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"The MATH of Property Prices"

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 "The MATHematics of Property Prices"


V = (12x R) -12x A - PT
. . . where: V=Value, R=Rent, A=Assoc.fees, PT-Prop.Tax, IR=Interest Rate

I have wanted to tackle this subject for sometime, and this section on Philippines property is the right place to do it.

There is so much nonsense spoken about property prices, that maybe someone needs to explain in detail the mathematics of property price evaluations.

In PH there seems to be a common misconception that Property Developers set property prices. Well, this is partly true, since developers do set the prices for the New properties that they build and sell. The problem is: the prices on new properties are only relevant for the developers.  Individual owners can rarely achieve the same price,  It is common for a person who owns a new or almost new property to find that he needs to offer a 25-30% discount to “developer prices” to find a buyer.  And sometimes, in a rush sale to a cash buyer, the price achieved might be an even bigger discount than this.

Why do developers get higher prices? 

I believe that there are three main reasons:
+ Developers have their own “marketing machines”:
All the major developers have big & well-oiled marketing machines, that find buyers using tactics like passing out brochures at shopping malls, and hiring marketing staff with firm sales quotas, and sending them on foreign trips.  These teams are good at finding new buyers who may not be fully aware of other purchase opportunities beyond what the developers are offering. They also seek out Filipinos overseas, and  prospective foreign  buyers who may see no other opportunities, other than those offered in the brochures.
+ Credibility, & buyer ignorance:
The marketing teams can help to find buyers who may be totally unaware of the relative bargains available in the secondary market.  And unlike more mature markets like HK and SG, it is not easy to discover what are the actual transaction prices available in the secondary market.  There are very few agents operating out of estate agencies on the street near large new condos,  And Partly to avoid too many questions from Tax authorities, sellers may be reluctant to report actual selling prices. And there is nothing like a MLS (Multiple Listing Service) to give buyers a clear picture of what is available from those who want to resell their properties
+ Developer financing
Many Filipinos lack sufficient capital to buy for cash, and may find it tough to get bank loans for purchasing property. And when they do get loans for secondary market purchases, loans provided can be lower rate of advance, and at higher interest rates. Thus, the only way that many can buy is on an instalment basis.  Developers have geared their property sales that way. Once you talk to a seller you might meet at a mall, they will very quickly start talking to you about how much the monthly instalment is for pre-sale property.  If you are a cash buyer seeking the lowest possible price, you may find the discounts for cash buyers are small, way less than you would expect based on prevailing interest rates.  This seems to be designed to force buyers into supporting the fiction that developers high prices, are the real market price. 

Will banks provide bigger loans for new properties?
Here is a little-known secret that I recently uncovered:  Many developers will provide a PUT option to the banks when they finance a new property.  If the loan is in default, the bank may agree to buyback or resell the property at a price which will allow the bank to escape without a loss.  (I do not yet know, if this is only offered to tie-in banks: ie SM for BDO, Ayala for BPI, etc.). Anyway this practice explains why a bank may be willing to provide a larger loan for a new property, than they would for exactly the same property purchased through the secondary market.

How do banks appraise property prices?

(Discussed in the Next Section)

LINK to here: https://tinyurl.com/prop-Maths

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How do banks appraise property prices?

Certainly banks will look at developer prices.  But unless the developer will buyback (through a Put option) the developer's price for a new property is not really relevant.  What matters to the bank is HOW MUCH CAN THEY SELL the property for, if the loan goes into default.  The price is likely to be far below the price of a brand-new property; partly because if may be in less than pristine condition.  And also because the bank will not have access to the powerful marketing machines of the developer.

Typically, a bank will look at :
+ Comparable prices of similar properties sold in the secondary market.  They bank may have these figures from other foreclosure sales of similar properties. And they may have recently financed similar properties and seen the prices at which they were purchased
+ The cash flow potential of the property.   Obviously, the higher the rent, the more the property is worth - assuming the rent is at market rates, and the property will maintain its condition and rent-ability.  A one-off above market rental which is not repeatable is unlikely boost the value of a property.

