Osmeña: Commercial real estate pain

Antonio V. Osmeña
Estatements

COMMERCIAL real estate loans represent the second largest loan type after home mortgage. As what is happening in the United States, some analysts and investors say the recession, combined with inadequate loan-loss provisions when times were good, has left banks dangerously vulnerable to the deteriorating commercial real estate market.

The remarks suggest that banking regulators are girding for a rerun of the housing-related losses now slamming thousands of banks that failed to set aside enough capital during the boom to cushion themselves when the bubble burst.

The broad field of commercial market operations includes office buildings, store properties, loft buildings, theaters, garages, hotels and motels.

Cebu, with its thrust to promote tourism by the government and private sectors, is in the midst of building condotels, hotels and offices. It is highly probable that commercial real estate loans were availed of to build them. Will the worldwide bank crisis scenario affect the demand in the commercial real estate market? The worldwide commercial property brokerage is being clobbered by declining revenue, because of the slowdown in sales and leasing transactions, which has hurt the real estate service and brokerage business. Like many property owners, the industry is struggling to cut costs to make up for declining revenue and to raise cash to service its looming debt.

But as the financial crisis hit and global property markets collapsed, Cebu’s real estate market is now feeling the downturn, prompting developers and brokerage services to rethink their long-term plans. Today, banks in the United States are slow to take losses on their commercial real estate loans being battered by slumping property values and rental payments.

Cebu’s property owners are overwhelmingly excited in building commercial properties such as condominiums and hotels, unknowingly slow to recognize the pain likely lies ahead with looming mortgage debt payments.

Fortunately, local banks have been conservative in looking at sources of repayment, to determine whether the loan will get repaid. The poor adjustment of market supply and demand is a real estate characteristic many property owners fail to understand. Although fixity in real estate location prevents equalization of supply and demand on a regional or national level, it is the durability of real estate that causes maladjustments in supply and demand at the local market level.

Land itself is indestructible and physically will stand forever. Improvements, too, if properly maintained will last a hundred years of more. Thus, where demand suddenly falls, for any reason, inability to adjust (withdraw) supply will cause real estate to become a drag on the market. An oversupply of real estate creates a buyer’s market, which readily results in lower purchase price offerings and keen competitive trade practices.

On the other hand, a sudden increase in demand for real estate is also difficult to meet. The housing problem caused by shifting of population due to migration is an illustration in kind. It takes weeks or even months to construct a single home: construction conditions must be favorable for the entire building industry to supply in excess of hundreds of dwelling units during a given year. Even at this favorable rate of home construction, it would require years just to replace the nation’s housing stock.

The lag of time to bring the forces of supply and demand into reasonable balance, as well as the uncertainty of keeping these price-determining forces in equilibrium, makes real estate market transactions calculated business ventures. The risks involved are reflected in higher interest rates, especially those applicable to the equity part of a real estate investment.

A tightening or liberalization of mortgage lending policy has a direct and immediate influence on building construction and real estate market activity. The Home Guaranty Corp., a government corporation with an authorized capital of P50 billion, might as well be a benevolent landlord by underwriting mortgage loans extending over 35 and 40 years in the home ownership market.