Industry Report: Property

By Mark T. Amoguis, Researcher
INVESTORS were cautious last year on property stocks amid high interest rates that increased borrowing costs, but market watchers still consider the sector on their shopping lists account of strong demand for residential, office and retail spaces.
At the close of last year’s trading, the bellwether Philippine Stock Exchange index (PSEi) shed 12.8% year-on-year to 7,446.02 versus Dec. 29, 2017’s 8,558.42 finish.
This decline was also reflected in the 18-member property sub-index, which declined 8.8% to 3,627.98 by the close of last year’s trading, a turnaround from the 29.7% year-on-year uptick recorded at the close of 2017.
The Philippine stock market is composed of 270 member companies, with 38 belonging to the property sector.
Among property stocks, DoubleDragon Properties Corp. registered the biggest fall as it shed 55.1% of its stock price from last year. It was followed by the price declines seen in Belle Corp. (-40.5%); Starmalls, Inc. (-38.7%); Primex Corp. (-38.1%); and Philippine Realty and Holdings Corp. (-31.5%).
On the other hand, Philippine Infradev Holdings, Inc. (formerly IRC Properties, Inc.) was the top gainer as its share price surged by 204.1% year-on-year last year. Trailing behind were MRC Allied, Inc. (34.3%); Philippine Estates Corp. (32.4%); Sta. Lucia Land, Inc. (23.8%); and 8990 Holdings, Inc. (20.4%).
Market watchers attributed the tightening of monetary policy as the main cause of dampener for property stocks.
“Some factors that weighed on property firm’s performances were the prevailing interest rates, land appreciation prices, influx of POGOs (Philippine offshore gaming operators) to name a few,” Regina Capital Development Corp. Managing Director Luis A. Limlingan said.
The Bangko Sentral ng Pilipinas (BSP) fired off a cumulative total of 175-basis-point (bp) increase to the policy rates to rein in surging inflation last year that went to as high as 6.7% in September and October, a near-decade high. Inflation averaged at 5.2% last year.
Mandarin Securities Corp. research analyst Zoren Philip A. Musgni had the same view, saying that many expected the higher market rates from rate hikes to “ultimately impact mortgage rates and the take-up of properties.”
For Jeffrey Lucero, equity analyst at RCBC Securities, Inc., mortgage rates increased by as much as 100 bp to 175 bp following interest rate hikes implemented by the central bank.
“Based on our estimates, a 100-bp increase in mortgage rates will increase monthly mortgage payments by an average of [approximately] 7% to 11%, which we reckon is manageable given annual wage increases and the additional disposable income provided by TRAIN 1,” he said, referring to the first package of the Tax Reform for Acceleration and Inclusion Law that took effect in the beginning of last year.
“The negative impact will likely be more pronounced on [real estate] sales to investors given that rental yield to opportunity cost has become little to negative…I think that impact of rising interest rates will be more pronounced to investors than to end-users,” Mr. Lucero said.
Despite last year’s dampener, analysts are still optimistic on the sector’s growth prospects given the sustained demand for residential projects as well as office and retail spaces.
“A lot of property companies are still undervalued because of the significant increase in land prices in recent years,” said Richard G. Laneda, research analyst at COL Financial Group, Inc.
“Demand for residential projects are still very robust. Demand for office spaces are still growing due to higher BPO (business process outsourcing) demand. Retail is also doing very well as increasing disposable income is translating to higher spending, especially in food-related products,” he added.
Mandarin Securities’ Mr. Musngi was likewise upbeat: “We have a positive outlook for property companies as they continued to provide strong earnings results despite difficult economic conditions such as higher inflation and interest rates.”
For Piper Chaucer E. Tan, client engagement officer and research associate at Philstocks Financial, Inc., the Philippines remains a “sweet spot” for investors due to its dynamic workforce and young demographics.
“We think that this may be an advantage against our Asian peers mostly on office and commercial leasing and this is also a driver in bolstering economic growth going forward,” he said.
Regina Capital’s Mr. Limlingan, for his part, was more cautious: “At the end of 2018, we were overweight on property companies. However, we have changed this to neutral given that prices have jumped in the last [two-and-a-half] months.”
“We believe that investors should be more selective with the timing, as to enter during any correction,” he said.