A good argument can be made, that you only need to know THREE MAIN numbers to value a property:

+ RENT, at fair market level, and the

+ COSTS, like association fees and property taxes to be borne by the owner

+ INTEREST RATES, for someone who might buy the property

With this information, you can calculate a Valuation, where the property will cover the Interest costs on a notional 100%


Let me give an example. (This could be a Studio unit at an Avida property)

Suppose you know a (newish) property can be Rented at P24,000, with Costs of P2,000 for monthly association dues + P8,000 of annual property taxes, and prevailing Interest Rates are 7.0%. The first thing to ask is what Maximum size Loan* could be made, where this property would support all the interest costs.

Here is how to calculate this:

Annual Net Income = Annual Rent ( 24k x 12= 288k ) - Costs ( 2k x 12= 24k + 8k = 32k) = 288k - 32k = 256 k per annum

100% Loan Size = Net Income (256k pa) / Interest rate ( 0.070) = 256/ 0.070 = P 3,657 k

That value, of P 3.66 Million might be a starting point in valuing the property

If a buyer were confident that rents were headed higher, or interest rates would fall, then he.she might pay more


*Why a Maximum Size Loan, which assumes 100% of the property is financed with a loan?

In real life, this is unlikely, since most banks would be reluctant to go beyond a 60-70% Loan.

Here's why: many sophisticated investors will be willing to Buy a property if it has a positive cash flow, but may be reluctant to buy, if the property has a negative cash flow.  If a property's Net Rent can cover a 100% Loan, then any Equity that is invested will help to insure that the property will pay itself off

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There are some limitations to the "mathematical" approach to valuations

(this is a reaction from a Viber chat where someone commented upon this thread):

I think age of building could be a big factor to costs as there might be larger one off repairs frequently as a building ages.

+ Liquidity of the asset (how frequent are there comparable transactions to have a narrow bid/ask spread)

Assumption is cash flow inversely related to Liquidity, so time horizon of investment is important


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USING the Formula

V = (12x R) -12x A - PT

Historical Example: An Avida Studio in Makati area

VALUE Timing  :  V = RENT- status : x 12mo : Assoc: x 12 : P.Tax : COST: Income / InterestRate= Valuation

2015, Purchase:  V = 12,000-bare = P 144 K : 2,000: 24k : 8,000 : P 32 K : P 112k / 5.5%, 0.055  = 2,036k
2017, Furnished:  V = 18,000- FF   = P 216 K : 2,000: 24k : 8,000 : P 32 K : P 184k / 6.0%, 0.060  = 3,033k
2019, Low Case:  V = 20,000- FF  = P 240 K : 2,000: 24k : 8,000 : P 32 K : P  208k / 7.0%, 0.070  = 2,971k
2019, High Case: V = 24,000- FF   : P 288 K : 2,000: 24k : 8,000 : P 32 K : P  256k / 7.0%, 0.070  = 3,657k


This VALUATIONS seem very close to actual numbers.

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How Real is this 14% Yield opportunity?

Look how SMDC is trying to Target foreign investors - talking about High Yields

 Invest in a luxury residential apartment in Pasay City, a major international commercial hub where rental demand is high, and average yields stand at 14%! 


Sail Residences is located in the thriving area of Pasay City in Manila - a prime business and entertainment district. There is huge rental demand due to a shortage of housing options in the area, with average yields of 14%!

1 -beds start at $155,000 per unit, and 2-beds from $265,000. All units include a private balcony and 5-star amenities such as swimming pools, a gym, jacuzzi, and concierge. Structured payment plans on offer with 15% payable over 47 months, and the balance over 5 years.


I believe this is Utterly dishonest!

What they seem to be doing here is talking about the yield earned by those who invested YEARS AGO at lower prices with the RENTS OF TODAY

"1 -beds start at $155,000 per unit," at P51 per USD, that is: P3million for a 1BR unit - is this possible today?  No!

I think today's price is P7 million or more

This sort of high yield return was available for buyers of many projects, using the same "trick"

My own San Lorenzo studio cost P2.05M in 2015, and is now rented at P24k.  That's a 14% Gross yield.

But this calculation ignores certain important details

+ I paid Cash, and had to wait several months before I moved in - getting no return on investment while waiting

+ I spent something like P250k on furniture & fixtures - Gross yield: P24k on P2.3M = 12.5%

+ My "return" for the first 3.5 years was use of the property, not a cash return

+ The current rent is more than I would achieve if I rented to the average tenant at the average rent

(Example: If 22k rent to Pinoy tenant, then Gross yield comes down to 11.5% on P2.3M.)

