Days of the Quick Flip (of condo units in CBDs) are coming to an End

Days of the Quick Flip (of condo units in CBDs) are coming to an End
Published: January 22, 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.

 

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“Flipping…refers to a strategy of purchasing properties and selling them on a short time frame for a profit.” -Investopedia

Condo flipping has become a popular investment strategy in Makati and BGC given the double-digit capital appreciation condominiums have enjoyed in recent years. Investors are enticed because flipping is so simple: a. Buy pre-selling; b. Hold on to the property for 2 to 3 years (before turnover); and c. Sell at a profit. It’s stress-free since it bears the least risk relative to other financial assets.

We (brokers) have noticed recently that overpriced units have suddenly flooded the secondary market. The owners of these unsellable condo units likely bought between 2016 and 2018 (at prices above Php250,000/sqm), wanted to make the same quick profit, but seemed to be stuck with them. The owners of the unsellable argue that since the Developer is selling the same property at, say Php325,000 per sqm, buyers get a bargain if they sold at Php300,000 per sqm. Thing is, there doesn’t seem to be any takers. What’s the problem here?

Higher prices have caused local demand to drop because as the basic principle of economics dictates, “as the price goes up, demand goes down.” With higher prices per square meter, demand naturally has to go down.

Prices have outstripped financial capacity of domestic buyers

2019 reports show that the Philippine Real Estate Market is doing well, and will continue to do well. In my opinion, however, “Yes” and “No”.

In GENERAL, “yes”, capital appreciation is still on an upward trajectory, but “No” not like before. The appreciation of condo prices has slowed down, and is continuing to decelerate (especially in Makati and BGC) at an increasing rate. “Yes”, the need for condo units is real and remains healthy. People continue to purchase condo units for various reasons, for example as a halfway home to address the traffic, or to move out of their parents’ house before marriage.

But “No” the surge in prices have made condos unaffordable. For example, one needs to have an income of at least Php100,000 to be able to purchase a 30-sqm studio unit selling for Php300,000/sqm (downpayment and bank financing for the balance). Employed couples, on the other hand, need a combined basic monthly salary of Php300,000 to be able to afford a 90 sqm two-bedroom unit. This is the reason why people have started to consider buying units in the fringes of Central Business Districts (CBDs) or in neighboring cities.

Foreign demand likewise is slowing

During the earlier boom years of the property market, foreigners quickly noticed the double-digit returns of investments in the Philippine property market. Most would agree with me that foreigners were the major driving factor for condo prices to shoot up in Makati over the past two to four years. Today, however, the 40% foreign ownership limit has started to bite. Local sellers can no longer bank on selling to foreign buyers because even foreign buyers who can afford the elevated prices are prevented from doing so.

Rental yields are dropping

The higher prices of condos have pushed rental yields to lower levels of 3% to 4% on average. The table below depicts the rental yields in the market today.

RENTAL PRICE / SQM

600 700 800 900 1,000 1,100 1,200

P
R
I
C
E
/
S
Q
M

180,000 3.33% 4.00% 4.67% 5.33% 6.00% 6.67% 7.33%
200,000 3.00% 3.60% 4.20% 4.80% 5.40% 6.00% 6.60%
220,000 2.73% 3.27% 3.82% 4.36% 4.91% 5.45% 6.00%
240,000 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50%
260,000 2.31% 2.77% 3.23% 3.69% 4.15% 4.62% 5.08%
280,000 2.14% 2.57% 3.00% 3.43% 3.86% 4.29% 4.71%
300,000 2.00% 2.40% 2.80% 3.20% 3.60% 4.00% 4.40%

*Association Dues of Php100/sqm deducted from rent income
Note: This still doesn’t consider other expenses incurred such as real property tax, depreciation of furnishings, etc.

The reason is that the growth of disposable income of Lessees has lagged behind the growth of condo prices. In other words, the budget for rent has more or less stayed the same while acquisition costs have increased significantly. It’s now common that monthly rent prices are kept the same for renewals since lessors risk suffering from bigger opportunity losses if units stay vacant for a few months. With lower returns, savvy property investors have shifted their focus to other countries or other types of real estate assets.

Developers reining in flipping

With prices hitting record highs, developer sales are actually slowing. In fact, some condo projects have turned over with the developer still holding on to unsold inventory–which was uncommon before. This inventory, which are priced 40% higher than secondary market units, stay unsold. To mitigate this problem, some developers have mandated that units sold before turnover will be subjected the usual property taxes despite titles not being transferred to the initial buyers. One developer even went as far as to ban reselling if projects have not yet been turned over.

With these reasons, why continue to prefer real estate to other investment options?

Best return relative to risk

A study of 16 developed countries for a period of 145 years showed that real estate was the best performing asset relative to equities, bonds, etc. Although the stock market provides comparable returns, it exhibits greater volatility than real estate, meaning returns vary to a greater degree year after year. Thus, the relative stability of real estate is a huge plus.

The main drawback of real estate is that it’s less liquid. Financial wizards (such as Warren Buffet) would advise, invest in stocks and forget about it for the next five years, practically to breeze through the fluctuations. But if we were to follow this advise, wouldn’t stocks be as illiquid as real estate?

Constant, stress-free cash flow

I believe the one investment that can beat both real estate and stock returns is investing in a business. By all means, entrepreneurial ventures can record exponential returns. The one drawback of this investment is the stress-involved. You’ll have to deal with a lot of headaches: irate clients, incompetent employees, rapidly changing consumer demands, etc. Real estate investing, on the flipside, practically provides stress-free monthly cash flow.

Leverage

Last and best of all, real estate can make you earn on money that you don’t have! If say you had Php650K  today, and had the capability to invest an additional Php526,000 annually for the next 8 years, which do you think would have a higher internal rate of return: stocks that provided 8% consistent annual return OR a condo unit (turning over in 4 years) that appreciated 2% per year, to which you’ll get a loan for (at 7.5%) upon turnover? Real estate.

You would earn a greater rate of return from the condo unit. This is because the growth rate of equities, although high, is applied to a lower base–the total actual invested capital. In contrary, the growth rate of real estate is based on the full contract price, regardless if you’re fully paid or not. To prop up earnings, you’re even able to rent out the unit when it turns over.

Key take-aways

First, for the people who have bought real estate at high prices, don’t worry, it’s still the better investment. You’ll just have to wait longer.

Second, for the people who are just about to invest, consider real estate. It provides the best returns (in the long-term) as well as the best returns relative to risk. Just make sure you use free cash (money that you won’t need any time soon) to purchase properties.

Lastly, if you do not have enough money to purchase real estate, don’t force it. Save more!

I would love to hear your thoughts. My contact details are listed below.

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 / E: jpatag@remax.ph
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