Housing, retail sub-sectors: property’s only hope?

Manila, Philippines Monday, January 20, 2003 (Reviewing the Past)
ALAB D. VITUG, Reporter

Still reeling from the effects of the 1997 Asian financial crisis, the real estate industry continues to struggle on the road to recovery.
Two of its sectors remain resilient in the market, bringing hope to the industry as these show signs of recovery and growth. These are the housing/residential and the retail/commercial sectors.
The residential sector is divided into three subsectors, namely: mass housing, middle-income housing and the high-end residential market -- or what is known as the luxury market.
Low-cost housing ranges from PhP200,000 to PhP800, 000. Middle-income housing ranges from PhP1 million-PhP5 million per house and lot, townhouse or a condominium unit. The cost of residences in the luxury segment starts from PhP5 million.
Although the sector has been in the doldrums since the 1997 financial crisis, market players are unfazed. On the contrary, market players are positioning themselves and finding their own place under the sun.
Among the players in the residential sector are companies such as Ayala Land, Inc., (ALI) Megaworld Corporation; Keppel Philippines Properties, Inc. (KPPI), the property arm of Singapore-based Keppel Land International Limited; DMCI Holdings, Inc. (DMCIHI); and Filinvest Land, Inc. (FLI).
The retail segment covers the property developers who are building commercial centers and targeting the "malling crowd" who come from a wide spectrum of society.
Market players in this segment include SM Prime Holdings, Inc., operators of the country’s largest retail chain, the SM malls, Robinsons Land, Inc., ALI, KPPI, and the Araneta Group, operators of the Araneta commercial center.

A facade of the East Ortigas Mansions, a mid-income residence being developed by DMCI Homes Inc. Photos by Ben Razon
In the residential sector, the segment that has emerged lately and shown growth potential is the middle-income residential market.
Prospects are also bright for farm lot projects in the luxury segment. "The trend that is currently dominating the real estate sector is ’selective’ development wherein property developers choose niches to pursue their developments.
In the residential sector, most developers are focusing on developments in the middle-income housing segment, which is actually doing very well," said Richard T. Raymundo, manager of the research and consultancy division of property research consultant Colliers International, in an interview with BusinessWorld Online.
Selective development in the property market is in stark contrast with the industry’s direction before the Asian financial crisis, said Mr. Raymundo.
Most of the developments then were moving in all sectors, whether it is the industrial, office, leisure or the high-end residential segment, which used to be one of the big earners.

MIDDLE-INCOME MARKET

Property developers see the middle-income segment as the driver of growth for the market, since in the middle-income segment, housing is a need.
"For the buyers in the middle-income residential segment, housing is a need. That is why we are focusing mainly on this market for we see a resilient market niche in this segment," said Ang Wee Gee, KPPI president.
In its 2001 Annual Report, KPPI said the "middle-income residential prospects remain sound, notably for projects in and around the major business districts. Based on market feedback, buyers’ interests are focused on affordability and the availability of friendly in-house financing schemes. The middle-income residential sector is anticipated to benefit most from the-low interest rate environment."
Its first residential development in the Philippines targets the middle-income residential market. Located in Pasig City, Palmdale Heights will offer 29 residential blocks consisting of about 4,000 condominium units.
Property developers said middle-income buyers have the purchasing power to own a home in this price range, with banks like Bank of the Philippine Islands (BPI) offering as low as 8.75% per annum for housing loans.
In its July 2002 quarterly research report, Colliers International noted that the licenses to sell in the middle-income residential sector approved by the Housing and Land Use Regulatory Board (HLURB) increased by 9.5% in the first five months of 2002 to 15,773 from 14,399 licenses in 2001.
Listed construction firm DMCIHI is also setting its sights on the middle-income housing market. It recently refocused its thrust from constructing retail malls and buildings to developing residential communities. It commercial development projects include the Rockwell Center and Glorietta 4 in Makati and the new International School of Manila, which is still under construction at the Fort Bonifacio Global City.
In its annual stockholder’s meeting last August 2001, DMCIHI announced the creation of a new subsidiary, DMCI Homes, to handle its housing projects. The thrust of DMCI Homes would be the full-scale construction of small middle-income residential communities.
"Based from (sic) the success of our initial middle income residential projects like the Lakeview Gardens in Taguig and Hampstead Gardens in Sta. Mesa, Manila, we expect significant cash contribution to come from housing development," stated the DMCI 2001 Annual Report.
The middle-income housing projects of DMCI Homes include Lakeview Manors, Morning Sun Townhomes, and the Vista de Lago condominium units which are under construction in Taguig, Hampstead Gardens in Manila and the East Ortigas Mansions, a five-storey residential unit in Pasig City which is still being developed. Units cost around PhP1 million to PhP3 million.
"Residential communities are where the market is, as most of the sectors are still recovering, and foreign investors are not coming in. Also, our construction works have significantly lessened," said Isidro A. Consunji, DMCI president.