+ Net yield is lower. After commissions to the agent, and assoc. fees, it is 10.1% to current tenant. 9.1%, rented to Pinoy.

REPEATABLE? Probably not. 

Just because this apparent high return was achieved once over a 4-5 year period does not mean it will be achieved again.  During this period, Mainland chinese have flooded into certain parts of Manila and pushed up rents dramatically.  Without this (unexpected) surge in demand, rents would be lower and yields lower.

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VALUATION MODEL example, for Bellagio in BGC


Bellagio Tower is located at Burgos Circle in Bonafacio Global City

The Hallmark of Opulence

Feast on nature’s masterpiece. The Manila golf course’s priceless scenery, reserved for your viewing pleasure, is best enjoyed from the comfort of your home. Watch the play of light over an ever changing palette of Zoysia-covered fairways. ... At the Bellagio, you are part of Forbes Town Center.

@6.5% interest rate, "REALISTIC" Case?
60m-Loft: R: p950: 57k, 684k : - 72k, 30k: 102k = 582k / 6.5= P8,965K: 149.2k

Bellagio : RENT est. = x12mo : Costs: Assoc.+PropTax/ IR = Est.Value : /sqM
60m-Loft: R: p750: 45k, 540k : - 72k, 30k: 102k = 438k / 7%= P 6,257k: 104.3k
60m-Loft: R: p800: 48k, 576k : - 72k, 30k: 102k = 474k / 7%= P 6,771k: 112.8k
60m-Loft: R: p900: 54k, 648k : - 72k, 30k: 102k = 546k / 7%= P 7,800K: 130.0k
60m-Loft: R: 1,000: 60k, 720k : - 72k, 30k: 102k = 618k / 7%= P 8,829K: 147.1k
60m-Loft: R: 1,100: 66k,  792k : - 72k, 30k: 102k = 690k / 7%= P 9,857K: 164.3k
60m-Loft: R: 1,162 : 70k, 840k : - 72k, 30k: 102k = 738k / 7%= P10,543K: 166.7k
60m-Loft R: p950: 57k, 684k : - 72k, 30k: 102k = 582k / 6.5= P8,965K: 149.2k
60m-Loft: R: p750: 45k, 540k : - 72k, 30k: 102k = 438k / 6%= P 7,300k: 121.7k
60m-Loft: R: 1,000: 60k, 720k : - 72k, 30k: 102k = 618k / 6%= P10,300k: 171.7k
BTW, in the current “Overheated” or “Firm” seller’s market, it is not usual to see
Properties sold at prices ABOVE the Valuation estimates.
Also, if interest rates drop to 6%, the Value at p1000 psm rises by P1.47Million.
And NEW property prices are far higher than these valuations.
But a smart buyer will aim to buy at these levels (or even less)

Following, As Listed on the PHrealestate website

Type / Size: Price- : Per sq.m :
Studio : 43 : 4,900k:  P114.0k/ sm
1 BR.   :  43 : 5,500k:  P127.9k
2 BR.   :  67 : 10.5 M : P156.7k
3 BR.   : 125: 19.0 M : P152.0k
Not sure how up-to-date these prices are.
But it is weird to see the much lower Per Sq M prices for smaller units


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"Known for their frugality and tendency to stockpile cash for the future,

the members of Generation Z are actually more informed about investing... than Millennials" 

Interesting idea

MORE HERE - in two articles (scroll down):

8 hours ago - Known for their frugality and tendency to stockpile cash for the future, the members of Generation Z are actually more informed about investing ...

/ 2 /

8 hours ago - Boosting Filipinos' financial literacy, one program at a time BSP, in partnership with BDO Foundation, the corporate social responsibility arm of ...

scroll down > http://www.greenenergyinvestors.com/topic/20754-need-for-financial-literacy-innovation-in-ph/?tab=comments#comment-333012

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COMMENT on Social Media

(from N.): read the thread. nice mathematics


+ Allows you to value a property... when you only know the market rent, and the mortgage interest rate

+ If the "price" is higher, you can ask yourself, HOW WILL THE GAP BE CLOSED? 

- will rents rise?

- will interest rates drop?

- Or will people go on overvaluing cash flww, because they think property prices will rise.

/ Betting on future capital gains can be risky, and I do not like doing that

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