Revised 2019 Zonal Values for San Juan, Metro Manila Published

Revised 2019 Zonal Values for San Juan, Metro Manila Published

Please be informed that the new zonal values (ZVs) of real properties in San Juan City was published in the Manila Standard on May 8, 2019. It will be effective on May 23, 2019. Prior to this update, ZVs for San Juan were last revised in 2015.

In 2019, a number of cities have published new ZVs including, Mandaluyong, Novaliches Q.C., Quiapo (et. al), and Pasig. Soon to be released is Taguig, which conducted their public hearing last December 2018.

Why is this important?

If you’re buying a property in BGC, you have to sign the Deed of Absolute Sale before the BIR releases the new ZV. Otherwise, the contract price might be lower than the ZV, and higher taxes must be paid by the Seller/Buyer. The Seller may also opt to back out from the deal if he finds out that he’s getting less proceeds than what was originally calculated.

Are my annual real property taxes going to increase?

No, real property taxes (i.e. RPT, amilyar) will not be affected. Zonal Values are determined by the BIR and are used for calculating taxes for sale of properties (CGT, DST, TT, RF).

Feel free to ask me questions.

Juan Alfredo S. Patag, REB
REB Lic.# 0023114; ID# 18-1612675 until 10/20/2022; PTR#7335646 until 12/31/2019
M: +63 917 520.5826
E: jpatag@remax.ph

RE/MAX Capital
7th Floor, 8 Rockwell, Hidalgo Drive, Rockwell Center, Makati City

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When Bubbles Burst

When Bubbles Burst
Published: May 10, 2019

Most real estate presentations and articles talk about how the stars have aligned for the Philippine economy and how the time is ripe for people to invest in real estate. I haven’t really heard anybody talk about the flipside: what if a property bubble did exist and what if it bursts?

To have a better grasp of these bubble-burst episodes, we can take a look at the three most recent and historic bubble-burst episodes: Japan’s Property Bubble, the Asian Financial Crisis, and the Global Financial Crisis.

Japan’s Property Bubble: “The Lost Decades” (90s to Present)

Three decades after World War 2, the Japanese economy was once again a world super power. The Japanese dominated the global electronics industry, manufacturing a majority of the world’s consumer electronic products. As their economy grew, the government decided to deregulate financial markets. This meant that banks were given more power to choose whom to lend to and to determine what interest rate to lend at. With low interest rates, Japanese conglomerates borrowed recklessly to purchase real estate. The buying pushed property prices in Tokyo to increase by as much as 62% in 1987 (Takagi, 1989). At a point, Tokyo’s prime neighborhoods were 350 times more expensive than comparable properties in Manhattan (Colombo, 2012). With property prices increasing, conglomerates booked hefty profits and were able to borrow more money to invest into real estate.

By 1989, the government was alarmed by the ballooning property bubble so they tightened monetary policy, increasing interest rates by as much as 3% in a span of 3 months. Companies defaulted (due to higher interest payments); the stock market crashed; and property prices plunged. By 2004, real estate in Tokyo was only worth 10% of their 1990 peak (Barsky). Up to today, prices still haven’t recovered.

Philippine Property Market during the Asian Financial Crisis (1996 to 2003)

Coming from a revolution and a failed coup d’état, the Philippine economy was on its way to a great recovery in the early 90s. Buildings sprouted and the property sector was booming. During this time, it was common for developers to borrow in US dollars given that dollar loans had lower interest rates (5% to 6%) than peso loans (12% to 14%). Everybody was happy, until Thailand’s currency crisis.

In July 1997, the Thai Central Bank was forced to change its currency regime from a “fixed-currency” to a “floating-currency” system, after it ran out of US dollar reserves to support its policy. The Baht depreciated against the US dollar, falling from US$ 1 = THB 25 to THB 49. Fearing emerging market currencies would suffer the same fate; investors quickly sold their holdings of emerging market currencies, pushing them to devalue against the US dollar. The Philippine peso depreciated from a rate of US$ 1 = PHP 26.4 in June 1997 to PHP 42.7 in a period of 6 months.

