Supply & Demand, Rent or Own? Show me the Math

vic abola Economist Vic Abola discussed about property inflations. source:

Economist Dr. Vic Abola discussed the possibility of a property bubble

In January 2012, my Professor, Dr. Vic Abola,  an Economist at University of the Asia and the Pacific, said a property bubble is looming for the high-end properties.

He was critical when he said that “It does not matter whether real estate companies are competing for the top spot as the biggest housing builder in the country but what is important is the purchasing power of the buyers, especially the OFWs”.

Last October 9, 2013, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo advised Philippine real-estate firms to go slow in their development plans to avoid a market bubble. He said that overheating in the sector at this time is still “quite remote” and developers should be vigilant, and avoid flooding the market with properties that may end up idle.

Prudent Investment Newsletter’s Benson Te wrote an article about “Cracks in the Philippine Property Bubble”?  He said “The race to build real estate projects funded by debt by property developers and by the government has been rapidly inflating domestic property prices”

With such events and issues, the real estate sector in the Philippines still remain bullish.

Mr. David LeeChiu of Jones Lang LaSalle (JLL) mentioned that in their research, “that despite soaring prices and massive supply growth there is no glut in the property sector”.

Several developers agreed with him by saying the Philippine property market remains vibrant, with strong economic growth boosted by robust domestic consumption and increases in government spending.

According to Colliers International, statistics shows it. During the year to end-Q2 2013, the average price of a luxury 3-bedroom condominium in Makati CBD soared by 12.92% (9.98% inflation-adjusted) to PHP128, 730 (US$2,938) per square meter (sq. m.)

High-end residential property prices in Makati CBD increased 6.92% (6.25% inflation-adjusted) in Q2 2013.

In Bonifacio Global City, the average price of a premium 3-bedroom condominium rose by 12.4% y-o-y to PHP127,575 (US$2,911) per sq.m. in Q2 2013. In Rockwell Center, secondary residential property prices also increased by 10.6% y-o-y and 3.6% q-o-q, to an average of PHP132,770 (US$3,030) per sq.m. in Q2 2013

Land values have also been appreciating For over the past seven years, is this speculative Market Sustainable? In the second quarter of 2013 Makati CBD, land values rose by 8.32% to PHP283,185  (US$6,462) and PHP325,275 (US$7,423) per sq. m.

In Ortigas Center, land values did not increase as much, only by 6.45% to a range from PHP104,925 (US$2,394) to PHP171,860 (US$3,922) per sq. m. Quarter-on-quarter, land values rose by 1.75%.

Mr. Ramon CF Cuervo III and Mr. Roque Sorioso with Ms. Marissa Benitez, Director of Valuation and Advisory Services of Colliers International.

Mr. Ramon CF Cuervo III and Mr. Roque Sorioso with Ms. Marissa Benitez, Director of Valuation and Advisory Services of Colliers International.

However, In Bonifacio Global City, land values rose at a faster rate, by 8.47% y-o-y and 1.8% q-o-q to a range from PHP200,850 (US$4,583) to PHP292,900 (US$6,684) per sq. m.

Rents are also rising. In Makati CBD, the average monthly rent of a premium 3-bedroom condominium rose by 7.2% y-o-y to PHP790 (US$18) per sq. m. in Q2 2013. Likewise, residential rental rates in Bonifacio Global City also increased by 7.4% to a monthly average of PHP780 (US$18) per sq. m. over the same period.

It is interesting to note the Debt structure for Real Estate,  Total real estate loans country-wide soared by 42% to PHP546.51 billion (US$12.47 billion) in 2012 from the previous year. Is this not a warning sign?

So why is Real Estate a Good and Favorite investment?

First is the increasing number of Business Process Outsourcing BPO’s.  These companies increased the demand for buildings to rent. And as an off-shoot, employees who are earning well in this industry also increased demand for mid-range condominium or housing units, whether the intention is to rent or to own.

According to the Business Processing Association of the Philippines (BPAP) President and Chief Executive Benedict Hernandez, employment in the Philippine Information Technology and (IT-BPO) industry grew by 22% to 638,000 people in 2011.

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, according to the World Bank.

Overseas Filipino Workers (OFW), account for around 17% to 18% of residential sales of Ayala Land, one of the country’s major developers. In the next five years Ayala Land President Antonio Aquino expects to double this, by branching out to the affordable and low-end market segment.

David Leechiu of Jones Lang LaSalle source:

David Leechiu of Jones Lang LaSalle

The young population and low dependency ratio in Southeast Asia is also seen as a factor in supporting real estate growth. When you have an affluent economy, young people, coming from affluent families move out of the family home earlier, creating more demand for the housing market”.

And, surprisingly, more foreigners from Hong Kong, Singapore, Korea and US are buying residential condominiums in Metro Manila, according to real estate service company Jones Lang LaSalle. These foreigners, who are not allowed to buy land, purchase condominiums.  With cost of real estate here considerably lower than other countries and with a high yield of 5 – 8%, investors gets their money’s worth, either by leasing or reselling the property.

BSP Deputy Governor Diwa Guinigundo, “in a change of tune” added that the property upswing in the country was “fundamentally supported,” citing the big backlog of housing demand from end-users, rising trade activities and the business process outsourcing industry which, in turn, helped boost demand for office and commercial space”.

