Rich Asians Buy Into Upwardly Mobile Manila’s Luxury Condominiums

A woman carrying an umbrella rides an escalator past a construction site in the Fort Bonifacio district of Manila in 2013. (Bloomberg Photo/Julian Abram Wainwright)

Manila. Sweating under their hard hats, renowned Polish architect David Libeskind and interior designers from Italy’s Armani trooped to a construction site in sweltering, downtown Manila, to perform the ground breaking for a new tower in the Philippine capital.

Marketed to attract buyers wealthy enough to own luxury apartments, most likely in more than one country, the 60-story office and residential project, dubbed “Century Spire”, is being built in the downtown Makati district.

Featuring an angular glass shaft with an asymmetrical triple summit, the “Spire” is due to be completed in four years, but two-thirds of the space is already sold, with many of the apartments taken by rich Asians living elsewhere in the region.

At the ground breaking ceremony in May, Libeskind — whose other landmark buildings include the Jewish Museum in Berlin and the Denver Art Museum — said the “Spire” would “make a bold and optimistic statement about the future of the Philippines.”

Manila’s changing skyline reflects the Philippines’s increasing wealth, with many similarly stylized high-rises sprouting up across the capital of a country that was once regarded as one of the region’s economic basket cases.

Yield-hungry investors from Malaysia to Japan now buy Philippine condominium space in bulk, rotating money from favorites Hong Kong and Singapore as the authorities there have acted to cool real estate prices, property managers and consultants said.

“There has never been this strong foreign interest in the Philippines,” said David Young, Philippines managing director with consultancy and brokerage Colliers International.

Typically, 40 percent of space in newer condominiums is owned by foreigners, the maximum they are allowed. Foreigners cannot own land in the Philippines, but they are allowed to hold condominium titles as long as 60 percent of the development’s total floor area is owned by Filipinos.

“The fact that you have all these developers maximizing the foreign limit is becoming very common,” said David Leechiu, Philippines country manager with property manager and advisory Jones Lang LaSalle Inc.

He said foreigners buy into Manila’s gleaming new towers for capital gains, or to rent to a growing Filipino middle class and expatriate population.

Bubble talks but steady yields

Rising prices and the influx of foreign money has sowed fears of an asset bubble, but there are no signs of a slowdown. Real estate prices are still below rates seen before the global financial crisis despite a steady increase, brokers say.

In revising rules to banks’ real estate exposure this month, the central bank maintained that there is “no clear evidence” of bubbles forming in the sector.

Only as a precaution were banks told to maintain higher capital buffers if they want to lend more for real estate purposes, the central bank said.

With supply steadily meeting demand, property investors and brokers remain bullish.

Manila’s condominiums offer yields between seven to nine percent, nearly double those in most other Asian cities, a premium seen lasting for at least five more years, brokers say.

Residential condominium rent in the main business districts on average rose around 5 percent annually in recent quarters, while office rent is up over 5 percent, Colliers data showed.

A report by the US-based Urban Land Institute and PricewaterhouseCoopers ranked Manila as fourth best in Asia-Pacific for property investments this year after Tokyo, Shanghai and Jakarta, saying operating cash flow returns in the Philippine capital could be in the mid-teens.

Stoking sales

Rich Singaporeans, Chinese, Japanese, Koreans and Malaysians bought the most condominiums among foreigners in the past 18 months, officials from developers Ayala Land, Megaworld and Century Properties Group (CPG) told Reuters.

“Purchase levels can go from one unit to a couple of floors,” said Jaime Ayala, chief finance officer at Ayala Land.

Jericho Go, first vice president with Megaworld, said foreigners “buy residential condominium units in bulk, while others group together and pool funds to buy a tower in a development.”

Aided by strong foreign demand, domestic developers have enjoyed bumper sales in recent quarters.

Ayala Land, the second most valuable listed property firm, has increased international sales- including purchases by Filipinos living overseas — by 64 percent year-on-year in 2013, the company disclosed to Reuters.

