Commercial real estate loans

According to Industry Trends, a regular publication of the Institute for Development and Econometric Analysis, Inc., real estate industry is at the helm of the rapid expansion of the local economy and transformation of urban (and rural) landscape. From 2009 to 2013, the gross value added of the real estate sector escalated by a yearly compounded average rate of 13.7 percent. GVA growth rates during the review period consistently hit double-digit figures. GVA of the real estate sector has its highest point in 2012 with 18.1 percent growth rate.

Per IDEA, at the onset of the review period, the industry experienced contraction, recording negative 8.2 percent GVA growth rate. This drop has to be attributed to the weakening of the domestic economy. Economic turmoil that hit developed nations in 2008 affected the country thereby prompting individuals and households to safe keep their resources, causing massive pullout of investments.

Based from the data released by the BSP, total real estate loans recorded a CAGR of 21.0 percent in the five-year period ended 2013. RELs eases up since 2009. Industry players find comfort in the vibrant investment landscape for the real estate sector. However, the financial sector is wary on the potential asset bubble formation when this trend persists in medium-term.

Credit loans to real estate spiked up in the first quarter of 2009, and then slowed down the following quarters until it reached its the lowest growth rate at 12.2 percent in the fourth quarter of 2010. During the period of deceleration, credit markets are more careful in lending out loans to the real estate market given the measly performance of the top earning real estate developers, Ayala Land and Megaworld. According to the Global Property Guide, Ayala Land and Megaworld suffer from decline of sales in 2009. Income from other property use such as renting buoyed up the earnings for these property developers and augmented the revenue loss from new unit sales. Below-on-par performance of major developers, together with the weakening of housing demand from Overseas Filipino Workers in the US and other developed nations, put real estate projects on a halt. As a result, financial institutions became stricter in approving loan requests.

By the latter years of the review period, the BSP observed an uptrend in REL, which reached an all-time high in December of 2013. In that period, outstanding loans to real estate sector reached Php705.5 billion, equivalent to 22 percent growth in the REL share from the previous year. Individuals and households were encouraged to borrow money from financial institutions given the enhanced confidence in the domestic market and attained security from income sources.

Increased real estate loans can be attributed to the low interest rates, attractive financing terms offered by banks, and the positive investment climate of the real estate sector propped up by the growth of outsourcing industry, remittances, and population. According to the BSP, the interest rate remains to be at the competitive level, and mostly likely to be kept the same or adjusted lower in short to medium term. The BSP’s overnight borrowing rate reached its all-time low level in September 2013 at 3.75 percent, after inflation fell to 3.6 percent in August of the same year, according to the researchers of IDEA. 

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