Philippines Real Estate Over the Last Several

Philippines Real Estate

Over the last several years, the Philippine Islands has been going through a major transformation. Part of the reason for this, is because the country has become an area of focus for many firms that are looking to outsource jobs from other regions of the world. As, the nation known is known for: having an educated workforce and low labor costs. This has helped to increase the total number of businesses that are relocating to region. A good example of this can be seen with the total number of IT jobs that were outsourced to the Philippines. As, they increased by: 26% in 2011, which is following a rise of 24% in 2010. These factors are important, because they are highlighting how the Philippines are quickly becoming a popular location for variety businesses. (Philippines Real Estate Report 2011)

While at the same time, the government has been aggressively focusing on promoting the nation as place for tourists and retires. This is based upon the tropical lifestyle they offer and their close proximity to other countries in the region (i.e. Japan and China). Over the course of time, this has helped to increase tourism. Evidence of this can be seen with the high number of arrivals that were reported in the first half of 2011. As the country, reported a total of 1.9 million visitors, which is up 12% from the previous year. This is significant, because the increases in tourists and potential retirees are helping to fuel the demand for housing and other kinds of properties. (Real Estate Sector Banks 2011)

For the real estate market, this means that prices have been consistently rising. The reason why, is because there is a shortage in available housing and a large number of employers are relocating to the region (which is improving the standard of living). These two factors have helped to shelter the Philippines against the financial crisis. As the overall amounts of demand, are pushing prices higher. The below chart illustrates the underlying strength of the markets from 2008 to 2011. (Clancy 2010)

Strength the Philippines Real Estate Market

Year

Increase

2008

34%

2009

26%

2010

41%

2011

100% (Estimate)

(Clancy 2010)

These different figures are significant, because they are highlighting how the real estate market in the Philippines has tremendous amounts of demand.

However, there are worries that the region could be slowing down. The reason why, is because of fears surrounding a double dip recession and the Euro Zone crisis. These two factors have been raising concerns that the Philippines could be overheating (based upon its strong performance in the past). To determine this, we will be looking at the impact of these events on the real estate market. Once this occurs, is when we will be able to offer specific insights about how they are impacting the Philippines over the last quarter.

The Current Situation in the Philippines

The Philippine Islands has always been at the crossroads of the West and Asia. This goes back to the days when the country was controlled by the Spanish and later the Americans. Once they gained their independence in 1946, is when there was even more focus on the country. The reason why, is because it is within close proximity to the various ports in Asia and it has a good relationship with Western nations. These two factors mean that business and tourists will visit the country on a regular basis. This has helped to fuel tremendous amounts of economic growth that the nation has been experiencing. Evidence of this can be seen by looking no further than, the 7.3% GDP rate that the Philippines experienced in 2010. This is despite the fact that the world economy was going through a jobless recovery, in an attempt to overcome the issues from the last recession. (Philippines 2011)

However, unemployment continues to remain at 7.5% and the number of people who are living in poverty has not improved (with this accounting for 32.9%). This is significant, because it is showing how the overall amounts of economic growth are uneven. As this is helping, particular segments of the economy while ignoring others. Over the course of time, this can cause the economy to go through a period of stops and starts (based on these inequalities). At the same time, the government has taken massive steps to reduce their national debt levels from 3.9% of the current GDP to 2% by 2013. (Philippines 2011)

These different facts and figures are troubling because they are highlighting how there are a number of localized challenges that are effecting the real estate market. When you combine this with the issues from the U.S. And Europe, all of these elements together have the ability to slowdown the housing market dramatically. The real key going forward will be: if the economy can maintain its high levels of economic growth and what the demand for housing will look like. This will depend upon if the world economy is able to avoid another downturn and begin to go through another phase of slow growth. If this can take place, it will help to give buyers confidence about the country's real estate markets. This is the point that sales will continue to remain strong. (Philippines 2011)

The Impact of Events in the U.S. On the Philippines Real Estate Market

In 2007, the real estate market in the United States began to implode. This is because of low interest rates and a robust economy fueled the overall amounts of speculation. As, a variety of consumers were purchasing the largest homes available on credit and a new kind of financing vehicle was introduced (called an adjustable rate mortgage or subprime loan). This is when the bank is offering borrowers, who have bad credit, with a home loan that has number of features. A few of the most notable include: low introductory rates, payments and little to no money down to purchase the property. However, once the Federal Reserve begins raising interest rates, is when this had an impact on these mortgages with the monthly payment adjusted upward to reflect these changes. The combination of these different elements is important, because they all helped to create a large asset bubble in the real estate market. While, increasing the possibility, that there could be some kind of sudden shock to the financial system from these types of mortgages. (Sub Prime Mortgage 2011)