Megaworld’s international sales were up 52 percent last year, while “Century Spire” developer CPG’s overseas sales increased 15 percent, Reuters estimated from sales data released by the two companies.

Buyers and sellers

Asians usually buy apartments worth as much as $550,000 per unit, CPG managing director Robbie Antonio said.

Brokers also noted rising interest in office space on bets that commercial leasing prices will skyrocket as more foreign firms outsource in the country.

The action remains concentrated in Manila, brokers said, although it is slowly spilling over into “new wave cities” in central and southern Philippines, which host business process outsourcing firms.

Top property developers use globally-known luxury brands to attract overseas demand.

Other than Armani, CPG has tapped Versace and American socialite Paris Hilton to design interiors. “Brand associations have attracted interest from foreign nationals,” Antonio said.

Ayala’s Ysmael said they continue to open sales offices overseas and is rolling out a Tokyo hub “soon.”

For their part, Megaworld’s Go said the company is offering in-house brokerage services to help in leasing apartments.

The surge in overseas pre-sales also keeps top property firms awash with cash to fund projects and fatten their land bank.

Jones Lang’s Leechiu said top developers brush off private equity and sovereign wealth funds seeking discounts as they foresee sustained strong demand from retail buyers.

“If they ask for too much discount we won’t agree. We don’t need the money,” Go said.

Reuters

By Siegfrid Alegado on 10:03 am Jul 02, 2014

Dubai Faces Moment of Truth Over Looming Property Bubble

An advertisement for a property finding portal that reads, ‘Keep Calm There’s No Bubble’ is seen on a building in the Marina district of Dubai, in this November 19, 2013 file photograph. Surging supply and unsustainable demand are a risky mix — the same combination that got Dubai into trouble six years ago, forcing state firms to reschedule tens of billions of dollars of debt and jolting financial markets around the world. (Reuters Photo/Caren Firouz)

Dubai. “Keep calm. There’s no bubble”, proclaimed a giant poster on a 40-story building overlooking a Dubai highway, advertising a property finding portal late last year. That may have been true at the time, but the risks are rising.

A leap in bank lending to the construction industry indicates financial institutions have resumed pouring money into real estate projects in the last few months, after cutting back sharply in the wake of Dubai’s 2008 crash.

At the same time, property prices have been soaring on the back of Dubai’s economic boom, increasing the chance of the market rising to unsustainable levels.

Surging supply and unsustainable demand are a risky mix — the same combination that got Dubai into trouble six years ago, forcing state firms to reschedule tens of billions of dollars of debt and jolting financial markets around the world.

This time, authorities say they are aware of the dangers, and they have taken regulatory steps to slow demand growth. But the steps are still modest compared to those by other global cities facing the same problem, such as Hong Kong and Singapore.

“It’s too early to be calling top, but credit growth of that pace tells you that the cycle is accelerating rapidly,” said Simon Williams, HSBC’s chief economist for the region. “Such a huge increase in lending is simply not consistent with economic order and stable asset prices. The time for policy action is now, before bubbles really get going, not when they are already in place.”

Demand

Dubai house prices posted the fastest year-on-year rise of any of the world’s major markets in January-March for the fourth straight quarter, soaring 27.7 percent, consultants Knight Frank said. Rents rose about 30 percent on average in the same period.

The value of real estate deals in Dubai, with a population of 2.3 million, jumped 38 percent in the first quarter to some 61 billion dirhams ($16.6 billion), the Land Department said.

There are good reasons for property prices to rise, including annual economic growth around 5 percent and inflows of money from Arab investors seeking safety in a turbulent region.

While some prices have almost returned to their pre-crash peaks, they are well below some other global business cities. Prime real estate in Dubai costs between $6,200 and $7,500 per square meter, against $27,600 to 33,700 in Singapore, according to Knight Frank.

The volume of real estate deals has not reached its pre-crash peak but demand is showing signs of slowing. Propsquare Real Estate said sales volumes so far this year were down about 25 percent year-on-year as prices become less affordable.

