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Monday, October 26, 2015

Stress Has Been Building Up in the Philippine Real Estate Sector

The information presented here has been out for some time now - for at least six months.  The Philippine Real Estate Sector is already showing signs of strain - particularly in the area of in-house real estate financing wherein real estate developers finance their customer's purchases of real estate in the form of Installment Contract Receivables.

We have documented how the so-called real estate bubble has already burst for 8990 Holdings (otherwise known by its ticker HOUSE).  We have also shown how the bursting of the bubble has started to affect Vista Land & Lifescapes (VLL), 8990 Holdings' nearest competitor in the Socialized Housing space.

What is not known is how the slowdown has affected other publicly-listed Philippine Real Estate companies.

Thanks to company disclosures in, now we know.  And it doesn't look great.

We do know that, for the past three years, Past Due Real Estate Receivables as a percentage of Total Real Estate Receivables have been climbing significantly not just for HOUSE and VLL but also for inter-related companies SM Investments Corporation (SM) and SM Prime Holdings (SMPH).  In fact, SMPH holds the dubious distinction of having the highest percentage of past due real estate receivables which, at 22.16% as of 2014, dwarfs that of HOUSE and VLL.  Even Century Properties (CPG), which registered 0% past due receivables for 2012 and 2013 is showing that 1.02% of its receivables are now past due.  

As a result, impaired real estate receivables have noticeably jumped, not just for HOUSE but for Megaworld (MEG), SM, SMPH, and VLL.  If the situation continues to deteriorate in 2015, expect these numbers to climb even further this year.

So far, with the exception of HOUSE, these past due and impaired real estate receivables pose little risk to the individual companies Stockholder's Equity.

Several readers have commented that past due and/or impaired receivables pose little risk to the developer because the developer holds the title to the property until the property is fully paid for.  In the event of default, the developer can simply evict the buyer (avoiding a lengthy and expensive foreclosure process) and resell the property for even higher prices in a rising real estate market.  Thus, the financial impact of the impairment is minimized.  Yes, that may be true, especially in a hot market.  But what if there is a general slowdown and everyone wants to sell?

If the whole receivable portfolio deteriorates, some firms might be more affected than others.  Surprisingly, it's not just HOUSE and VLL but also industry stalwarts such as CPG, MEG, and ALI who bear a lot of risk.

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