Makati condo bubble?

Corporate Watch
Amelia H.C. Ylagan

Posted on November 10, 2014

CAPTURED IN the notorious EDSA traffic en route to Makati, there’s time, waiting in the car, to look around and peer through the gray haze at the tall buildings on the skyline. Makati has the tallest buildings in the country, rising from 40 to 70 storeys high, most of them residential condominium developments. Awesome urban scenery, in spite of the unrelenting traffic to reach Makati and the 83.91 very high pollution index there.

The “daytime population” of Makati is over four million people versus its “nighttime population” of just over 500,000 live-in residents. Those high-rise office buildings and malls in the business and commercial areas are densest with the daytime population going to work, eating, recreating and eking out their workaday life in Makati. Many still commute back to their residences outside of Makati in the evening.

Vertical housing (condominiums) has been practically mass-produced to answer to the demand for residential communities to be built closer to work and recreation areas. Developers and realtors have also whetted demand for other buyers and investors with disposable income, who would like to live “New York style” in the glamor and efficiency of a self-contained condo unit. A third group of condo buyers would be those who foresee rental or resale income from investing in condo units at a rate of return higher than financial products and other investments in the prevailing low-interest economic climate.

The Housing and Land Use Regulatory Board (HLURB) reveals that the condominium building craze started in 2001 with 34 projects, all in the National Capital Region (NCR or Metro Manila), building up to over 1,060 various developments having been issued licenses to sell as of 2013. These developments (construction projects) have supplied more than 500,000 units from 2001 to 2013 in Metro Manila alone. At an estimated average of two persons occupying a condo unit, does that mean that about a million people in Metro Manila are now enjoying the advantages of condo living?

The majority of Metro Manila condos are in Makati -- about 80%, according to the HLURB -- judging only on licenses to sell issued. But by ocular experience, one can really feel and know that the humongous condo complexes rising and already built are almost brusquely nudging each other for positioning in busy Makati. (Second most condos built or being built is in Taguig, in the Fort Bonifacio parcel.) Whether high-end or medium-end, Makati condos are more in demand than condos in Quezon City or Pasig, for example, and this reflects in the pricing for these, in preselling, selling, reselling and rental.

From what started as P40,000 per square meter for initial sales of Makati condos in 2001, the price per square meter of new condos in Makati now range from P150,000 to about P220,000. While classification as to high-end or medium-end used to depend much on the density or number of units per floor and the size of cuts (studio, one-, two- or three-bedroom) in the earlier years, now the developers simply hype up the offered amenities and other come-ons, offering unbelievably easy instalment schemes at little or no interest.

How can they do this? Well, their cost is probably already built into the pricing to the buyer, as they, the developers ride on the easy cost of borrowing from banks and financial institutions, favored as they are by their creditworthiness as big, listed corporations. Furthermore, pregselling, or selling condo units even before completion of construction, has kept the condo developer whole up-front, having already received full or instalment payments with the right to forfeiture of payments made by the defaulter. How can the developer lose?

And how can the bank lose, if the bank had financed the loan to buy the condo, since the condo unit would surely be collateralizing the bank loan? The buyer has all the risk in buying a condo.

According to the HLURB, the condo boom peaked in 2012, rising 151% from the previous year, when there were 183 developments in NCR (versus 230 total in the entire country), providing 108,335 units in Metro Manila. In 2013, the high of 62,000+ units in NCR was still 35% higher than 2011.

Supply has evidently been bullheadedly charging forward and up, purposely riding on the perceived increasing appetite of buyers assumed to be still elastic with further price increases. But a BusinessWorld article on the rising prices of development land in Metro Manila’s five major business districts elicited fearful thoughts on what may pierce the condo bubble.

Real estate groups and brokers warned that “developers are now prepared to push their pricing for development land by 20%-30% over previous highs.” In Fort Bonifacio, a 1,600-sqm site was sold in September at a record P500,000 per sqm, 80% higher than the previous government-owned site sold in the area.

To cover their costs, particularly the rising land costs, developers would have to raise their selling prices by 21% for office space and 30% more for apartments (residential units), one big broker said. At the increased acquisition costs, buyers and investors must be ready to suffer the tucked-in increases in developer costs, and worry that the expected yields from resale or rentals will shrink even lower.

Rentals on Makati condos are advertised at about P1,000 per sqm per month for a 20-sqm studio up to cuts of below 50 sqm. For condo units of more than 50 sqm, the rental rates would be around P800 per sqm per month. However, for the really premium developments (all two- and three-bedroom units, no studios), the rental price would be around P1,200 per sqm per month. Per annum yields on condo rentals (net of costs) are somewhere around 7% per annum, according to the group of realtors and brokers. But “investors must be ready to accept yields closer to 5%.”

Resale prices hold at the current prices for new condo buildings, provided these are of comparative construction and location, and the unit to be resold is not over five years old. But is there a vibrant enough market for reselling? Or even for rentals? Owners of older condos have a difficult time trying to sell units, or even rent them out, in the face of declining prices, and little demand for old units. Is there a glut?

Near the Makati Fire Station is a new condo complex 59 storeys high, dense with 74 units per floor, composed of one- and two-bedroom units from 20 sqm to 36 sqm each unit. Further down is a four-tower condo complex, 41 storeys high sitting on top of a five-floor commercial podium, 50 units per floor of one- and two-bedroom units, 22.25 sqm to 39.7 sqm each unit.

There seems to be a big condo bubble blowing in Makati.

Amelia H.C. Ylagan is a Doctor of Business Administration from the University of the Philippines.