As the Philippine currency depreciated, the country’s largest companies were at the brink of default from their dollar loans. Since these companies generated most (if not all) of their revenue in PHP, they needed more PHP to convert into US dollars to settle interest and principal payments. Philippine property developers were in turmoil. Property prices fell from their peak in 1997 and the construction of new developments halted. It took 6 years for general property prices to recover and reach their highs. Today, some properties still remain in litigation.

Global Financial Crisis (2006 to Present)

In 2001, the US economy suffered an 8-month long recession after the dot-com bubble burst. To boost the economy, the US central bank lowered its benchmark rate to 1% and the US’ housing boom ensued. Interest rates were so low that Americans could borrow money to purchase houses, rent them out, settle interest and principal payments, and still pocket sizeable profits.

Loans to people with no income, no jobs, and no assets (otherwise known as “NINJA loans”) became prominent. Buyers thought that they could always either flip properties for a profit or refinance the loan at a lower rate, especially since “property prices always increase”. More importantly, they failed to understand that their loans had “teaser rates”, and that these rates would eventually become higher. When the US central bank increased interest rates in 2004, people started to default from their loans. Properties were foreclosed and real estate prices bottomed. It took 13 years for prices to crawl back to their 2006 highs.

Take-Aways

These events show us that real estate investments are not immune to economic downturns. As pointed out by the Asian Financial Crisis, economic shocks may originate from external events/factors. Today, a number of risks exist including: rising global interest rates, a disorderly Brexit, and a military confrontation in the Korean Peninsula. But are these enough reasons to avoid investing in real estate?

In times of economic slowdown, no asset/investment/life is recession-proof. Your business is at risk; your job is at risk; even money kept in a vault is at risk (from devaluation). Real estate prices will also take a hit, but I argue that CERTAIN real estate investments will recover faster than other assets for the simple reason that they are tangible and useable. I’m not saying that you should put all your money in real estate. Global financial advisors recommend allocating 20% to 45% to real estate, depending on age. The younger you are, the more allocation you should have in real estate assets. You can mitigate the inherent risks to real estate investments by choosing which developers to buy from, which properties to buy, where to buy, and what price to buy at. This is where your trusted broker can help.

If you’re wary about a bubble in the condo market, then buy a lot/land. If you think lot prices in the metro are too high, then look in the fringes or outside where they are comparatively lower. Knowing your liquidity needs (do you want/need passive income from the property), risk appetite (are you conservative or risk averse), and investment horizon (how long you’re willing to wait) will help narrow down your options.

If you’re the type who would wait for the market to fall before buying, it’s easier said than done. The world’s most successful real estate tycoons agree that nobody can time the real estate market–not even them. If the pros can’t time it, how can you? Truth is, successful investors know how to create wealth at any point in a cycle. Time in the market is more important than market timing.

What about those who have bought condos at high prices; should they sell now? Based on what I’ve seen in the market, condo sales have started to slow down (and is continuing to do so). For example, some developers have established new rules/fees to prevent the “flipping” of units; extra incentives are given to brokers who are able to sell the remaining inventory at current prices; and some unit owners have decided to simply rent out their condos, instead of selling. This cooling down is actually essential and healthy for the market. I’ll be more concerned if average condo prices continued to rise above Php280,000 per square meter (read my article, The Need to Look Elsewhere).

The key take-away is this: asset bubbles form due to overconfidence and exuberance. They can burst due to unforeseen events. If you had one exit strategy (which is to “flip”) when you bought/buy real estate, what you’re doing is speculation (gambling). You may have profited from the practice before but you’ll have a more difficult time now (read my article, Days of the Quick Flip are Coming to an End). Real estate investment has always been meant for wealth preservation, not for capital growth. It has always been a long-term play.

If anything needs clarification or a trusted real estate broker, send me an email.