"We want to stay in the housing segment first and be really good in this market segment as there is currently an oversupply of buildings. The industrial sector has no investments and most investors are going to other Asian countries like China and Vietnam," added Mr. Consunji.

Housing, retail sub-sectors

Ayala Land or ALI has also formed a new subsidiary, called Community Innovations, which targets the growing middle-income market.
ALI is one of the country’s largest property developers and more known for its high-end residential projects in the Makati CBD (central business district). Examples are the high-rise condominiums One Roxas Triangle and the Paseo De Magallanes. It also has a subsidiary for mass housing development, the Laguna Properties Holdings Inc. (LPHI)
"We haven’t really been doing specific things to address the middle-income market so we decided to cater to this sector by forming a new subsidiary, so that we could cover the gaps in the sectors we are addressing," said Angela De Villa-Lacson, vice-president of the Residential Buildings Group of ALI.
"For Community Innovations, we’re looking at developing more projects in the future. We’ve already launched Verdana Homes, and another project will be launched shortly," said Ms. Lacson.
Verdana Homes is a 25-hectare middle-income subdivision located in Bacoor, Cavite that was launched last March 2002.

HIGH-END MARKET

Luxury residential projects, which previously had a steady stream of customers, are experiencing a considerable slowdown in uptake since the 1997 financial crisis.
Vacancy levels for this segment are still at 11.2%, according to the July report of Colliers International.
Colliers International noted that prime three-bedroom residential capital values have declined since 1997, from a high of around PhP98,000 per square meter to the current average of around PhP65,000/sqm.

High rise residential condominiums in the Ortigas central business district.
"The luxury sector has basically remained flat as rents and prices have generally bottomed" out, said Mr. Raymundo.
Neither is KPPI pinning its hopes on the high-end market.
"Luxury residential sector remains in the doldrums given the soft market conditions as rental rates and capital values of luxury residential units in the Makati central business district have declined by an average of 3% and 8%, respectively, from last year’s levels," the company said in its report.
However, property developers have found a new approach to selling properties in the high-end residential segment by giving it a different spin.

