1. finance
2. bank

Adjusting the Sails:
Supporting the Sustainable Growth
of the Real Estate Sector
3rd Monthly Business Meeting
Chamber of Real Estate & Builders’
Association, Inc. (CREBA)
Hotel Intercontinental Makati, 26 March 2015
DIWA C. GUINIGUNDO
Deputy Governor
Monetary Stability Sector
Outline
I. Recent Developments in the Real Estate Sector
II. What is the BSP doing?
III. Moving Forward
2
Real estate market and the Philippine economy
ADEQUATE HOUSING
REAL ESTATE SECTOR
SUPPORT GROWTH
MACROECONOMIC STABILITY
3
Outline
I. Recent Developments in the Real Estate Sector
II. What is the BSP doing?
III. Moving Forward
4
Real estate development remains robust, characterized by
continued building and strong take-up
Vacancy Rates (Makati)
In percent
14.0
Office (all grades)
Residential
12.0
8.1
10.0
8.0
6.0
4.0
1.9
2.0
Source: Colliers International Philippines
2014-Q4
2014-Q3
2014-Q2
2014-Q1
2013-Q4
2013-Q3
2013-Q2
2013-Q1
2012-Q4
2012-Q3
2012-Q2
2012-Q1
2011-Q4
2011-Q3
2011-Q2
2011-Q1
2010-Q4
2010-Q3
2010-Q2
0.0
2010-Q1
Table adapted from 2014 IMF Article IV Consultation – Staff Report
5
5
Construction activity continues to be
a key driver of economic growth
Share of RE & OD and Construction-to-GDP/
Contribution to GDP Growth
14.0
2
12.0
1.5
10.0
7.3
4.9
8.0
5.7
5.5
5.8
5.0
5.6 5.7 6.1 5.6 6.0
5.3 5.7
6.2
4.6
4.8 5.3
5.5
4.9
4.9
6.0
4.0
1
0.5
0
6.6 6.3 6.6 6.0 6.6 6.5 6.9 6.2 6.7 6.6 6.9 6.2 6.7 6.6 7.1 6.1 6.6 6.4 6.9 5.9
-0.5
2.0
-1
0.0
-1.5
Construction-to-GDP
RE & OD-to-GDP
Contribution-to-GDP Growth (LHS, in percentage point)
Source: PSA
RE: Real Estate
OD: Ownership dwellings
6
Capital and rental values continue to rise.
Capital Values: Office (Grade A)
Capital Values: Luxury Residential
2008 Q1 - 2014 Q4
2008 Q1 - 2014 Q4
150,000
100,000
140,000
95,000
130,000
90,000
peso/ sq.m.
80,000
110,000
100,000
75,000
90,000
70,000
80,000
70,000
Office Capital Values (Grade A)
Residential Capital Values (Luxury)
2008
2009
2010
2011
2012
2013
2008
Source: Colliers International Philippines Research; DER Staff Computations
2009
2010
2012
2013
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
2011
2014
Source: Colliers International Philippines Research; DER Staff Computations
Rental Values: Office (Grade A)
Rental Values: Luxury Residential
2008 Q1 - 2014 Q4
2008 Q1 - 2014 Q4
900
850
850
800
800
750
750
peso/ sq. m.
900
700
650
600
700
650
600
550
550
500
2008
2009
2010
2011
2012
2013
2014
2008
2009
2010
2011
2012
2013
7
2014
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
400
Q1
400
Q4
Office Rental Values (Grade A)
Q3
Residential Rental Values (Luxury)
Linear (Residential Rental Values (Luxury))
450
450
Q2
500
Q1
peso/ sq. m.
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q1
2014
Q4
60,000
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
60,000
Q3
65,000
Q2
peso/ sq. m.
120,000
85,000
7
10
8
6
4
2
0
-2
-4
-6
-8
-10
United Kingdom
Australia
Iceland
Turkey
New Zealand
China
Brazil
Colombia
Malaysia
United States
Germany
Canada
South Africa
Austria
Thailand
Switzerland
Indonesia
Netherlands
Korea
Philippines
Hong Kong
Norway
Japan
Portugal
France
Spain
Singapore
Italy
Greece
India
But prices remain comparable to peers
House Prices Around the World
Annual Percentage Change, Q2 2014 or latest
Source: IMF Global Housing Watch
8
Is there a ‘bubble in disguise’?
• The real estate sector is grounded by the Philippine
economic story, which is based on constructive dynamics
that have solid structural underpinnings.
• Growth impulses are coming from:
o Macroeconomic stability
o Sound banking system
o Improving competitiveness ranking
o Buoyant business and consumer sentiment.
