it’s just a matter of time before the House gives its full blessing to this legislation. I look forward to having both houses holding the bicameral conference meeting on this bill soon to hammer to finally pass this measure.

National InVoluntary Settlement Policy

Besides creating the Department of Housing and Urban Development, I believe it is equally urgent and necessary that the government should formulate and develop a National Involuntary Settlement Plan in order to address comprehensively and effectively many thorny and outstanding issues in our housing sector, especially those relating to the needs of low-income groups. Resettlement, we must say plainly, is a major issue which has been inadequately addressed by our government, and has not been sufficiently covered by wise public policies. It is my plan to propose to Congress the adoption of a National In Voluntary Settlement Policy that will set out our government’s official resettlement policy and comprehensive action plan to deal with various problems.

Such a policy will also call for the creation of a national Resettlement Fund. In this way messy problems in our housing sector can be effectively addressed, such as:

•The issue of the presence of professional squatters in sites occupied by informal settlers which poses a major deterrent to the delivery of socialized housing by government and the private sector. Unless we eliminate and stop the squatting syndicates, all our efforts to ameliorate the lot of informal settlers will be frustrated and wasted. We must confront this issue once and for all.

•The integration of a resettlement Action Plan in major government projects. Many a project have been delayed or frustrated for lack of a resettlement action plan to deal not only with right-of-way issues but with eviction of informal settlers.

•Rationalization/amendment of the Lina law. It is high time for Congress to deal sensibly with the inequities and shortcomings of the so-called Lina Law or UDHA Act, which has exacerbated many of the problems we are facing in housing and urban planning. While protecting the interests of informal settlers, the law has discriminated against the rights and interests of property owners, thereby stalling sound property development.

Conclusion: Need for Rationality

The current boom taking place in our property sector is a great boon for the economy and the nation. For the real estate industry, it is a well-earned dividend from all the years of slogging through the years of crisis and keeping faith with the industry. Down the road, there will be room for a lot more growth and profitability. Expansion is moving to include more and more regions and cities in the countryside. I am confident that this dynamic expansion and development will eventually include the construction of more socialized housing, public housing, and rental housing, which are historically always essential to meeting the needs of the low-income groups.

We in Congress must have the wisdom to see this salutary development as a great opportunity to legislate policies and strategies that will result in welfare and benefits for the greatest number of our people. The establishment of the proposed Department of Housing and Urban Development will not be a magical solution to all our housing and urban development woes. At the very least, it will represent the injection of rationality into all programs, policies and agencies governing housing and urban development in our country. In place of a scattered government system, we will finally have a focused and effective instrument for public service.

Instead of addressing only aspects of the housing and resettlement problem, government will finally be compelled to deal with the problems and issues comprehensively, effectively and most of all, rationally. With Divine Providence guiding our commitment to our onward undertakings, we will accomplish what we desire most for housing and urban development in our country. You and I and our policy makers all have a stake in this! That is our challenge; that is our opportunity!
Thank you once again for having me here today.