WEEKEND FARMS

Property developers like ALI and Filinvest Land or FLI are also focusing on market niches. For instance, these firms are developing leisure farm houses in provinces just outside Metro Manila, like Laguna or Tagaytay.
These "weekend farms "target "gentleman farmers," or those who enjoy spending weekends in their countryside farms while maintaining jobs in the city.
"The development in this niche is also for residential purposes, like a second home, but it was just given a different twist," said Mr. Raymundo.
ALI, through its wholly owned subsidiary LPHI, launched last August a farm estates project in Lipa City, Batangas, a community of combined farm estates and residences standing on approximately 90 hectares of land named Hacienda Sta. Monica and Villa Sta. Monica.
The 64-hectare Hacienda Sta. Monica is an integrated country estate development that will offer farm lots ranging from 750 to 1,500 square meters at PhP1, 800 per square meter.
The bigger hacienda lots, ranging in size from 4,547 to 5,265 square meters, are prized at PhP1,200 per square meter. These are designed for recreational and commercial farming, which can be planted with fruits, flowers, vegetables and ornamental plants.
"Our research indicated a strong demand of people, particularly those who live in Manila and wants an agricultural type of retreat. Hacienda Sta. Monica and Villa Sta. Monica are LPHI’s response to particular market clamor for farm estates," said Manuel Colayco, LPHI president.
Villa Sta. Monica is a 30-hectare residential village developed for those who want to build a house in an estate setting. The lot sizes range from 150 to 300 square meters with the cost per square meter pegged at PhP3, 000.
Colliers data show that the HLURB approved about 5,841 licenses for farm lot sales in the first five months of 2002, a 100% increase as no licenses for this category were issued in the same period last 2001.
University of Asia and the Pacific economics professor Winston B. Padojinog said farm lots or the gentleman farmer concept actually started in the early 1990s. But it was only lately that the idea caught up.
FLI, which has residential real estate developments for the entire spectrum of the market--socialized or low-income, middle-income, and high-end housing units--has also thrown its hat in farm lots.
The company developed the Nusa Dua, a 200-hectare estate in Tanza, Cavite that also offers both residential and farm lots.
Lot sizes in Nusa Dua range from 750 to 2,000 sqm. Its farm estate services include seminars, technology transfer activities and access to farming supplies such as fertilizers and crop protectors. Like ALI, it also targets the so-called gentleman farmer.
In its corporate profile posted in its Web site, FLI said it is expanding geographically to meet new growth markets, which includes the development of farm lots. It said these new markets offer excellent opportunities for expanding FLI’s business in future years."
In the past, FLI strived for a balanced sales mix of socialized and low-cost housing, and middle-income and high-end housing. But in its corporate profile, it said "in the past few years, the company focused on the low-income sector. However, in 1999, it said middle-income and high-end housing have become a more attractive market as more banks are offering various types of housing loans with affordable interest rates and flexible payment terms."

LOW-COST HOUSING

For the low-cost housing sector, the lowering of interest rates of government financial institutions (GFIs) and banks alike, coupled with the steady stream of overseas Filipino workers (OFWs) remittances, served as catalysts for demand.
Compared to the first five months of 2001, the HLURB issuance of licenses to sell for this segment increased by 153.9% from 5,724 to 14,531 for 2002.
"Most of the home sales in this segment would have links to OFW (overseas Filipino workers) remittances as they find it a very good time to buy. They have the dollars coupled with the low interest rates," said Mr. Raymundo.
Isaac S. David, president of the Realty Group Filipinas Dravo Corporation (FDC), said the firm is eyeing a 40% share of the OFW market--particularly those Filipinos based in Japan and the Middle East--for their low-to medium-cost housing project in Brgy. Quisao, Pililla, Rizal named Living Water Subdivision.
"Our OFWs are a potential market because they are earning in dollars. Also, one of the major priority purchases of an OFW is a house to come home to," said Mr. David.
Ernesto Encarnacion, vice-president of FDC, added that other property developers who are into low-to medium-cost housing are also targeting OFWs as primary buyers.
The loans and the financing offers are very attractive for residential units.
DMCI also developed a low-cost housing project named Morning Sun, located in Taguig, DMCI officials said OFW remittances play a factor in this market segment too.
Mr.Consunji added that they plan to venture more into the low-income housing projects, where house and lot acquisitions may financed by the state-run Pag-IBIG Fund, particularly in areas like Carmona and Cabuyao in Cavite. Lots would cost around PhP500,000-PhP1 million.
"The lower end market after all accounts for 80% of the demand in this country. The government is trying to address this, little by little as GFIs like Pag-IBIG and GSIS (Government Service Insurance System) are implementing more user-friendly regulations and more realistic, rather than standard, regulations, said Mr. Colayco.

HOUSING AGENCY

Also, the government is addressing the demand for housing in the country by creating a housing department. The bill on its creation is now on its second reading at the Senate.
The creation of a department of housing seeks to have a unified housing agency that will ensure the delivery of funds and streamline procedures in the housing bureaucracy, in hopes that government will catch up with the 4.5 million housing backlog in the country.
Senate Bill No. 2133, which seeks to create the Department of Housing, and aims to rationalize and strengthen the urban development and shelter delivery system of the government, also proposes that the Department of Housing be tasked to coordinate, supervise and control programs and activities related to urban planning, development, and renewal, including land use and zoning, housing provision, and financing.
However, analysts said the housing program of the government seems deficient. Majority of those who have no homes are not members of GFI’s and thus cannot avail of their financing packages.
Also, those in the marginalized sector cannot afford the price tag of PhP180, 000 for a house. Quoting Bayan Muna representative Crispin Beltran, BusinessWorld reported last July that many housing units constructed by the government remain unoccupied simply because the poor cannot afford units amounting to PhP180,000 each at an annual interest rate of 9% even if it is payable in 30 years.

