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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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

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.

 

Screen Shot 2019-01-23 at 9.44.53 PM.png

“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

FAQs on the Government’s T.R.A.I.N.

Question: Can I just choose to “donate” a property to a buyer (who’s a stranger) since the tax base for donations is USUALLY lower?

Tax Base for Capital Gains Tax/Donor’s Tax with TRAIN
  • Capital Gains Tax (6%) – higher of the selling price (typically the base), zonal value, or the fair market value as determined by the City Assessor
  • Donor’s Tax (6%) – higher of the zonal value or the fair market value as determined by the City Assessor
No; you’ll have a hard time depositing the proceeds (of the sale) in a bank. When the Buyer/Donee (the supposed buyer) gives the payment to you, the payment, if and when deposited, will likely be flagged due to the Anti Money Laundering Act (AMLA — deposits Php1 Mn and above are automatically flagged and questioned by the bank). Without any Deed of Absolute Sale to show, I’m not sure how you would be able to deposit it in a bank.

Question: Would it be better for me to just hold on to my real estate properties up to death than donate them to heirs especially since estate taxes are at 6% AND I can use certain deductions to lower the tax base?

While you may use certain deductions to the gross estate, chances are zonal values/FMV have gone up as well, consequently increasing the tax base. Unless you hit the bucket soon, the increase in the determined/assessed land values may ultimately increase the estate tax to be paid).

Question: My lolo passed away 10 years ago and we still haven’t settled his estate. Does this mean that we only have to pay 6% of the value of his estate? Which value for the estate should we use, the value when he died or the value today? Also, what happens to the penalty for non-filing/interest charges?

For now, the estate tax portion of TRAIN only covers deaths that occur beginning January 1, 2018. What you’re talking about is probably the tax amnesty. Please note that the Tax Amnesty is separate and distinct from the TRAIN. Drafts have been routed and they project for the tax amnesty program to be released within the 1Q2018.

Question: The BIR Revenue Memorandum Circular No. 3-2018 issued on January 4, 2018 mentions that BIR Form 2000-OT, the Doc. Stamp Tax Declaration/Return One Time Transactions increased by 100%. Does this mean that Doc. Stamp Tax for real estate transactions is now at 3%?

No. BIR RMC 3-2018 does not mention Alphanumeric Tax Code (ATC) No. 122, which is the Doc. Stamp Tax for real estate transactions. Simply put, the Doc. Stamp Tax for real estate transactions still remains at 1.5%.

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, any other RE/MAX franchise, or of Rockwell Land. 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.

WHAT THEY DON’T TELL YOU

Last Updated: 10 November 2017

1. Registering yourself as a Lessor with the BIR will subject the future sale of ALL your properties to VAT.

2. When buying pre-selling lots, there’s a possibility that a Meralco transformer will be placed right in the middle of your frontage or that you’ll find a tree in the middle of your lot. Moving these immoveable objects will be at your own cost.

3. To the east of Rockwell Center Makati is Barangay Guadalupe Viejo. Marching band practice occurs every Saturday and Sunday in the afternoon and is quite noisy for the buildings located in the East Bloc of Rockwell Center.

4. Park Terraces in Ayala Center has not determined the proper association dues to charge since unit owners found the original proposals to be too high (Php160+/square meter). For now, a provisional fee of Php75/square meter is charged while they determine an appropriate figure.

5. Some residential condominium buildings in BGC have LEASEHOLD arrangements for the land the buildings sit on. This means that the condominium corp. (and ultimately the unit owners) are simply leasing the land from the developer on a long term basis (as opposed to actually owning it).

6. It’s best to keep the architectural plans of your house. Having them on hand helps prospective buyers calculate how much they have to spend to renovate the place.

7. Before renting out/purchasing a condo, test your mobile phone’s signal in the unit. Some condos have excellent reception while others don’t. It will be quite frustrating if you have to keep on going out the balcony to take a call.

8. Some developers charge real property taxes even if the title is still in the developer’s name (and not under the buyer’s). Paying real property taxes is a requirement for the developer to process the title to the buyer’s name.

9. Some condos in Metro Manila take years to deliver the Title to the buyer. This makes it hard for the current owners to sell these properties.

10. Paying taxes to the wrong BIR Revenue District Office (RDO) will is termed by BIR as “misvenue”. Unless another payment is made to the correct RDO before the respective deadline, tax payers will be subject to the 25% penalty. The payment to the wrong RDO may still be refunded by the tax payer through tax credits.

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, any other RE/MAX franchise, or of Rockwell Land. 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.

BIR now requires an SPA to process payments

BIR now requires an SPA to process paymentsThe BIR now requires a Special Power of Attorney to request for an ONETT (One Time Transaction) Calculation if the requestor is not one of the parties to the transfer. BIR explained that this is to address issues in dealing with fixers under the guise of a legitimate representative. Read the BIR Memo here.