Real estate boom’s downside

First, the good news.

There has been so much activity in the real estate sector during the last couple of years, mostly fueled by investments of overseas Filipino workers in mid-end development and the influx of call centers now filling up previously vacant and idle spaces in major business districts.

Excess office space inventory is now lower, a happy change from the huge glut in capacity that developers faced right after the 1997 Asian crisis.

With the declining inventory, developers are starting to build more offices to accommodate the phenomenal rise in demand by business process outsourcing /call centers. These entities have made the Philippines their refuge and are taking advantage of an abundance of the unemployed and relatively cheap English-speaking labor force.

At the same time, construction of mid-end housing continues to flourish, helped by modest borrowing rates that enable Filipinos with better earnings to finally buy a place of their own.

During the last five years, interest rates have stayed in low double-digit levels despite fiscal and political problems. Part of the reason is obviously a still anemic demand for and an ample supply of funds that is available for lending to the public.

With the growing demand for affordable housing and office spaces, real estate appears to be on the cusp of a true recovery.

Pseudo-developers on the prowl

And now, the downside of the current real estate boom.

Industry experts are warning of the mushrooming of developers who have no track record, and no right and capability to build, much more pre-sell real estate properties.

There are a lot of realty firms now with big names and fancy logos that are all over the metropolis and nearby towns pre-selling holes in the ground like hotcakes, reminiscent of the fever that once gripped the property sector before the Asian financial crisis struck.

Some of these companies, however, have nothing at all except a developer’s permit from the Securities and Exchange Commission (SEC) to show for their worth. Such a permit which can be bought for about P60,000. Unfortunately, for the spurious, this amounts to virtually nothing: just a few documents and some signatures

What then is the game for these pseudo developers?

It is the simple case of churning or collecting the money upfront through aggressive marketing and pre-selling, using monies collected from unsuspecting buyers to reduce their debt piles so they can borrow again, and then hopefully finish the promised housing/condominium units. That is, unless the funds are diverted once more to other profitable quick-return projects or deals for themselves. In the meantime, the victimized buyers are frustratingly sweating it out.

Warning signs ignored again

We see here a worrying template similar to that of pyramid companies that eventually caved in under the pressure of the unsustainable cycle. When the development project crumbles, so will the dreams of middle class Filipinos who toil and sweat blood just so they could finally have a house of their own.

Once more, the warning signs are all over. Yet, the SEC appears to be doing nothing except allowing developers to continue with their heyday just like what happened with pre-need companies and multi-level marketing (pyramiding) companies. Will the commission only start acting on the problem once the problem reaches crisis proportions?

Perhaps it is time that that regulation of real estate developers be seriously looked with the end view of putting in place more stringent conditions.

More stringent conditions needed

Merely requiring a more significant amount as fee for a developer’s permit is not sufficient to cull pseudo-developers from the legit ones since it is not just the financial capability of developers that must be put to test.

As important is the capability of the real estate developer to construct a project that will stand the test of time and calamities, especially now that natural disasters seem to be striking more often than usual.

In Japan, a construction scandal shattered the long-time belief in the Japanese’s unquestionable standards to quality after an architect admitted he had connived with developers to bring down cost by using lower grade materials. When the Japanese government looked closely, it found out that 20 condominiums and a hotel in the heart of Tokyo failed to meet Japan’s strict earthquake-resistance standards.

If you apply Japan’s standard in the Philippines (an earthquake hot-spot similar to Japan), I seriously doubt whether all these condominiums and office spaces being developed now would pass. Just imagine what would happen to the tall condominiums along EDSA should a strong earthquake hit the metropolis. The thought of families occupying these buildings are being exposed to such danger gives me the shivers.

It is time that stricter regulation is enforced on the housing development sector. Let us not repeat the mistakes made with regards the pre-need and the multi-level marketing sectors. There has been too much heartache already over lost opportunities and wasted lives when the government failed to prevent on these two tragic experiences.

We beg our regulators to please spare the property sector from their ineptitude.

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Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected] or at [email protected]. If you wish to view the previous columns, you may visit my website at http://bizlinks.linkedge.biz.