Osmeña: Forces influencing real estate demand

Tuesday, February 3, 2009

Antonio V. OsmeñaEstatements

THE real estate market is sensitive to changes in the balance of economic, political and social forces that influences the supply and demand for real estate.

As an investment, real estate requires large capital outlays. Capital outlay is made in anticipation of future returns from which the purchaser expects to recoup his peso investments. The large expenditures required to put real estate into productive use calls for careful analysis of the nature of real estate as an investment.

To be productive, land must be combined with units of labor and capital. Generally, the improvements placed on land far exceed the value in peso or market price of a vacant land.

Amazingly, would-be investor-developers are excited to venture into Cebu’s real estate market.

The Visayan archipelago with its pristine environment, specifically Cebu, has become a paradise destination similar to Phuket in Thailand and Bali in Indonesia. With Cebu gaining ground in tourism (local and international) the real estate market demand continues to grow.

But critics are worried about the possibility of an over-supply of the commodity traded. Attempts to centralize or organize real estate activities on a large scale have failed because of the nature of the commodity traded.

Fixity in location and lack of standardization of real estate as a commodity account for the fluctuations in value and number of transactions that characterize the real estate market. Such fluctuations are notable not only in different regions
throughout the country, but also within a province or single community. The market price for residential condo in Manila, for instance, is cheaper than those sold in Cebu.

However, dissimilarity of real estate as a commodity and the legal right to specific performance discourage speculation and prevent the market operation known as “short selling.”

There are important influences that must be considered in an analysis of the real estate market such as: a) changes in population size and fa-mily composition; (b) wage levels, employment opportunities, and stability of income; (c) personal savings, supply of mortgage funds and interest rates; (d) rent levels, vacancies and rent controls; (e) taxation and land use control; (f) supply of land, cost of land, labor and building materials; (g) changes in the arts and building obsolescence.

It is interesting to note that the forces influencing real estate supply and demand as a basis to foretell the future formally known as “economic forecasting” to meet the anticipated demand for tomorrow undoubtedly has short cyclical swings in our country due to frequent political instability, the Asian economic crisis and now the world economic meltdown.

Most of the frequent purchaser of newly developed residential subdivision projects are investor-speculators. The bandwagon promo gimmick that enable speedy sale of their subdivided lots continues, and often prospective buyers are told there are only a few lots left—a trick meant to encourage sale of the property.

It is only in condo projects where foreigners are legally allowed to own real estate.

Will Cebu now reveal a rhythmic change from major booms to major business depressions interspersed by minor periods of prosperity and minor business recessions due to the global economic meltdown?

In retrospect, the pendulum movements of business activity, from optimism, to over-optimism, to caution, to pessimism, and then to panic appear as a logical sequence and are traceable to violations of economic laws of supply and demand and to lack of central business control.

What barometric measures has the government undertaken to prevent an over-supply of housing or hotel rooms that saturates the real estate market in Cebu?

Saturation in the real estate market creates abnormal vacancy ratios and competitive pricing conditions upon which real estate depressions have fed in the past. Cebu is getting to be over-crowded with realty players. Many housing developments have been developed hastily without much consideration for location (major factors to consider in real estate: location, location and location), creating a sales problem.

Other than the importance of location, improvements erected are not favorable to market conditions. Unfortunately, many realty players—because of greed—have failed to define the highest and best use of his land to ascertain the future production capacity of the land.