The Bear Case looks compelling now... Very!
Five Big Bear factors
1. Mind the Gap! Prices have shot up ahead of lower Rents
The index for Modern Condos in Makati has reached P175k psm, and Rents for Luxury 3BR units is now at P800 psm. That puts Gross yields now at XX%. If yields go back to the historical average of the last five years (xx%), then Condo prices may need to fall by XX% - and more than that if Rents keep falling, and perhaps more than that for even more expensive brand new properties.
2. Aggressive Buying driven by foreigners, largely mainland Chinese
Add HK (2.9%) to Mainland China (49.4%), and you get over HALF of the Foreign buyers
Based on 2017 data from property giant Ayala Land Inc. (ALI), international sales—referring to combined sales take-up by overseas Filipinos and foreigners—grew by 32 percent last year to P41.6 billion. This accounted for 34 percent of the company’s P122-billion sales take-up for the year.
Foreigners accounted for the bulk of 24.5 percent of ALI’s total sales take-up last year compared to the 9.6 percent share of overseas Filipinos.
Are these aggressive new buyers paying proper attention to the deteriorating fundamentals. Will they be surprised by lower-than expected Rents, and have more difficulty in financing any payment balloons than they were led to expect (when they were sold properties by "optimistic" sales agents?)
3. PH Governments interest rates are shooting up - 10 yr Zeros hit 6%
Why accept a 5-6% Gross yield on expensive new property - that's maybe 3-4% Net (!), when you can get 6% of Zero Coupon bonds issued by the PH government - and having a 10 year maturity? Might it be smart to earn almost twice as much with government risk, while you wait for property prices to come down?
4. PH banks are becoming increasingly restrictive; balloons may not get financed
After years of rapid growth, many banks are at or near their Property lending limits and are becoming more restrictive in their mortgage lending. It certainly looks like those buyers who have payment balloons due of 60-80% (ore more!) may have some real problems in finding a bank who will lend to them all the funds they will need.
(from October 2014):
"Local banks will soon be ordered to cap real estate loans at 60 percent of their collateral values, down from the average of 80 percent at present, as banking regulators try to head off the formation of a property bubble in the country."
5. Future Supply is heavy, especially in Manila Bay, and BGC
Coming Condo Supply - per Colliers
=========== : Ye2016: Ye2017: 2018est : %vs'17 / 2019est: %vs'17 / 2020est: %vs'17 / +%chg
BGC, The Fort : 24,300 : 27,500 : 09,300 : + 33.8% / 3,000 : + 10.9% / 0,000 : + 00.0% / + 44.8%
Makati CBD -- : 22,100 : 25,000 : 02,600 : + 10.4% / 0,600 : + 2.40% / 0,300 : + 1.20% / + 14.0%
Ortigas Ctr. -- : 16,200 : 17,400 : 01,100 : + 6.32% / 0,600 : + 3.45% / 0,400 : + 2.30% / + 12.1%
Manila Bay --- : 08,900 : 11,000 : 11,900 : + 108.% / 2,600 : + 23.6% / 0,000 : + 00.0% / + 132.%
Rockwell, etc- : 00,000 : 00,000 : 00,000 :
=Total Condos 91,200 : 101.6K : 27,200 : + 26.8% / 8,200 : + 8.07% / 3,100 : + 3.05% / + 37.9%
The numbers for expected completions in 2018 are scary!
Already, the stocks action in two key property stocks, ALI & MEG is looking negative
ALI / Ayala Land Int'l ... 10yr-W : 5yr-W : 2yr-D : 6mo-D : 10d :/ 6mo: ALI, vs-SMPH, MEG, DMC : 10d :
MEG / Megaworld Corp ... 10yr-W : 5yr-W : 2yr-D : 6mo-D : 10d :