9
PH economy’s growth
supported by broadening growth drivers
Gross Domestic Product, Q1 2011 - Q4 2014
Positive economic growth for 64 consecutive quarters
At Constant 2000 Prices
Growth Rate (%)
10.0
8.4
9.0
8.9
8.0
7.3 7.2
7.3
7.0
7.7 7.9
7.0
6.4 6.3
6.1
5.6
6.0
4.6
5.0
6.9
6.4
6.3
5.3
average growth = 4.9
3.8
4.0
3.2 3.1
3.0
2.0
1.6
1.0
Year-on-Year Growth Rate (%)
average growth (Q1 1999-Q4 2014)
Trend
1.4
0.5
1.0
0.0
Q1
Q2
Q3
Q4
Q1
2009
Q2
Q3
Q4
Q1
2010
Q2
Q3
Q4
Q1
2011
Demand-side drivers: Private consumption,
exports
spending
Contributions to
GDP Growth, and
Q1 2008government
- Q4 2014
Q2
Q3
Q4
Q1
2012
Q2
Q3
Q4
Q1
Q2
2013
Q3
Q4
2014
•Supply-side drivers: Services and industry
Contributions to
GDP Growth, particularly
Q1 2008 - Q4 2014
sectors,
manufacturing
Production Side
Expenditure Side
20.0
10.0
8.9
8.4
15.0
8.0
7.3 7.2
7.3
5.0
3.7
0.0
Percentage Point
Percentage Point
5.5
6.9
6.0
4.0
-5.0
2009
2010
2011
2012
2013
2014
6.9
6.4
6.3
5.6
5.3
5.3
4.6
4.3
3.3
3.8
4.0
3.2 3.1
3.1
1.6
2.0
1.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2008
7.0
6.4 6.3
6.1
10.0
7.7 7.9
3.1
1.4
0.5
0.5
0.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-2.0
-10.0
-15.0
Household Consumption
Exports
Government Consumption
Imports
Capital Formation
GDP Growth
-4.0
2008
2009
Service Sector
2010
Industry Sector
2011
2012
Agri., Hunting, Forestry, & Fishing
2013
2014
GDP Growth
10
Sustained output growth of the Philippine economy
attained in a stable inflation environment
Inflation within the government’s target
range for the 6th consecutive year
since 2009
Calibrated monetary policy actions
contributes in warding off inflationary
pressures
Headline Inflation (2006=100)
January 2007 - January 2015
RRP Rate and Average Bank Lending Rate (in
percentage)
January 2007 –January 2015
12.0
10.0
10.0
8.0
8.0
in percent
12.0
Jan ‘15: 2.4%
6.0
4.0
Dec ‘14: 5.7%
6.0
Jan ‘15: 4.0%
4.0
RRP Rate
2015
2014
2013
2012
2011
2010
2009
2008
Average bank lending Rate
2007
2015
2014
2013
2012
2011
2010
0.0
2009
0.0
2008
2.0
2007
2.0
11
Increasing third-party recognition
of the Philippine economic performance
Projected 2015 growth rates (%)
of international financial
institutions
6.6
Credit ratings
25 Mar 2014
12
Sound and stable banking system
an efficient intermediator of funds
12
Total Resources of the Banking System
2003-2013
PhP10.4 Trillion
24.7 %
10
30
20
6
15
4
10
2
5
0
0
20
Gross Non-Performing Loans (Net) and NonPerforming Assets Ratios (%) of PH Banking
System, 2001-2014
15
End-Nov 2014
GNPL
2.0%
NPA
1.9%
10
5
0
NPL Ratio
NPA Ratio
40
Domestic liquidity (M3)
Outstanding loans of U/KBs (Net of RRPs)
25
8
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Level (in Trillion PhP; lhs)
Growth rates (in %; rhs)
M3 and outstanding loans of U/KBs
2007 - 2014 (y-o-y g.r.; in %))
30
16.8%
20
10
9.6%
0
2007
20
18
16
14
12
10
8
6
2008
2009
2010
2011
2012
2013
2014p
Capital Adequacy Ratio (%)*
2001-2014
CAR consolidated basis
Jun‘14: 16.7%
CAR Solo basis
Jun‘14: 15.9%
BSP Standard: 10%
BIS Standard: 8%
*End-period data
* 2001-2011 data is on the Philippine Banking System; available data for 2012 onwards is on U/KBs.
**Starting January 2013, figures are computed as prescribed under BSP Circular No. 772. Gross NPL
represents the actual level of NPL without any adjustment for loans treated as “loss” and fully provisioned.