 

Juan Alfredo S. Patag
REB Lic.# 0023114; ID# 18-1612675 until 10/20/2022;
PTR#7335646 until 12/31/2019
M: +63 917 520.5826

LinkedIn: https://www.linkedin.com/in/juanpatag/
Facebook: https://web.facebook.com/jpatagrealestate/

RE/MAX Capital
7th Floor, 8 Rockwell, Hidalgo Drive, Rockwell Center, Makati City

DISCLAIMER: This material, which is strictly for information purposes only. The views and opinions expressed in this article are those of Juan Patag’s and do not necessarily reflect the position of RE/MAX Capital, or of any other RE/MAX franchise. Any information is subject to change without prior notice. No liability whatsoever is accepted for any loss that may arise (whether direct or consequential) from any use of the information contained herein. Information Each RE/MAX franchise is independently owned and operated.

The Not as Rosy Real Estate Picture

Published: March 14, 2019

The picture isn’t as rosy as the way as readers interpret it. One report stated that condo pre-sales in the Metro reached a record high in 2018. While true, the year-on-year increase was minimal. In 2018, sales take up was reported to be 54,000 units–a mere 1.89% increase vs. the previous years 24% increase.

Another report claimed that the Philippines had the best performing luxury real estate market in the world, beating Boston, Tokyo, and Paris. The report clearly states “luxury”. So let’s not extend the view to other segments in the market. Choose where you put your money, it doesn’t apply to all segments.

Back in the day, you can wear a blindfold, choose a property to buy, and make money–regardless. Those days are gone. The time deposit today is now at 5%. The SMC Global Power perpetual note yields 6.75%. These are the returns your real estate investment has to beat.

The properties that can beat these returns aren’t offered everywhere. Send me an email, I’ll show you some.

Juan Alfredo S. Patag
REB Lic.# 0023114; ID# 18-1612675 until 10/20/2022; PTR#7335646 until 12/31/2019
T: 505.3584 / M: +63 917 520.5826
7th Floor, 8 Rockwell, Hidalgo Drive, Rockwell Center, Makati City

DISCLAIMER: This material, which is strictly for information purposes only. The views and opinions expressed in this article are those of Juan Patag’s and do not necessarily reflect the position of RE/MAX Capital, or of any other RE/MAX franchise. Any information is subject to change without prior notice. No liability whatsoever is accepted for any loss that may arise (whether direct or consequential) from any use of the information contained herein. Information Each RE/MAX franchise is independently owned and operated.

Once in a Lifetime Chance: Estate Tax Amnesty of 2019

Published March 5, 2019

In a move to alleviate the Bureau of Internal Revenue’s backlog of tax cases, increase revenue collection, and free up idle properties, the government finally approved the long-awaited Tax Amnesty Act (TAA). This is great news because it gives all taxpayers the once-in-a-lifetime chance to settle unpaid taxes and have a clean record. In this article, I’ll tackle one of three items covered by the TAA: the Estate Tax Amnesty (ETA).

Before the TAA was executed, the estate tax ranged from 0% to 20% of the net estate of the decedent (the person who passes away). Assuming heirs weren’t able to settle the estate taxes to transfer the inherited properties to their name, the BIR automatically slaps a 25% penalty of the tax payable. Moreover, each year of non-payment subjects the tax payable as well as the penalty to a hefty 20% annual interest. In short, the tax payable grows exponentially to exorbitant levels, which sometimes are even more than what the property is worth.

Let’s take a hypothetical case as example. In 2001, Jose Reyes (90 years old and widowed) passed away, leaving a 2,000 square meter lot in Forbes Park to his only son Joe. At the time of death, the zonal value of the lot was Php70 Mn. The estate tax payable at the time of death was Php14 Mn (Php70 Mn x 20% estate tax), which Joe didn’t have the cash to pay for. Years pass and by December 31, 2016, the tax payable had grown to Php217 Mn (actual calculation). Sadly, Joe passed away on December 31, 2016, leaving behind his wife Josefina as the only heir. On December 31, 2017, Josefina was mandated to pay estate taxes of Php260 Mn to transfer the title from Jose’s name to Joe’s, and an additional Php72 Mn (Php360 Mn Zonal Value * 20%) to transfer the title from Joe’s name to hers.