Banks, like Rizal Commercial Banking Corporation, have lowered their interest rates for housing loans.
Analysts have also noted the contribution of banking institutions for the housing sub-sector like low and middle income housing. They pointed out that interest rates of loans continue to decrease, apparently to attract takers.
Previously pegged at around 18%-24% interest per annum, interest rates for housing loans have now gone down to as low as 8.75% per annum.
"Definitely, residential units are more affordable given the low interest rates that are available," said Mr. Raymundo
"The market pickup is really dictated by the availability of loans and the financing offers. Now, they’re at an all-time low and are very attractive for people who cannot afford to shell out PhP4 million to PhP6 million for residential units..." said Ms. Lacson.
Just recently, thrift bank BPI Family Savings Bank said it is setting aside PhP5 billion in loans for the housing sector.
"Housing is a basic demand. We believe in the positive multiplier effect of end-user housing loans. BPI Family Savings Bank housing loan demand has been strong with end user loan growth at 15% for this year, as against a flat industry loan growth. In fact, applications in September are double the applications in January," said BPI Family Bank president Aurelio R. Montinola III in a statement.
Mr. Montinola attributed the strong demand to lower interest rates and low downpayment rates of around 20% to 30% of the property’s value. He said BPI Family Bank is holding loan rates steady at 8.75% for home loans with interest rates fixed for a year, 9.25% for those fixed for two years, 9.75% fixed for three years, and 11.75% fixed for five years.
The volume of housing loan transactions has doubled since banks lowered their interest rates for housing loans.
In Equitable-PCI Bank’s own-a-home program, the minimum loanable amount is PhP500,000 with a fixed interest rate of 10% per annum. Available periods in which to pay the loan vary from 10 to 20 years with approval of the housing loan application taking around three weeks as long as requirements like income tax declaration, collateral property and location plan for the house, are complete and in order.
In a telephone interview, Gary Vargas, vice-president of the real estate mortgage division at Equitable-PCI Bank, said: "Definitely, the volume of housing loan transactions has doubled since we lowered our interest rates for housing loans." Before, interest rates were above 15%.
GFI FACTOR
Atty. Romero FS. Quimbo, acting president and chief executive officer of government’s Home Mutual Development Fund, popularly known as the Pag-IBIG Fund, said the fund’s members have started availing of the housing loan program again last 2001.
He added that the agency also "helped in the developmental financing for for developers of housing projects so there would be activities in the construction sector." BusinessWorld reported last July 2002 that Pag-IBIG has been the most active lender among the GFIs with PhP5.809 billion provided to 24,915 households.
Mr. Quimbo said Pag-Ibig’s commitment is to provide around PhP10 billion to PhP15 billion in housing assistance for its members and developers. In 2001, Pag-IBIG spent PhP5.8 billion. He added that the agency’s efforts were vindicated, judging by the increasing number of activities in the housing loans business of both banks and GFIs.
"It just vindicates the move that we made last 2001 when we lowered our interest rates from 12% to 9% per annum for loans up to PhP180,000, from 16% to 12% for loans between PhP180,000 and PhP500,000, and from 18% to14% for loans between PhP500,000 and PhP2 million," said Mr. Quimbo.
"Two years ago, people scoffed at us, as if we were taking a financial dive. But we knew that housing was the way to go. We knew that everybody would follow suit and they did," he said.
Just recently, Pag-IBIG announced that it was again lowering its interest rates, thanks to the prodding of President Gloria Macapagal-Arroyo.
In a statement, Secretary Mike Defensor, chairman of the Housing and Urban Development Coordinating Council (HUDCC) and the Pag-IBIG Fund Board of Trustees said: "Now is the best time to buy a house to take advantage of the very low interest rates." The board approved last October a further reduction in the interest rates for housing loans of prospective applicants.
The new interest rates are as follows:
6% for loans up to PhP150,000;
9%, PhP150,000 to PhP225,000;
10%, PhP225,000 to PhP500,000; and
12%, PhP500,000 to PhP2 million.
Mr. Quimbo said "the move is in accordance with the vision of President Gloria Macapagal-Arroyo to further make our housing loans well within the reach of the low and middle-income group."
Also, to further expand the access of members to housing loans and make more people qualify under Pag-IBIG’s housing programs, the fund set aside the residency requirement.
A member-borrower will no longer be required to wait until he has completed the 24 months of membership to qualify for a loan. "All a member has to do is to make a lump sum payment equivalent to 24 months contribution to fulfill this requisite," Mr. Quimbo said.
In addition, Pag-IBIG now allows the refinancing of an existing mortgage loan with an institution acceptable to the fund to enable members to benefit from low interest rates.
All Social Security System (SSS) and GSIS members earning PhP4, 000 and above monthly are mandatorily covered by the Pag-IBIG Fund that also provides death and retirement benefits to members.
GFIs mainly give out loans in the low-cost housing sector.