13
Outline
I. Recent Developments in the Real Estate Sector
II. What is the BSP doing?
III. Moving Forward
14
Real estate sector, a policy concern for the BSP
 Asset prices affect aggregate demand
 Real estate booms indicate market
expectations, one of the factors considered in
formulating policy actions, e.g.
macroprudential or monetary policy.
 Asset price misalignments may give rise to
widespread financial instability
 Bank lending as the primary source of real
estate funding; real estate as one of the most
credit-intensive goods
 Busts reduce profitability and cause
deterioration in asset quality in banks
 Central bank actions affect asset valuation,
hence influence investment and consumption
decisions
15
15
Exposure of the financial system to the
real estate sector is increasing.
Real Estate Exposures (REEs)
in billion pesos, as of end-of-period
1200
1000
800
742.90
797.99
826.11
Jun-13
Sep-13
885.43
914.73
Dec-13
Mar-14
976.41
1,038.09
600
400
200
0
Mar-13
Jun-14
Sep-14
* Bank Proper only
Source: BSP Expanded Report on REs
Real Estate Loans
(in billion pesos, as of end-periods indicated)
1200
1000
Real Estate Loans (REL)
800
600
400
200
0
Bank credit remains significantly skewed to real
estate, renting & business services (RERBA) which
is one of the primary drivers of economic growth.
16
Constructing a policy toolkit for financial stability
MONETARY POLICY
• Loan-to-Value Ratio
• Industry Reference on CTS
• Sound Credit Risk
Management Practices
MICROPRUDENTIAL
POLICIES
FINANCIAL
STABILITY
MACROPRUDENTIAL
POLICIES
• Concentration Limits
• Expanded Reporting of
Exposures
• Real Estate Stress Test
17
BSP policy directions
Macroprudential regulations
• To prevent excess liquidity in the system (arising from foreign
exchange flows) from translating into increased bank lending and
further adding to asset price pressures
• Include:
• loan-to-value ratio caps for residential real estate;
• imposition of 20 percent ceilings on real estate loans; and
• tighter monitoring of banks’ real estate exposures
18
BSP policy directions
Memorandum No. M-2012-046 : Expanded Reporting Requirements
for Bank Exposures to the Real Estate Sector
• Aims to get a comprehensive reading of banks’ exposure to the real estate
sector without pre-qualifying the potential risk impact of these exposures
• Extends the previously captured data series by including:
• loans by developers of socialized and low-cost housing,
• loans to individuals,
• loans supported by non-risk collaterals or Home Guarantee Corporation
guarantee as well as exposures by banks’ trust departments and thrift
banks
• Submitted by covered banks and their trust
departments on a quarterly basis
19
19
BSP policy directions
Circular Letter No. 2012-084:
Industry Reference Practices on Sound Contract to Sell Financing
• Sets minimum requirements and standards for banks extending property
loans.
• Ensures that consumer protection is embedded in the framework of the
institution or the bank.
• Maintains strong credit discipline and avoids imprudent lending and
investments as market opportunities expand
20
BSP policy directions
Circular No. 839 Series of 2014:
Real Estate Stress Test (REST) Limit for Real Estate Exposures
• REST is a pre-emptive macro-prudential policy
measure to ensure the banking industry’s
continuous healthy exposure to real estate
development.
• Covers both UKBs and thrift banks
• Mechanics. After assuming 25 percent writeoff of real estate exposures, a bank should be
able to maintain:
• Common Equity Tier 1 capital ratio of at
least 6 percent; and
• Minimum risk-based capital adequacy ratio
of 10 percent, on a solo and consolidated
basis.
21
BSP policy directions
Circular No. 839 Series of 2014:
Real Estate Stress Test (REST) Limit for Real Estate Exposures
• Banks are not prohibited to lend to companies and individuals as long as:
1. They have sufficient capital to absorb any credit risk or stress
conditions
2. Effective risk management frameworks are in place.
• REST does not reflect any imminent vulnerability among banks with RE
exposure. It forms part of the BSP’s broader macroprudential toolkit to
strengthen the banking system and promote financial stability.
22
BSP policy directions
Circular No. 855 Series of 2014:
Guidelines on Sound Credit Risk Management Practices
• Shift of focus in credit underwriting from collateral-based to:
o Cash flow analysis
o Ability-to-pay
• Cap of 60 percent on the maximum loan value of real estate
mortgage as collateral.
o Not the same as a loan-to-value ratio limit or a minimum
borrower equity requirement
o It is the bank’s decision to lend beyond the 60 percent of the
collateral, as long as proper risk frameworks are in place.
• Requirement to define limit structures for their credit exposures
and employ portfolio diversification strategies to mitigate credit
concentration risk.
