Hitting a home run in affordable housing

Font Size
Marvin A. Tort-125


Hitting a home run in affordable housing

We need roughly 11 million homes put up and sold to buyers in the next 11 years, or an average of one million homes every year. That is, if we are to address the backlog or shortage in the supply of affordable housing from now until 2030, as estimated in a study by the University of Asia and the Pacific.

The reality, however, is that even if we add to the hundreds of housing developers already out there, they can all put up and sell only so many housing units in a year. The backlog is huge, at this point. Moreover, there are concerns regarding availability of land, cost of development, affordability to buyers, as well as cost of financing.

Frankly, up until recently, I didn’t realize the magnitude of the housing problem — or the size of the backlog — and how it has been driving the growth of the housing industry. On the surface, to me, it didn’t seem like there was much to gain for investors to get into “socialized,” “economic” or “low-cost” housing.

By government definition, “socialized housing” are units costing not more than P450,000; and, “economic housing” are homes costing P450,000 to P1.7 million. These two brackets cover mostly the lower-income class, and around 85% of the housing backlog. “Low-cost housing” are homes costing P1.7 million to P3 million.

I had always felt that housing was a difficult business, given problems bandied about particularly when it comes to collecting payments. Then, there is the ever-rising cost of land and construction materials. I have always had the impression that in housing development, profit margins were slim, risks were high, and work was difficult.

That’s what I thought, at least, until not too long ago, when I was introduced to people in the “affordable housing” business. And what I learned from my informal talks with them made me realize the strong potential of the housing industry. Demand is so great that there is money surely to be made for those who are ready to work hard.

In fact, I am no longer surprised that the same group of people I spoke with months ago had just opted to tap the capital markets, I believe for the first time. And I am talking about San Pedro, Laguna-based PA Alvarez Properties or PA Properties, and what I believe to be their “unusual” decision to offer Perpetual Notes to investors.

In a statement released recently, PA Properties said it had issued the first tranche of its Perpetual Notes offering to institutional lenders, the proceeds of which would be used to partially finance property development and land banking initiatives in the next five years in line with the company’s expansion. A second tranche is expected to be issued within this quarter, said PA Properties Chairman Romarico “Bing” Alvarez.

The PA notes offering is said to be only the second of its kind to be offered in the domestic market, with another Philippine company having reportedly done the same in 2017. While other big Philippine companies have likewise been issuing Perpetual Notes, these were all in the foreign market.

In 2015, port terminal operator International Container Terminal Services Inc. (ICTSI) — a listed company — offered $450 million in perpetual bonds at 5.5% per annum. It went back to the notes market, for another $350 million, in 2018. The company reportedly had been selling perpetual notes since 2011.


In late 2017, Ayala Corp. — also a listed company — went to the overseas bond market with $400 million in Perpetual Notes, or “fixed-for-life” corporate paper. The notes carried an annual coupon of 5.125% for life, with no step-up or resetting deal. Aside from ICTSI and Ayala Corp., other blue-chip Philippine companies have either sold such notes or were reportedly planning to do so soon, either locally or abroad.

PNB Capital & Investment Corp., the Issue Manager and Lead Arranger of the PA Properties notes, was quoted by PA as saying that it was expecting more Philippine companies to issue Perpetual Notes as the market becomes more familiar with hybrid securities.

I find PA’s decision unusual because unlike regular debt papers or corporate bonds, Perpetual Notes have no maturity date. Also, perpetual bonds are fixed-income securities that are required to regularly pay coupons (returns to investors) in perpetuity or “forever.” As such, they are considered “hybrid” because they are more in the nature of equity, rather than debt, but with a fixed return as opposed to dividends.

Such notes are usually issued only by big blue-chip companies, and local or municipal governments, because the issuer should have a very strong balance sheet to afford such a borrowing. It is necessary for the issuer to have consistently high revenues and profits in the long term, so it can assure payment of the “fixed” coupon or return to investors practically for life — or when the issuer opts to buy back or redeem the notes.

Based on PA’s brief for investors, it was offering an initial tranche of P1 billion in notes, and a second tranche of an additional P1 billion. “Step-up” date is five years from date of issue, which means that after five years, the rate of return on the notes may go up. In this case, the coupon will go up to 10-year BVAL reference rate + 800 basis points, from the initial interest rate of 5-year BVAL reference rate + 400 basis points. PA also has the option to redeem the notes on the step-up date.

It will be difficult for an issuer to make such a commitment unless it was certain it can make money for its investors. In PA’s case, it appears confident of returns on the investments. After all, in the case of this low-key developer, a relative unknown compared to the likes of Ayala Land, SM, and Megaworld, it has managed to consistently post a steady growth in sales and assets over the years.

In 2015-2017, for instance, sales grew from P1.33 billion in 2015 to P1.97 billion in 2017, while real estate assets went up from P7.49 billion in 2015 to P11.77 billion in 2017. Net income hit P458 million in 2017 from P101 million in 2015, while gross profit margin grew from 42% to 49% in the same period. Sales are also forecast to grow at a compounded annual growth rate of 22% from 2018 to 2023.

And, when Osaka-based Hankyu Hanshin Holdings Group was looking for a partner in the Philippines, as it started investing all over Asia, instead of going with the bigger names here in affordable housing, it opted for PA Properties. Hankyu is listed in the Tokyo Stock Exchange as having a market capitalization of around US$8.28 billion.

Since 2017, PA Properties has signed three joint venture agreements with Hankyu subsidiary Hankyu Hanshin Properties Corp. with a combined value of over P3 billion. Projected revenues from these ventures with the Japanese partner — all in housing — is estimated at about P11.25 billion.

I met the PA Properties people months back when I was invited as a resource person during their media training. To be honest, when I arrived at their San Pedro, Laguna office for the two-day training, I got the impression that they were just “small” players; modest, low-key developers of small housing communities in the provinces.

But I was surprised as they introduced themselves and noted that they have been in business for almost 25 years. Starting in 1994 by developing a small rice field in Laguna into a residential community, Bing Alvarez and his motley group are now capitalized at P3.3 billion and have already built almost 20,000 housing units in Southern Luzon. And, they have about 15,000 more units planned for construction.

To me, PA Properties is now ready to break out of its old mold. It’s ripe for expansion, particularly to other parts of the country. So, next time you think that the “socialized” or “low-cost” housing business doesn’t make much sense, or that the property business is on the way down, think again. As PA Properties clearly shows, in its niche, things are just beginning to heat up.


Marvin Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippines Press Council.