RETAIL SECTOR

Propped up by increased consumer spending, developers like SM Prime Holdings Inc., Keppel, and ALI all have a positive outlook for the retail industry. Proof of its prospects are the high occupancy rates of shopping malls and expansion plans.
"The retail sector is the only sector that did very well. Its performance went flat but did not go down. Primarily, it’s the consumption which is propping it up especially the mass consumer items and the middle-income spending," said Mr. Raymundo.
Consumption spending is propping up the retail sector
In its 2001 Annual Report, KPPI noted that healthy consumer spending is propelling the retail sector. KPPI also has developments in the retail sector, joining forces with SM Prime Holdings in putting up its first mall, The Podium, in Metro Manila.
The Podium, located at the Ortigas Center in Pasig, was inaugurated only last August 2002 but claims to have already achieved an occupancy rate of 90% since February. It mainly caters to the A and B market segment, targeting young urban professionals and residents of neighboring upscale villages.

Greenbelt’s themed gardens usher a new perspective in malling.
"If you look at the macroeconomics, the consumer area is one of the few promising areas of growth. For at the end of the day, the customers still need to buy their basic needs. Get their entertainment and leisure," said Miriam Katigbak, senior vice-president of ALI and head of the commercial centers group.
Also, ALI is continuing its expansion for the retail sector. Recently, ALI opened its Greenbelt 2 and 3 malls in Makati, which mainly caters to the A, B and upper C market (See related story).
"We still continue to grow in the retail sector. If you look at the next five years for our retail plans, the company tends to be optimistic and our investment and spending continues and have not slackened in the shopping center business," added Ms. Katigbak.
ALI’s ongoing retail projects include Market! Market! a 152,000-sqm value mall that cater to those who go around Metro Manila in search of bargains. Target market ranges from A to D, including those who live in nearby provinces. Market! Market! is located at the Fort Bonifacio Global City in Taguig. It is set to have a soft opening by October 2003.
Also, another ALI mall is expected to rise at the North Triangle area in Quezon City, just across SM North Edsa, for one of their land banks is situated there and also they are seeing good prospects for the area, aiming at Quezon city residents and those coming from the north like Bulacan and Valenzuela.
Ms. Katigbak also disclosed that ALI is looking at provincial expansions, both north and south of the Philippines. She said ALI will build a three-storey mall in Angeles City, Pampanga in Central Luzon on a nine-hectare property. She noted that there are good prospects for the project as it is beside the Angeles area of the North Expressway, making it accessible to commuters and townsfolk. The mall is expected to open by late 2004.
SM Prime Holdings, operator of the SM chain of malls, said it will open 10 malls in the next five years while it cautiously expands overseas through an unlisted firm also owned by taipan Henry Sy, Sr.
SM Prime will open 10 malls in the next five years
SM Prime chief financial officer Jeffrey Lim told investors during the Philippine Stock Exchange roadshow presentation last September that the land developer’s expansion will be sustained until 2007 to utilize its huge land bank of 128.5 hectares.
Mr. Lim said by this year, SM is looking at ushering two new malls in Lucena City in Quezon province (southern Luzon) and Marilao, Bulacan (central Luzon). The following year, Baguio City (northern Luzon) and Dasmari–as, Cavite (southern Luzon) will be home to two more SM malls.
Of the 10 malls to be opened by 2007, only two will be opened in Metro Manila within the next two to three years.
Also, the Araneta group, owners and developers of the Araneta Center in Cubao, have started the construction of a PhP2-billion mall named the Gateway mall last October 2002, as it aims to once again position itself in the retail sector after being overshadowed by such developers as SM, Robinsons Land, Inc., and ALI.
The Gateway mall is also the first phase of the PhP20-billion redevelopment of the entire Araneta Center. Its target market is the middle class--mainly the C market, said Jorge Araneta, CEO of the Araneta group.