However there are several concerns & problems  facing  the real estate industry. Namely;

Most houses in the Philippines are sold for cash or pre-sold, due to an underdeveloped mortgage market. Property buyers face high valuations, additional transaction costs, corruption , red tape, fake land titles and substandard building practices.

Few major banks offer housing loans. Different banks’ loans have strangely similar terms and conditions, and approval of loan applications takes a long time. 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.

Over the past recent years, residential condominium projects have mushroomed particularly within and around the metropolis that practically changed the skyline of the big city.

Industry experts and research firms have attributed the preference for condominium lifestyle for a local and international market to several factors namely:

1. Affordability. Low interest rates, available and easy financing packages from banks and financing institutions;

2. Accessibility. As these condominium projects are strategically located near or within their respective places of work;

3. Security and the lock and go lifestyle of urban workers;

4. Proximity to major commercial and shopping areas, schools, hospitals.

As an experienced Appraiser, Real Estate Broker and Consultant, my opinion is now different.  One has to consider Taxation, Monthly Dues, Number & Type of Occupants , and Safety, Security and Privacy factors.

Donald Trump, Author of The Art of the Deal

Real Estate Guru and Legend Donald Trump, Author of The Art of the Deal

Donald Trump’s advice is “I always go into a deal anticipating the worst. If you plan for the worst- if you can live with the worst- the good will always take care of itself”.

For Wage- Earners, forming the majority in the Low to Mid-Market, the need for housing is high; Estimated to be numbering about 100,000- 150,000 dwelling units a year. However, for  the High-End Market, the demand is motivated by investment security, speculation, cash – flow, or even greed more than need. Since money is not a problem, the super rich will buy, just to keep up with the fashion, trend  or simply ” feeling good ” from the purchase of Luxurious , “one-of a- kind” dwelling unit.

Our main concern for the Low to Mid- Market, is that of Affordability and Location. Can a wage earner keep up with amortization payments? And, this is related to Location. Because, to be situated in a place near one’s work and/ or school for the children; for this  will add up to big savings from transportation costs, food and traveling time.

Unfortunately, a wage earner, suffers a huge slice from his/her salary. About  one-third of an employee’s salary goes to deductions for SSS or GSIS, Pag-Ibig, Medicare and Taxes. Therefore the money needed to pay for amortizations in buying a home is not enough.

Today, the Condominiums for the Mid Market range from P2M-12M  with roughly 200,000 units available and in the pipeline. We have noted for the top ten developers, that the absorption rate is lower by 10-33% depending on the type of development, location and price. Therefore one can observe, the stiff competition and a rush of developers in scrambling to win a bigger market share. The battle for sales or rent has just began. We remember that before, the byline was “why rent when you can own”, but today, it’s more like, for the middle-class, “why own, if you can rent”.

The new finance/ pricing  strategy of developers is to go , Zero –10% down payment, from the usual 20-30% down payment. There is a substantial promotion and shift by Developers to tap the rental market and  offer ” rent to own”  schemes.

We can illustrate this on a “rule of a thumb”: mathematical  computation:

P = Income/Rate : where P = Principal ; I = annual Income or rent and r= capitalization rate.

For example: a condominium for sale for P2M with an amortization of about P15-20K a month, depending on one’s age, time of loan and interest rates.

Now if a same condominium unit is available for rent at P1ok / month, then logically I would advise the would-be home dweller, to rent rather than pay a higher amortization rate in ” ownership” .

Let us computer if rental is P10,000 x 12 months = P120,000/.09 (based on gross) = P1.4M

Therefore the asking price of P2M is higher;  or the other way around if rental is P20/mo. x 12 = P240,000 /.09 = P2.6M.

This is a simple “rule of thumb”  formula; but it can serve as a guide for the buyer. Knowing your Math, can help you in making a decision. So, with Math of Investment, one can compute in order to justify purchasing the unit for P2M , or if it comes out cheaper,  than paying a P20K rental / month. But there is still the risk of Taxes, Dues and unwanted neighbors.

Real Estate Gurus and Legend M. Anthony Carr and Gary Eldred

Real Estate Gurus M. Anthony Carr and Gary Eldred

“Whether you are buying or renting a house, it always comes down to the numbers. Many renters don’t think they can buy a home which in reality, it costs almost as much money to move into a rental and takes nearly as much financial scrutiny to determine a renter’s qualification. Some rentals requires a security deposit, first month’s rent, per deposit, move- in deposit, and other fees before you can even open the moving track doors”. (M.Anthony Carr, The Art of the Deal)

“So in addition to market value, look to these leading market indicators to hep you predict markets that are about to turn up or down. Sharp investors avoid bubbles about to burst, they arrive early for the next housing party. When you stay tuned to leading indicators, you materially decrease your chance of loss and disappointment. More profitably, you position yourself for beat-the-market gains in appreciation”. (Gary W. Eldred, PhD., Make money with Condominiums and Townhouses)

Mr. Bean, always funny, and  happy on his decision to rent an apartment.

Mr. Bean, always funny, and happy on his decision to rent a ” homely” apartment.

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One Response to Supply & Demand, Rent or Own? Show me the Math

  1. Boots Leano says:

    you never fail updating trends Mon…..very interesting….

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