“The gap between what the seller is asking for a property and what the buyer is willing to pay is huge at the moment,” said Parvees Gafur, Propsquare’s chief executive.

Yet the Land Department described the first-quarter surge in real estate deals as “impressive” and looked forward to more.

“We expect the next three quarters to be similarly active, especially as this period follows the launch of a number of stimulating economic projects in Dubai and the disclosure of some of the preparations for the city’s hosting of Expo 2020,” said the department’s Director General Sultan Butti Bin Merjen.

The government fueled the current property boom when it announced plans, in November 2012, for a huge development including the world’s largest shopping mall, over 100 hotels and a park almost a third larger than London’s Hyde Park.

Meanwhile, most of the more than 200 man-made islands off Dubai laid out in the shape of a world map that symbolized the 2008 property market crash remain empty after state-owned developer Nakheel’s near debt default in 2009.

Authorities have taken some steps against price speculation and “flipping”, in which investors buy and sell properties — many of them unbuilt — in quick succession. Late last year, Dubai doubled the fee charged on property deals to 4 percent, while the UAE central bank imposed caps on mortgage lending.

Some real estate developers have taken their own action; partly state-owned Emaar Properties allows resale only after about 40 percent of payment for a property has been made.

But these steps are minor compared, for example, to a 15 percent fee imposed on the quick resale of property by Hong Kong and a 30 percent fee introduced by Singapore. Last month, the International Monetary Fund warned that Dubai might need to consider such tools as well.

For now, it does not seem that the growth-hungry emirate has the will to act more aggressively. The history of the mortgage loan caps suggests it may not; the central bank watered down stricter curbs after complaints by commercial banks.

In a statement on June 9, the Land Department insisted that the property market was broadly healthy, and that rising prices were simply due to a strong economy.

In an annual stability report a week ago, the UAE central bank warned that the real estate market might be overheating. But it is unclear what further action it could take; with US interest rates still ultra-low, any rate hike in the UAE is unlikely given the UAE dirham’s peg to the US dollar.

Supply

The supply side of the equation looks equally uncertain. Plans for real estate projects worth well over $50 billion have been announced in Dubai over the past 18 months — but it is unclear how many will actually get built and how fast.

Major work is starting on some of them. After shrinking for 16 months in a row, construction loans in the UAE jumped 40.1 percent from a year earlier in December to 181 billion dirhams, the fastest rate since June 2009, latest central bank data show.

That far outpaced growth in total bank loans, which rose just 8.8 percent in December to 1.1 trillion dirhams. And the lending boom is probably just beginning.

“We foresee an acceleration of real estate lending as developers launch new projects, and more local and expatriate customers seek to enter the mortgage market,” credit rating agency Standard & Poor’s said in a report last month.

A Dubai banker, declining to be named under briefing rules, noted increased risk-taking in funding to developers by local banks: “Some banks are offering 100 percent financing deals to firms on a selective basis. That’s not very sustainable.”

A return to the full excesses of the pre-2008 boom still looks unlikely. The crash cleared some second-tier developers out of the market, and the companies that remain still bear the balance sheet scars of the last crash; this should encourage at least some of them to be more cautious.

There are signs that developers are paying more attention to their rivals’ plans and implementing projects only in stages, proceeding with each one after reevaluating the demand outlook.

“Supply is more coordinated” than it was in the past, said Fahd Iqbal, head of Middle East research at Credit Suisse.

Nevertheless, the risks may be substantial in the next few years. Any sudden loss of confidence by a large proportion of foreign investors, or sharp tightening in US monetary policy, could ignite a pull-back in the market, S&P said in its report.

“What happened in 2013 was unsustainable. It is a big question mark whether or not we are going to have a sustained leveling off or whether it is going to pick up again,” said Farouk Soussa, Citigroup’s chief economist for the region.

“In Dubai things change quickly. If they build … all these big projects … then I think we can start to get more concerned about another massive cycle in the property sector that might be unsustainable.”

Reuters

By Martin Dokoupil & Praveen Menon on 01:36 pm Jun 15, 2014