23
Addressing the huge housing backlog
• What can be done to improve
access to finance of builders and
developers?
1. Improve access to local bond
markets
2. Review the implementation of RA
No. 10000 (Agri-Agra Reform Credit
Act of 2009)
3. Strengthen the government’s
secondary mortgage institution
4. Tap other innovative funding sources
24
Improving Access to Local Bond Markets
Corporate Indebtedness of 14 PSE-Listed Property Firms
• Primary bond issuances of
2007 - 2013, in million pesos
property firms grew at an
Corporate Bonds/Notes Total
average of 65 percent from
Bank Loans Total
2008 to 2013.
• Since 2010, the level of
corporate bonds/notes have
surpassed bank loans as a
source of financing.
• Prospects:
– Continued reforms in the local capital markets are expected to
help improve access to the bond market for property firms.
• Proposed merger between PSE-PDEx
• Refinements in market infrastructure such as clearing and
settlements
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
-
2007
2008
2009
2010
2011
2012
2013
Use of Agri-Agra Credit Quota for Housing Purposes
• Ongoing legal review by the BSP, DA and DAR to clarify the use of
the credit quota for housing sector.
Compliance with Agri-Agra Reform Credit Act of 2009 - Philippine Banking System
as of end-September 2014
in billion pesos
ALL BANKS
A. Total Loanable Funds Generated
Percent
Compliance
UKBs
Percent
Compliance
THRIFT BANKS
Percent
Compliance
RURAL/
COOP
BANKS
1,985.599
1,783.494
152.203
49.903
198.560
297.840
178.349
267.524
15.220
22.830
4.990
7.485
C. % of Compliance vs. Required
1.56
1.07
1.77
18.34
D. % of Compliance vs. Required
15.40
15.24
9.14
40.17
B. Minimum Amount Required to
1. 10% AGRA i.e. Agrarian Reform
2. 15% AGRI i.e. Other
E. Total Compliance
1. Direct Compliance
2. Alternative Compliance
3. Total
178.503
158.161
336.664
8.99
7.97
16.96
137.217
153.638
290.855
7.69
8.61
16.31
12.523
4.089
16.612
8.23
2.69
10.91
28.763
0.434
29.197
Percent
Compliance
57.64
0.87
58.51
Strengthening the government’s
Secondary Mortgage Institution
• Pushing for reforms of the NHMFC Charter
1. Strengthen present mandate to participate in the secondary
mortgage market
2. Increase capitalization to acquire mortgage receivables
3. Mandate government social security institutions to invest in the
issuances of the agency.
Other Innovative Financing Sources
• REIT Act of 2009
• Flotation of OFW Bonds
Overseas Filipino Remittances
Outline
I. Recent Developments in the Real Estate Sector
II. What is the BSP doing?
III. Moving Forward
29
What are the key issues that lie ahead?
Risks to domestic economic growth:
 slowdown in global economy;
 delays in infrastructure spending and
reconstruction bottlenecks;
 thin power reserves in Q2 2015; and
 possible damage from natural disasters.
 Risks to global growth:
 escalation of geopolitical tensions;
 bouts of financial market volatility;
 deflation in the euro area;
 slower growth in China;
 rapid shifts in sentiments in the oil market; and
 growth and policy divergence among advanced economies.
30
BSP policy directions
On monetary stability: sustained appropriate monetary stance
 Continued vigilance over inflation dynamics to safeguard non-inflationary
growth
On financial stability: continue to initiate key reforms
 Implement macroprudential measures to minimize systemic risks
 Enhance corporate governance framework
 Support capital market development
 Sustain advocacies on microfinance, financial inclusion and consumer
protection
On external sector stability: strengthen resilience to external shocks
 Maintain market-determined exchange rate
 Keep comfortable level of reserves and ensure manageable external debt
profile
31
Ongoing Efforts
• Continued Collaboration with the Financial Stability
Coordinating Council
– Forum of key regulators including the DOF, SEC, IC,
and the BSP to coordinate policies and collaborate
on efforts to promote financial industry.
• Development of the Residential Real Estate Price
Index (RREPI)
– First-ever in-house price measure in the Philippines
– Potential indicator of asset price bubbles in the
housing sector
– Expected date of release is by the Q3 2015
32
Adjusting the Sails:
Supporting the Sustainable Growth
of the Real Estate Sector
3rd Monthly Business Meeting
Chamber of Real Estate & Builders’
Association, Inc. (CREBA)
Hotel Intercontinental Makati, 26 March 2015
DIWA C. GUINIGUNDO
Deputy Governor
Monetary Stability Sector