Once the economy slowed, is when borrowers would be unable to afford their mortgage payments. As interest rates, were continuing to be reset higher on subprime homeowners. This is when these amounts began to increase and they were unable to keep up. At which point, the total number of foreclosures began to rise exponentially. (Sub Prime Mortgage 2011)

A good example of this can be seen by looking at: the total amount of foreclosures in 2009. As these numbers, rose to a 3 million homes (an all time high). Since that the time the markets have went through a mild recovery. (Record 3 Million Households 2010) This is because there were various programs designed to help homeowners, who were in subprime mortgages, to refinance to one that has a fixed interest rate. The basic idea is that this would help to stem the overall rate of foreclosures. During the recession, this protected the market against a much more severe downturn. However, the program and other stimulus measures to help homeowners only made the underlying situation worse. The reason why, is because a number of these measures have expired and they were not renewed by Congress.

As a result, the housing market has been continuing to experience the same kind of problems as it was in 2007 to 2009. The only difference is there are a large number of foreclosures on the market and prices have fallen to all-time lows. This is problematic, because if the current rate of foreclosure continues the economy could slip into a secondary recession (called a double dip).

Evidence of this can be seen by looking no further, the total number of foreclosures since the end of the recession. As, 2010 did not see a decrease in these rates with: economy improving and the stimulus measures helping to stabilize the housing markets to a certain extent. However, the total number of foreclosures has remained within the same range of 2.9 million for that year. When this is added to previous figures, the total amounts of unsold homes are increasing exponentially. This is problematic, because it means that the housing market is continuing to remain stagnant. (Record 2.9 Million Properties 2011)

At the same time, the U.S. government and the states have been wrestling with fiscal problems surrounding their large deficits and the how to balance their budgets. This has led to loss of confidence among homeowners, investors and financial institutions. They are fearful that any kind of potential default or government shutdown could lead to an economic meltdown. If this were to occur at key points on any level, it could have ripple effects on the entire country. As no one is willing to spend any money and they are all waiting for the economy to turnaround (i.e. Japan). This is when the nation could begin to experience severe amounts of stagflation based upon the shifts. (Latter, 2011)

Why does this matter to the Philippines?

For the Philippines, they are largely dependent upon tourism. As the nation, has become known as top choice for visitors from a variety of destinations. This has caused the total amounts of tourism to increase. However, within these figures are number of statistics that reveal how vulnerable the country is to sudden changes in arrivals. Evidence of this can be seen by looking at the below table.

Number of Visitors to the Philippines Islands

Year

Total Number of Tourists

1996

2,049,367

1997

2,222,523

1998

2,149,357

1999

2,170, 514

2000

1,992,169

2001

1,796,683

2002

1,932,677

2003

1,907,226

2004

2,291,3347

2005

2,623,084

2006

2,843,355

2007

3,091,993

2008

3,139,422

2009

3,017,099

2010

3,520,471

2011

3,200,000 (Estimate)

(Department of Tourism 2011)

These different figures are important, because they are showing how the total amount of visitors will vary. As there has been a dramatic increase between: 1996 and today. However, within the numbers there are tremendous amounts of volatility. This is because of a host of events ranging from the strength of the world economy to terrorism. As a result, this has caused the amount of arrivals to vary from one year to the next based upon these underlying issues.

Yet, when you look a little further, it is clear that the U.S. is accounting for some of the largest numbers of visitors to the islands. The reason why, is because of the relationship that the government has with the United States and the close cultural ties the two share. These common elements along with their close proximity to other nations in the region have made Americans one of the top visitors to the Philippines. Evidence of this can be seen by looking no further than the below table (which is showing the number of foreign nationals visiting the islands). (Department of Tourism 2011)

Top Five Visitors to the Philippines based on Nationality

Country

2010 Arrivals

Percentage

Korea

21.04%

USA

600,165

17.05%

Japan

358,744

10.19%

China

187,446

5.32%

Australia

147,469

4.19%

(Department of Tourism 2011)

These numbers are important, because they are highlighting how the Philippines are dependent upon a large number of American tourists. If there is any kind of shifts in global travel patterns from Americans or any of the other groups, the odds increase that their arrivals will be adversely impacted. For the real estate market, the ability to cater to this demographic means that they will see an increase foreign direct investment projects. This can be used to help build modernize and improve the image of the country.