With this kind of tax burden, real properties often become idle. Sellers believe that buyers are willing to settle the estate tax payable as part of the acquisition price. More often than not, buyers shy away from these properties for the fear that undisclosed heirs may suddenly appear or for the possibility that sellers may disappear the moment they settle the tax burden.

This all changes with the TAA. The new law states that Josefina only has to pay Php21.6 Mn (Php360 Mn Zonal Value as of Dec. 31, 2016 * 6% ETA rate). Josefina no longer has to pay the estate tax of Jose.

What if Josefina doesn’t have the Php21.6 Mn needed to settle the estate? She could proceed with an “Extra Judicial Settlement of the Estate with Absolute Sale”. This means that Josefina, the heir, will settle the estate as with the proceeds from the consequent sale of the property. This procedure transfers the title of the property straight from Jose’s name to the buyer’s name, skipping Joe and Josefina. Furthermore, the Buyer can acquire an “heir’s bond” from a reputable insurance company, to protect himself from unexpected claims of undeclared heirs.

If you would like to avail of the ETA with the goal of selling the property, you have to move quickly since it is only offered for a period of 2 years from the issuance of the Implementing Rules and Regulations (IRR) of the BIR. Send me an email; we can help provide a concrete plan and solution. It will likely take the BIR to produce the IRR within two to three months and it would be best if you’re first in line, especially with the sheer number of people who we believe will be claiming advantage of this development (as well as the General Tax Amnesty and Amnesty on Delinquencies). If you miss this chance, the taxes to paid reverts back to the National Internal Revenue Code of 1997, which means the penalties revert back to what they were.

Juan Alfredo S. Patag, REB
REB Lic.# 0023114; ID# 18-1612675 until 10/20/2022; PTR#7335646 until 12/31/2019

DISCLAIMER: This material, which is strictly for information purposes only. The views and opinions expressed in this article are those of Juan Patag’s and do not necessarily reflect the position of RE/MAX Capital, or of any other RE/MAX franchise. Any information is subject to change without prior notice. No liability whatsoever is accepted for any loss that may arise (whether direct or consequential) from any use of the information contained herein. Information Each RE/MAX franchise is independently owned and operated.

The Need to Look Elsewhere

DISCLAIMER: This material, which is strictly for information purposes only. The views and opinions expressed in this article are those of Juan Patag’s and do not necessarily reflect the position of RE/MAX Capital, or of any other RE/MAX franchise. Any information is subject to change without prior notice. No liability whatsoever is accepted for any loss that may arise (whether direct or consequential) from any use of the information contained herein. Information Each RE/MAX franchise is independently owned and operated.

Condominiums (condos) in the Philippines were among the best performing in the region, with prices increasing at a compounded annual growth rate of 9.38% in the past 10 years. Can condo prices in the Philippines’ central business districts continue to go up at the same pace? Logic tells you that prices would have to slowdown at some point. The question now becomes, how do you determine or at what level will it slowdown? This price level is what I’ll refer to as the “ceiling”. We can determine this by examining foreign and local demand.

Article - The Invisible Ceiling 2019.02.08 - Table 1

Can foreigners continue to push prices higher?

It has largely been believed that the influx of foreign condo buyers has driven condo prices up in the region. A quick comparison of condo prices in the region show that the values in the Philippines are still cheap and therefore can attract more investors to buy in. But can we assume that prices in the Philippines be as high as, say, Hong Kong? To what country can we peg the potential condo prices of the Philippines?

Table 2 shows that condo prices are inversely influenced by foreign ownership restrictions in the individual countries. The lower the level of ownership restriction, the higher the prices get. If this observation were true, then the Philippines’ ranking in the table is just where it is supposed to be.

