No Let Up in Manila’s Record Building Boom Triggers Glut Concern

Philippine developers are on a tear.

The capital Manila is in the grip of a building boom, led by developers such as Megaworld Corp. and Ayala Land Inc., that will add a record number of apartments over the next two years. It also threatens to lead to a glut that will weigh on returns for investors.

An estimated 55,000 residential units will come onto the market in Metro Manila this year, slowing growth in lease rates, according to broker CBRE Group Inc. Spending by property companies will rise 18 percent to more than 300 billion pesos ($6.8 billion) in 2015 from last year, according to broker Savills Plc.

Philippine developers have been on a building spree as the nation’s biggest economic boom since the 1950s and rising remittances from Filipinos working abroad spur home purchases. The market may need more time to absorb the expected record supply of new units, according to Macquarie Group Ltd.

“Some developers may have to slow down in starting new projects because there is a risk of overbuilding,” said RJ Aguirre, an analyst at Macquarie in Manila. “If developers don’t slow down and sales won’t move, we will see a build-up in inventory and receivables that will hurt earnings.”

As inventories increase, investors may find themselves holding assets that are yielding less, said Romeo Arahan, a Manila-based analyst with broker Colliers International UK Plc.

Rental yields will be 3 percent to 4 percent in 2015, said Antton Nordberg, research manager with KMC MAG Group Inc., the local associate of Savills. Yields have averaged more than 5 percent since 2011, he said.

Spending Frenzy

Construction will begin this year on 130,000 condominiums across the Philippine capital, KMC MAG said.

The capital region includes 17 cities and municipalities spread across about 640 square kilometers (247 square miles) sandwiched between Manila Bay to the west, and Laguna Lake and the San Mateo Mountains to the east.

Prices of Metro Manila residential condominiums rose 5 percent to 110,000 pesos to 180,000 pesos per square meter last year from a year earlier, according to Colliers. They may rise as much as 6 percent this year, the broker estimates.

Ayala Land, which developed the Philippines’ main business district of Makati, will spend a record 100 billion pesos this year. Robinsons Land Inc. is boosting capital spending by 20 percent in the current fiscal year to 17 billion pesos, while SM Prime Holdings Inc.’s 2015 budget is 70 billion pesos, 17 percent higher than last year.

Overseas Remittances

The number of residential units already on the market is equivalent to about two years of sales, said Aguirre at Macquarie. He maintains an overweight rating on developers because he said they can delay new projects to rein in the supply. Aguirre prefers residential builders that are cutting or have cut inventory, and those with a relatively higher share of income from office and retail rents.

Megaworld, which is spending 230 billion pesos in the next four years to build townships across the country, hasn’t seen a demand slowdown, said Senior Vice President Jericho Go.

“At least 70 percent of our projects are sold within the first year of pre-selling and that’s still the norm for us; there hasn’t been a change,” Go said.

The 10 million Filipinos working overseas, many of whom can now afford more expensive homes, are underpinning demand, Go said. More than half of the money they send home goes to real estate-related spending, he said.

Shares Rally

Remittances climbed 5.8 percent to a record $24.3 billion last year. The Philippine economy expanded 6.1 percent in 2014, the fastest pace in Southeast Asia. The government is targeting as much as 8 percent growth this year for the country once known as the sick man of Asia.

Megaworld and SM Prime are among the 10 biggest gainers on the benchmark Philippine Stock Exchange Index this year. Megaworld has rallied 20 percent, while SM Prime has gained 16 percent.

The shares, which have outperformed the 8 percent advance on the benchmark, may gain at least 5 percent in the next 12 months, according to the average of as many as 11 analysts’ price targets compiled by Bloomberg from brokerages that include JPMorgan Chase & Co. and UBS AG.

The Manila metropolitan region is home to 22 million people and the population is forecast to rise to 30 million by 2025, making it the world’s largest urban area after Tokyo and Jakarta, according to forecasts by Belleville, Illinois-based Demographia.

“Developers are spreading outside Metro Manila where they see a growing potential,” Colliers’s Arahan said.

Property Measures

Policy makers last year introduced measures to curb parts of the property market amid concerns prices were rising too fast. They ordered banks to cap the collateral value of real estate mortgages at 60 percent. Lenders were tested to determine if they have enough buffers against an asset price crash.

The central bank has held its benchmark interest rate at 4 percent since raising it by 25 basis points each in September and July last year. Bangko Sentral ng Pilipinas said Thursday its current monetary policy stance is “appropriate.”

Growth in areas outside of Manila will be important for developers as they rush to construct more apartments, said Lexter Azurin, research head at Unicapital Securities Inc. in the capital.

“Record-high inventory levels for residential property in Metro Manila may be a cause for concern if developers won’t see growth drivers elsewhere,” Azurin said. “Major developers are expanding projects outside Metro Manila into other cities which are also beneficiaries of strong growth backed by remittances and earnings from outsourcing firms.”

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