Commercial real estate loans (part 2)

According to Industry Trends, a regular publication of the Institute for Development and Econometric Analysis, Inc. (IDEA), real estate industry is at the helm of the rapid expansion of the local economy and transformation of urban (and rural) landscape. The BSP noted that domestic liquidity expanded by an annual growth rate of 38.6 percent with value of Php6.9 trillion by the end of January 2014. This performance comes out better than the previous month, when the year-on year growth rate reached 32.7 percent.

 Per IDEA, much has been said about the increase in the domestic liquidity and money supply, but the concern for stable price levels, interest rates, and overall financial stability in the long run when potential crisis realize also rises. BSP set out measures, such as adjusting the special deposit accounts, to maintain stable price that attunes with sustainable economic growth.

Furthermore according to the same published report, Real Estate Investment Fund has proven to be great success in some Asian countries such as Japan, and China. Although the Philippines adapted the concept in 2009, the REIT Law has yet to fulfill its full potential as driver of growth to the local real estate sector. This dismal performance has much to do with the more stringent policies included in the provisions. For an investment to qualify as an REIT, the following conditions must be met: existing 12 percent value-added tax on transfer of assets, 30 percent income tax rate, and 40 percent minimum public float in the first two years from listing which increases to 67 percent.

Philippine Stock Exchange President Hans Sicat managed to discuss with the Securities Exchange Commission and Bureau of Internal Revenue the brewing concern over the rigid regulations that come with establishing an REIT. This specialized corporation sets the tone on democratization of wealth of one of the robust sectors in the economy, the real estate. The problem, however, lies in the inability of the public to realize the growth advantage of setting up this stock corporation. Sicat voiced out that the stringent policies has much to do with the risk-averse nature that real estate developers show towards the REIT. In order to address this issue, Sicat proposes to lower the minimum public float to 33.33 percent in the first two years. Once revised, this law could be viable alternative for the bank credit loans.

Overall, the real estate sector proves to be potent source of growth for the local economy. The economy watchers, however, look for the possibility of ballooning property supply in the market, without enough support from real property demand. This phenomenon, called property asset bubble, has caused the downfall of financial markets in the past. At present, the demand for housing and office spaces are backed up by the surge of OFW remittances and burgeoning BPO sector, and continues to be so in medium-term. Credit loans are on the rise because of low interest rates, attractive financial schemes offered by banks, and positive economic outlook. Domestic liquidity and money supply remains stable.

Critical measures from the BSP, real estate industry players, and the government are needed to ensure that price and financial stability is maintained and asset price bubbles are prevented, according to the researchers of IDEA.

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