Data suggests that condo prices in the Philippines may improve IF restrictions on foreign ownership were loosened––or eliminated altogether. If not, the best that could be hoped for is to match at least at Bangkok’s average prices, which is around PHP260,000 per sqm.

Article - The Invisible Ceiling 2019.02.08 - Table 2

 

What about rental yield, can’t that attract foreign investors as well? Table 3 shows that risk-adjusted rental yields in the Philippines are higher than its peers. However, the differences in rates between the Philippines and Singapore/Malaysia, for example, shows that the percentage difference is too small to make a significant difference, especially since there are no foreign ownership restrictions in these countries.

(The country risk premium is the additional return investors require for the extra risk they take when investing in less stable and riskier countries. The higher the risk premium, the riskier investing in that country is. It’s determined by NYU Stern by studying bond prices of various countries.)

Based on my calculations, investing in the Philippines would make sense to foreign investors up until average prices hit Php220,000 per sqm, the price at which the price-to-income ratio of the Philippines equates to Singapore’s. At Php220,000 per sqm, investors would be indifferent between investing in the Philippines and in Singapore; and Php240,000 per sqm if against Thailand.

Article - The Invisible Ceiling 2019.02.08 - Table 3

Up to what level can local buyers push prices?

The local investor today would have a hurdle rate of 5%, basing it on Time Deposit (Gross) Rates today (yes, 1 year Time Deposit is now at 5%) or Long Term Negotiable Certificate of Deposits (LTNCDs). If we were to assume a very conservative 2% capital appreciation, which is based on the Philippine long term population growth rate, investors would need to get at least 3% to be indifferent between investing in a deposit product and a rental property. Consequently, a safe rental price per square meter to assume, to be sure that vacancy is kept at a minimum, is Php800 to Php900 per square meter in Makati. This suggests that the ceiling for local investors would be at Php280,000.

Obviously, anyone can assume a higher rate of capital appreciation or a higher rental price per square meter, which in turn would increase the ceiling. But as the assumption for these rates become higher, the probability of actually achieving these, decreases. For projection purposes, I used the very conservative rates, assumptions that are highly probable, based on what we have experienced in the market.

Article - The Invisible Ceiling 2019.02.08 - Table 4

As for local buyers who intend to bank finance the purchase, condo prices in Makati have started to become unaffordable. A buyer of a Php300,000/sqm, 30 sqm, studio unit should have a salary of at least Php166,862 per month. The table below depicts various RFO condo prices they can afford with their salary, assuming they will get a bank loan for 80% of the cost of the property to be bought.

Article - The Invisible Ceiling 2019.02.08 - Table 5

The Invisible Ceiling = Php280,000

The invisible ceiling for condo prices in the Philippines is at Php280,000/sqm––on average––today. These are for condos that are ready-for-occupancy now. By average, I mean that prices of some condos (i.e. ultra high-end) can be higher than Php280,000/sqm. What about condos that are going to be delivered in the future? For these, we can inflate the ceiling using IMF’s projected world growth rate of 3.9% (compounded). For example, the ceiling will increase to Php340,000, five years from now.

Please don’t get me wrong and decide not to invest in real estate TODAY (especially if you can buy cheaper than Php280,000). This article points to the fact that prices in Makati, have started to become unattractive to both local and foreign buyers. As such, I expect condo prices in Makati (and possibly BGC) to move sideways until a new catalyst bolsters foreign demand or until the disposable income of local buyers catches up. If you find properties in these central business districts selling below these prices, you should consider buying them (we have some of these properties in RE/MAX Capital). It is also important to look outside these two main business districts to find lower prices and higher potential upside.

If you think prices will crash and there would be a more opportune time to purchase real estate in the CBD, waiting for that moment risks you losing a bigger profit opportunity than investing now. As pointed out economists and analysts, the Philippines’ growth story is true, and unless there’s another crisis, you’d be left behind if you were not to invest in it. You just have to know where to look (you can consult with RE/MAX Capital on which areas to consider).

