Property price surge presents risks to banks

Global debt watcher Fitch Ratings said Wednesday a sustained surge in Philippine property prices over the past three quarters, driven by a boom in online gaming operations, presents rising risks to the country’s banking system.

The New York-based credit rating firm said in a report recent data were pointing to speculative activity that could affect market stability if unchecked. 

“To the extent that the increase in prices has been driven by a boom in the Philippine online gaming operator sector, it may also expose banks and the property industry to greater policy risk,” it said.

Fitch said residential property prices in the Philippines experienced some of the strongest growth of any major real-estate market since 2010 in real terms, and the pace of increase accelerated in recent months.

It noted that the national residential real-estate prices rose 10 percent year-on-year in the third quarter of 2019 while condominium prices in Metro Manila leaped “by an unsustainable 34 percent year-on-year.”

Fitch said the surge partly reflected a 75-basis-point decline in Philippine policy interest rates since April 2019, but also the strong demand from the POGO sector which accounted for around 30 percent of Metro Manila office demand from 2018 to the third quarter of 2019. 

Fitch said this activity likely had spillover effects on nearby residential property prices. “Prolonged rapid house price inflation tends to spur borrowers to take on more debt to afford increasingly expensive homes, particularly if the trend stimulates further speculative price appreciation. It could also lead developers to over-invest in future supply, risking an inventory overhang if demand weakens,” Fitch said.

“Both trends have a tendency to raise private-sector leverage, making the economy more susceptible to downside risks. Studies show that asset bubbles fueled by credit booms typically lead to deeper and longer downturns,” it said.

Philippine banks’ exposure to the real-estate sector remained broadly stable at around 20 percent of total bank loans since 2015, but credit growth reached 14 percent from 2015 to third quarter of 2019. The growth of real-estate lending was 13 percent during the period. Moreover, commercial real-estate lending saw a notable pick-up in growth in recent months.

“A higher reliance on the POGO sector to drive real-estate demand exposes banks and property firms to greater policy risks. In July 2019, the Chinese authorities signaled an intention to crack down on Philippine POGOs which are reported to employ many Chinese nationals and provide services to Chinese clients. Increased scrutiny or a clampdown on the sector by Chinese or Philippine authorities could call into question the growth and viability of the industry and may ultimately lead to knock-on effects on domestic property demand and the broader economy,” Fitch said. 

“However, some major property developers have placed internal limits on their direct exposure to POGO operators which should help mitigate downside risks to the sector,” it said.

It said the credit implications of the surge in property prices for Philippine banks would depend partly on their underwriting standards. 

Fitch said a significant loosening of underwriting standards designed to accommodate price affordability such as a relaxation of loan-to-value limits or debt-service ratios or a shift towards excessive loan tenors could negatively affect its assessment of rating profiles, particularly if coupled with weakening loss-absorption buffers. 

“Rapid price appreciation also makes it harder for banks to assess the true market value of property, raising downside risks to collateral valuations. A sharp correction in the real-estate market would test previous underwriting standards, posing risks to asset quality and potentially creating pressure on ratings,” it said.

“Our assessment so far is that rated banks’ underwriting standards remain broadly acceptable. Meanwhile, a regulatory requirement that banks demonstrate common equity Tier 1 and total capital ratios of 6 percent and 10 percent, respectively, after writing off 25 percent of their real-estate exposures should help ensure that loss-absorption buffers keep pace with their exposure to the sector,” Fitch said.

Topics: Fitch Ratings , Philippine property , Philippine online gaming operator
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