A good example of this can be seen with Donald Trump and his company building a project called the Trump Tower Makati. Located in the heart of Manila, this will be one of the tallest buildings in the Philippines (standing at 250 meters). As, it has: 200 luxury apartments and a 3.4 acre city center. These different elements are important, because they are showing how the large number of American tourists is fueling upscale building project by a host of international developers. This is a sign of how he is reaching out to this demographic by directly investing his own money (based upon the opportunities that he is seeing in these markets). (Trump Tower 2011)

The Impact of these Events on the Philippines Real Estate Market for the Current Quarter

The impact of events in the United States has been affecting the real estate markets in the Philippines by cooling them down. This is despite the fact that they were expected to improve going into 2011. Part of the reason for this, is because it was believed that the markets were seeing an upsurge in demand from tourists and a local population that was in need of affordable housing. These different elements caused speculation to increase about: how the strength of the upward momentum will continue into 2013.

Evidence of this can be seen with the below tables, which are showing how the strong export demand has allowed the economy to experience consistent amounts of economic growth in comparison with the GDP rate. This is divided into two different tables, one that focuses on: 2005 to 2009 and the other that is looking at 2010.

Export Demand in Comparison with the GDP Rate from 2005 to 2009

Year

GDP Rate

Exports

2005

5.0%

4.20%

2006

5.4%

11.20%

2007

7.3%

7.30%

2008

3.8%

-1.90%

2009

.9%

-9.90%

(Philippine Real Estate Market Report 2011)

The figures from this table are significant, because they are showing how exports will be dramatically impacted by changes in demand. Since the United States is one of the Philippines trading partners, this means that the country will feel the ripple effects of what is happening. At which point, the total number of exports began to decrease and the overall rate of GDP growth dramatically slows. During 2008, is when the lingering effects of what is happening in the U.S. will have an impact on both: exports and GDP growth rates by causing them to fall. Then, the numbers declined even further with the Philippines posting an annual GDP rate of .9% and a decline in exports of -9.90%. As a result, this is illustrating how the economy will be affected by events that are occurring in the United States. The below table is corroborating these views by showing how the economy followed a similar pattern of recovery as the U.S. (Philippine Real Estate Market Report 2011)

Export Demand in Comparison with the GDP Rate for 2010

Quarter

GDP Rate

Exports

1st Quarter

7.73%

17.90%

2nd Quarter

7.90%

27.40%

3rd Quarter

6.50%

28.00%

4th Quarter

7.10%

21.10%

(Philippine Real Estate Market Report 2011)

These statistics are important, because they are showing how the economy recovered into 2010. This is following the same kind bottom that took place in the U.S. during 2009. As a result, this is correlating how the economy of the Philippines is directly tied (to a certain extent) by the underlying amounts of strength or weakness in America. (Philippine Real Estate Market Report 2011)

However, beyond these facts the amounts of demand for properties remains very high. This is because, number of business are establishing on operations in the region for the outsourcing of different services (i.e. IT and customer support). While at the same time, a wide variety of mining companies have been expanding inside the Philippines. This is because, the country is known for having vast amounts of natural resources and untapped reserves. Over the course of time, these two factors are bringing more money and people to the nation. This means that they will need some kind of affordable housing. (Philippines 2011) (The Philippines Offers Value Investing 2011)

While at the same time, there is shortage of available housing in the general population. When, this demand is combined with: the increasing numbers of people relocating to the area and rising standards of living. It is causing, the markets to continue to experience massive amounts of growth, despite a slowdown in real estate around the world. Recent evidence of this can be seen with the fact that prices have seen a 3% rise so far in 2011. This is important, because it is illustrating how the markets have remained stable when others around the world have remained stagnant. As a result, this is an indication as to how the pent up demand is sheltering the Philippines from the fallout of what is happening in the United States. (Price Rises Resume 2011) (Philippine Real Estate Market Report 2011)

These different elements are important, because they are showing how the Philippines are affected by various events to a certain extent that are occurring overseas. However, the underlying demand in the markets has meant that they have protected them against sudden shocks. During the recent quarter is when they were able to continue to deliver consistent results of 3% growth. As a result, the impact of issues in the United States is somewhat limited with the GDP numbers and exports declining. Yet, beyond these factors, the real estate market in the country remains stable.

The Impact of Events in Europe on the Philippines Real Estate Market

Another issue that has been affecting confidence is the crisis that is occurring in Europe. The reason why, is because there are fears that Greece may default on their debt obligations. If this were to happen, it is believed that these kinds of events could cause the financial markets around the world to freeze. At which point, the crisis will spread to others regions, potentially sparking a secondary recession.