Let me end by sharing what my old boss told me, “Juan, you should consider buying a property now. If you think you don’t have enough money, you will never have enough. The time will come when you will get married and you will have kids. You’ll want to give your family the best things you can afford–the best luxuries; the best education; and the best vacations. All this while, property prices keep on increasing. Don’t get left behind.”

Juan Alfredo S. Patag, REB
REB Lic.# 0023114; ID# 18-1612675 until 10/20/2022; PTR#7335646 until 12/31/2019
T: 505.3584 / M: +63 917 520.5826
RE/MAX Capital
7th Floor, 8 Rockwell, Hidalgo Drive, Rockwell Center, Makati City

Savya Financial Center (by Arthaland)

Dear valued clients,

We would like to offer to you Arthaland’s newest office building in Arca South (old FTI Complex in Bicutan)–Savya Financial Center (SFC).

Here’s why I think SFC is currently the best pre-selling office investment in the market today:

Optimism for Arca South (Old FTI Complex in Bicutan, Paranaque)

It’s like BGC but with better infrastructure to support growth: South ITX transport hub (2020), Direct Skyway Exit and Entrance ramps (2020), and Sub-way (2024). It’s only 5 km away from the airport and BGC, and only 7 km away from Makati.

Great Value

SFC is priced at Php240,000/sqm (as of January 25, 2019), the lowest in the market (even lower than Alveo’s Tryne Enterprise Plaza). It’s like getting Ayala Land Premier quality at Avida prices.

(Price/sqm will likely be increased to Php280,000 to match prices of Alveo’s Tryne Enterprise Plaza (TEP) after the official launch in January 31, 2019.)

Better Investment Return

Net Present Value analysis shows that SFC is the better investment due to lower price/sqm and light payment terms. I expect SFC prices to grow 6%-8% annually in the next five years, driven by office space demand particularly BPO companies (e.g. online gaming). Unlike SFC, Alveo office buildings don’t allow 24/7 operations. Moreover, rental rates in Arca South would likely match the rental rates in Makati once the infrastructure and residential projects are completed in 4Q2024.

Value Today / sqm NPV/sqm*
Savya, Arca South Php 240,000 91,722
Tryne, Arca South 280,000 72,306
HSS, BGC 300,000 14,941
AFC, Makati 308,000 41,934

*JASP Estimates

 

My forecasts show that SFC will have a better rental yield than its peers.

Location Price
/Sqm
Rental Rate
/sqm*
Cap Rate Turnover Payment
Scheme
Savya (Arthaland) Arca South 240,000 800 4.00% 2021 10-30-60
Tryne (Alveo) Arca South 280,000 800 3.43% 2023 10-40-50
High Street South (Alveo) BGC 300,000 900 3.60% 2018 100
Alveo Fin. Center Makati CBD 308,000 1000 3.90% 2021 10-40-50

*JASP Estimates

 

Projected Price / Square Meter* for SFC

CAGR Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
5% 240,000 252,000 264,600 277,830 291,722 306,308
6% 240,000 254,400 269,664 285,844 302,994 321,174
7% 240,000 256,800 274,776 294,010 314,591 336,612
8% 240,000 259,200 279,936 302,331 326,517 352,639
9% 240,000 261,600 285,144 310,807 338,780 369,270

*JASP Estimates

If you are interested to invest in this project, send me a message. As of this writing, only 58 out of the 120 units of the North Tower remain available. The South Tower is sold out.

Thank you.

Juan Alfredo S. Patag, REB

REB Lic. # 0023114; ID#0023114 until 10/20/2022; PTR#7335646 until 12/31/2019

T: 505.3584 / M: +63 917 520.5826

 

President, RE/MAX Capital

7th Floor, 8 Rockwell, Hidalgo Drive, Rockwell Center, Makati City

http://www.remaxcapital.ph