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

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