Fitch backs BSP regulation to manage real estate risks

MANILA, Philippines - Fitch Ratings believes the proactive supervision and regulation being undertaken by the Bangko Sentral ng Pilipinas (BSP) would help contain macro-prudential risks stemming from the real estate market.

Fitch welcomed the plan of BSP to release a residential real estate price index (RREPI) later in the year since the lack of data on property prices and affordability indicators make it difficult for the debt watcher to assess the effect of credit growth on the real estate market.

“The proactive supervision and regulation of the BSP, particularly on the introduction of real estate stress tests and caps on mortgage loan values relative to collateral, may help to contain risks,” the debt watcher said.

It noted private sector credit is still growing at a brisk pace despite moderating to 14.1 percent in end June from 19.9 percent in end-2014.

Data from Colliers International show average land values in the Makati Central Business District jumped by more than 50 percent since end-2012.

Fitch, however, said relatively low vacancy rates and strong growth in rents suggest some fundamental support for current price levels.

As early as 2014, the BSP was contemplating on launching the index that would track property prices in Metro Manila and nearby provinces. The monitoring would be expanded to cover other key cities in the country.

The RREPI would help the central bank address concerns of a “bubble” in the country’s booming residential real estate sector brought about by the improving purchasing power of Filipinos.

BSP Deputy Governor Diwa Guinigundo said a statistical index like RREPI would help make a general characterization of the real estate sector and the likely path of property prices.

Likewise, it would also be useful to produce a decomposition into residential and commercial property prices which are driven by different dynamics.

He pointed out the country continues to have a large backlog in the housing sector while the capacity of the clients has increased due to overseas remittances, higher employment, and the business process outsourcing (BPO) sector.

“The risks of asset price inflation appear manageable and have, in fact, been addressed by a number of macroprudential measures,” he said.

He explained demand for commercial space has reportedly been shooting up as the robust economic tempo has generated great interest from investors.

“But again, the various macroprudential measures and careful monetary stance of the BSP have helped support the sustainability of this segment,” he added.

According to him, key property builders and developers are now more risk-conscious and, therefore, have conducted themselves responsibly, while banks engaged in real estate have been advised to ensure their capital base is not unduly challenged by their exposure in real estate.

The BSP stepped up its watch over the real estate sector as early as 2012 by ordering banks to disclose more comprehensive reports on their exposures to the property industry.

The pre-emptive macroprudential policy measure approved by the Monetary Board required stress tests for banks to determine if their capital will be enough to absorb credit risk that may arise from their exposure to the property sector.

The BSP explained universal, commercial, and thrift banks would need to meet a capital adequacy ratio of 10 percent of their qualifying capital following the stress test results.