Consumer spending has accounted for 70%of the economy and is expected to be the main driver of growth.
In a report of the Philippine Center for Investigative Journalism (PCIJ), it said in the past decade, consumer spending has accounted for 70% of the economy and is expected to be the main driver of growth.
Economists and analysts also expect that private consumption will continue to increase that will in effect propel the retail sector to further expand both in and out of Metro Manila.
RECOVERY IN 2004?
Analysts, brokers, private and public officials said they expect the real estate market to recover, albeit slightly, starting in 2004.
By this period, they say that the market will absorb vacancy rates and that the economic recovery of local markets will prop up the slow growing sectors of the real estate sector, given that no economic crisis occur within the specific period.
"It’s still too early to be optimistic for property in general as most of the sectors are oversupplied, with vacancy rates at all-time highs and with the prices of homes not really going up from 1997. The market is still soft and it will take some time for it to correct, most probably by late 2004, when the oversupply will actually be absorbed by the market," said Mr. Raymundo.
For low-cost housing, Mr. Colayco said: "It’s probably going to pick up a little in the next years on the assumption that the financing programs of the GFIs continue on."
Ms. Lacson added that for the middle-income housing sector there are good prospects in the coming years for it’s a bigger market in terms of population than the high-end market.
Furthermore, lower bank rates and creative financing schemes are available. The fact that more developers are going into the middle-income market indicates a signal that the market is growing, she added.
Mr. Consunji also said they intend to focus more on developing the middle-income housing segment, saying that the other segments in the construction industry like the infrastructure and industrial, currently has poor market status.
On the direction that he sees as regards the economic status of the real estate market, Gerry S. Cruz, president of Philippine Properties/Geo Ventures, Inc., a property brokerage and development firm, said that barring any more peace and order problems, he expects the Philippine property market to improve for the next year due to the following factors:
OFW market;
the continued low pricing and affordable term payments of properties; and
the economic recovery of the local and world markets.
Mr. Quimbo also said based on his forecast on several economic movements in the housing industry that started in 2001, particularly in the increase of housing loans especially for the low- to middle-income sector, recovery is in the offing.
"I would like to think that over this year and next year, while the recovery in the real estate sector would be slow, the housing sector, would have 2003 and 2004 as its banner years, barring any future economic crisis," he said.
The future for the real estate sector in terms of the entire sector’s growth may still be on a considerably slow pace as the areas that loom as having prospects of growth and recovery are the retail and residential sector with the office, industrial and leisure sector still lagging behind in the market.
With the current economic difficulties, property developers are now refocusing their thrust and delving into "niche developing" to adjust and focus to the market needs both in products and in marketing approaches.
This is seen in the move of property developers to go into the middle-income residential market and putting a new twist in the high-end residential market through the approach of farm lots.
This is in contrast to the retail sector, as it has been the strongest segment in the sector. Consumer pending and the evolving Filipino culture of going to the malls for a one-stop shop for everything has been propping up revenues of retail developers and has encouraged them to further expand its retail malls in the provinces.
As the helping hand for the property developers, banks and GFIs both play a crucial role in the proliferation of the market take up of residences, especially in the low cost and middle-income housing. The low interest rate environment has helped the market in the residential sector.