Written by Sheila Lobien
THE real estate industry's focus on certain macroeconomic factors such as gross domestic product (GDP) growth, the elevated interest and inflation rates and their effects on the property market, such as real estate values and real estate loans, has gained much attention at the start of the third quarter of (3Q) 2024. Notably, the first cut on benchmark interest rate was expected in 3Q 2024. Thus, when the Monetary Board finally lowered the overnight repurchase rate by 25 basis points last Aug. 15, 2024, it was well-received and taken as a positive signal of the industry's further recovery. The graph at the end of the article explains theimpact of the interest rate cut, along with other economic indicators, on the real estate market.
Graphically, it can be observed that residential real estate has an inverse correlation with interest rate (i.e., as interest rate goes up, residential real estate loan growth goes down and vice-versa). Homebuyers are sensitive to mortgage rates. A commercial real estate loan, on the other hand, has a direct correlation with GDP growth, more pronounced for the period 2019 to 2023. It shows that higher GDP growth has led to an increase in commercial loans growth during this period. Computationally, using the Pearson correlation coefficient, however, both residential and commercial loans have an inverse relationship with interest rate (-0.24 for residential and -0.15 for commercial), and both have a remarkably high negative correlation against inflation: -0.64 for residential and -0.76 for commercial loans. Simply put, as inflation goes up, real estate loans growth decelerates, which is a logical result of higher home prices (due to higher construction costs) dampening real property demand. Also, higher costs will make consumers prioritize basic commodities, and lower priority is given to property investments. Interestingly, one of the mechanisms of the Bangko Sentral ng Pilipinas (BSP) to control inflation is benchmark interest rate. In times of rising inflation, as seen starting 2021 until 2023 in the graph, benchmark interest rate is increased to reign in the economy and dampen investments to cool off employment that will, eventually, lower inflation.
Real estate performance in the first half of 2024
Briefly, below are the first half performance of select property submarkets:
Metro Manila office space had a vacancy rate of close to 18 percent with a net take-up projected to be at around 320,000 square meters (sqm) in 2024, which is much lower than the one million sqm average take up in the three consecutive years prior to the pandemic from 2017 to 2019. However, this is already higher than the 2023 take up of around 120,000 sqm. Rental rates, on the other hand, softened by 12.3 percent year on year (YoY) as a result of the high vacancy rate and a pipeline supply of around 1.5 million sqm from 2024 to 2028.
Residential prices, on the other hand, have remained robust, reflecting strong demand despite the high mortgage rates. Based on the first quarter of (Q1) 2024 BSP Residential Real Estate Price Index or BSP RREPI average price for all house types across the country increased by 6.1 percent with condominium units registering the highest price increase at 10.2 percent YoY. Demand, based on loans amount granted, has slowly shifted outside of the National Capital Region (NCR) to Calabarzon. Prior to the pandemic and until 2021, two out of every five loans (42 percent) approved by the financial institutions were in NCR; however, this has steadily decreased to 33 percent in 2022, 29 percent in 2023 and 26 percent as of Q1 2024. During such time, Calabarzon percentage share had steadily increased from 28 percent to 34 percent, an increase of 6 percent. Part of the shift can be attributed to the preference for more space at lower prices
The continuing growth in e-commerce revenues, expected to reach P54 billion in 2024 (from P34 billion in 2019), the demand for cold storage warehouses and the growth of data centers are fueling the industrial submarket. The Philippine warehousing market revenue is projected to grow from $750 million in 2022 to $1.2 billion by 2023, a compound annual growth rate of 6.5 percent. One third of the supply is in NCR or Metro Manila, another third is in Calabarzon and the remaining 33 percent is outside of these two locations. The growth in this submarket is expected to be sustainable in the medium term.
Macroeconomic factors and other economic indicators impact the interest rate cut on the real estate market by the Monetary Board. IMAGE FROM THE LOBIEN REALTY GROUP
Impact of the Monetary Board's interest rate cut
Given the above simple explanation of the macroeconomic indicators, the real estate industry is currently at an inflection point and is undoubtedly geared toward further recovery in 2025, aided by the expected successive interest cuts by the Monetary Board.
As the global economy recovers, the office market is also expected to recover. The primary driver of demand will be the business process outsourcing (BPO) industry's expectation of adding 400,000 FTEs for the next four years. This will require close to 1.2 million of office space; half of which will be in Metro Manila. Traditional companies are also expected to benefit from sustained GDP growth, which will result in higher workforce requirements and, eventually, office space. Finally, the co-working spaces or flexible office industry is another source of office demand. The flexible office set up has become part of the office space strategy of the BPO industry and traditional companies in terms of their business continuity, natural growth and investment risk management strategies. Lower interest rate will help landlords in making the necessary investment in this market.
On the residential market, pre-pandemic benchmark rate of 4 percent resulted in an annual average residential loan growth of around 15 percent or P75 billion. A lower mortgage rate is expected to drive the demand for housing units. Computationally, this will result in at least an additional P100 billion loan volume growth annually, based on the 2023 residential loans to P1.008 trillion. The expected annual growth in overseas Filipino worker (OFW) remittances, pegged at $33.5 billion in 2023, will further help buoy the residential market.
Conclusion
The country's economic indicators — a sustained GDP growth of at least 6 percent, decelerating inflation that is within the 3 to 4 BSP target range, lower interest rates, increasing OFW remittances and a better global economic condition, among others — positively provide the necessary backdrop for a resurgent real estate market in 2025.
Link to online article from The Manila Times: https://www.manilatimes.net/2024/10/11/tmt-anniversary/resurgent-in-2025/1982821