This is problematic, because if it were to occur, there are worries that this will cause the Philippines economy to be affected by what is taking place. As, exports will: slow and the GDP rate will begin to decline. Evidence of this can be seen by looking at the below table, with it illustrating the total amount of exports to: the EU from the Philippines between 2006 and 2010.

Total Exports from the Philippines to the EU during 2006 to 2010

Year

Imports (in millions of Euros)

Percentage Change

2006

6,451

-1.3%

2007

5,637

-12.6%

2008

5,365

-4.8%

2009

3,823

-28.7%

2010

5,379

+40.7%

(Philippines 2011)

These different figures are significant, because they are showing how the Philippines does not trade as much with Europe. This is because, they are more focused on trading with the United States and other Asian nations. However, in 2010 this changed with these numbers rising by 40.7%. As a result, this is a sign that the nation is trying to diversify the total amount of countries that are their trading partners. This is designed to help stabilize their levels of GDP growth, so that they are not as dependent upon the economic performance of a particular region. (Philippines 2011)

Yet, these lingering worries are continuing to persist. The reason why, is because the nation is vulnerable to a possible slowdown in visitors from Europe. As, this number was up from the previous year by coming in at 108,318 travelers (a 9.65% increase). While this is not as high as other regions, the fact that it is increasing is indicating that the government has been focusing on improving their relations with European-based nations. This means that if there was some kind of credit crisis in the Euro Zone, it could cause a major slowdown in passenger traffic. Once this takes place, the odds increase that the economy will begin to feel these adverse effects. (Philippines 2011)

When you step back and analyze this information, is it clear that there is a possibility the debt crisis in Europe could affect the real estate market. This is because it will have an adverse impact on trade and tourism. While at the same time, it could cause the U.S. To go into a recession. The combination of these different factors can lead to a slowdown in the Philippines real estate markets. That being said, the underlying amounts of demand continue to remain strong for a host of regions of the country.

Evidence of this can be seen by looking no further than, the demand for real estate inside the capital city of Manila from 2002 to 2011. As, this number varies based upon the changes that are taking place in the world economy. The below table illustrates how this is impacting demand during this time.

The Demand in Manila Real Estate from 2002 to 2011

Year

% Increase / Decrease in Demand

2002

5.1%

2003

8.0%

2004

6.2%

2005

7.0%

2006

9.4%

2007

2.3%

2008

-1.8%

2009

-4.4%

2010

3.7%

2011

3.9% (Estimate)

2012

5.2% (Estimate)

(Philippine Real Estate Market Report 2011)

These different figures are important, because they are showing how demand will follow the changes that are occurring in the world economy. Part of the reason for this, is because the events that are taking place will have an impact on confidence. This will cause some investors to become reluctant about purchasing property. Once this occurs, it means that demand will begin to decrease.

However, despite these issues, the total amounts of demand in the markets remain so high that any kind of slowdowns are just temporary. This is what happened in 2009, with the markets continuing to provide modest economic growth. As a result, this is an indication that the events in Europe will not impact the market during current or future quarters. Where, the tremendous amounts of demand and foreign direct investment capital have been consistently flowing into the nation. This is a sign that investors still have tremendous amounts of confidence about the possibility of future returns. The fact that large foreigners are becoming involved in the markets (i.e. Donald Trump) is: an indication of the overall strength of the nation's real estate sector. Therefore, the impact of the Euro Zone crisis would have to become so severe that it completely freezes the international credit markets to new investment capital. (Philippine Real Estate Market Report 2011)

The Asia Factor

Asia is having a positive impact on the Philippines, the reason why is because the entire region is experiencing tremendous amounts of growth from a trading with a number of countries. A few of the most notable include: China, Japan, Malaysia, Singapore, Vietnam, Thailand, Korea and India just to name a few. Evidence of this can be seen with the fact that the majority of their trading partners are from within the Asia Pacific region. The below table illustrates the countries that the Philippines does the most amount of trading with.

Top Trading Partners for the Philippine Islands

Country

Percentage

China

19.0%

USA

13.4%

Singapore

13.2%

Japan

12.8%

Hong Kong

7.6%

Thailand

6.5%

Germany

4.2%

South Korea

4.1%

Indonesia

4.1%

These different numbers are significant, because they are showing how the majority of the country's trading partners are based in the Asia Pacific region. As a result, they are less dependent upon what happens in the U.S. And Europe. Instead, they can be adversely affected by what takes place in the region. If something similar to the Asian Financial Crisis were to occur (like what happened in 1997). The odds increase dramatically that this will have an adverse impact on the economy. This is the point that there could be some kind negative effect on the real estate market.