Following the downtrend in 2018, Philippine equities rebounded this year with the PSEi having already reached the 8,000-levels by the ninth trading day. This rally was fueled mostly by expectations of decelerating inflation and the optimistic views on trade relations between the US and China, which led to the continued flow of foreign funds back into the local bourse.
As of March 21, the property sub-index is up 10.1%. Upticks in share prices were seen in some member companies in the counter. One is that of 8990 Holdings, Inc., whose stock price grew 55% since the start of the year, followed by Vista Land & Lifescapes, Inc. (35.9%); Century Properties Group, Inc. (31.8%); DoubleDragon Properties Corp. (28.1%); and Megaworld Corp. (19.6%).
According to analysts, the expectations of loosening monetary policy from the central bank, revisions to the real estate investment trusts (REITs), and the passage of the second package of the government’s tax reform program will likely drive the stock prices of these listed property firms.
The Securities and Exchange Commission targets to release the revised guidelines on the REITs within the first half of the year after taking the requests of the Department of Finance and the Bureau of Internal Revenue to ensure that money raised through REITs will be reinvested in the country.
REITs are listed companies that own and operate income-generating real estate assets like offices, apartment buildings, hotels, warehouses, shopping centers, and highways.
Congress passed Republic Act No. 9856 — known as the REITs Law — way back in 2009, but taxation issues have prevented companies from offering this investment vehicle.
“REITs could significantly boost profitability. Under the REITs law, at least 90% of a REIT’s income should be distributed as dividends annually and such dividends are tax-exempt,” RCBC Securities’ Mr. Lucero explained.
“Hence, this would save a company 27% tax on its investment properties’ income, which in effect will boost the rental yield of investment properties,” he added.
On March 21, the BSP kept benchmark interest rates unchanged, which marks the third straight meeting that kept rates within 4.25-5.25% and the key rate of 4.75% still at a decade-high.
The central bank said it was not yet time to start reversing the 175 bp total increase made in 2018, as inflation has steadily dropped to 3.8% in February, from a nine-year peak of 6.7% in September and October.
Meanwhile, newly appointed BSP Governor Benjamin E. Diokno has said that there is room for monetary easing following inflation slowdowns, as he looks to cut the banks’ “very high” reserve requirement ratio (RRR) in four successive moves this year, which, if realized, could bring down the RRR to 14% by early 2020.
Meanwhile, the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) bill, the government’s second tax reform measure, languished at the Senate’s committee on ways and means. The lower chamber’s version was approved in September last year.
It seeks to cut the corporate income tax rate gradually from 30% currently to 20% by 2029 via a two-percentage-point reduction every other year starting 2021. This will come alongside a uniform scheme for tax incentives that will replace various types granted by investment promotion agencies and likewise put a cap on the number of years in which a company can enjoy such perks. This reform has been flagged as a major risk by businesses.
As the market awaits the full-year 2018 reports of the listed property companies, analysts said companies’ will likely sustain their growth from the previous year.
“Earnings will likely grow at the same pace as last year, as industry drivers remain stable (residential demand, office & mall occupancies) and as most property companies have maintained the same level of capex (capital expenditure)/launches for 2019,” Mandarin Securities’ Mr. Musngi said.
“Possible sources of growth would be from the industrial or logistics side, as foreign manufacturing companies are slowly pouring in to the Philippines to escape the negative impact of the US-China tariffs/trade war,” he added.
For COL Financial’s Mr. Laneda: “Earnings this year will continue to grow owing to higher residential revenues from booking of sales made in the past 18 months. Leasing segment will also see higher revenues as all companies are expanding their portfolio.”
Philstocks’ Mr. Tan expects the sector’s “stellar growth” this year in terms of prices per square meter “mostly on office leasing and residential sales amid low supply of office spaces.”
“It is estimated that the office spaces would be exhausted by the year 2022,” Mr. Tan said.
Regina Capital’s Mr. Limlingan said that sales reservation for mid- to low-cost housing projects “will likely be tempered” by higher borrowing costs.
“Given this, we believe the higher-end residential segment will still see sustained growth given they are less sensitive to these changes. The retail sector will continue to experience stable growth as well through recurring income,” he added.