Asset Price Bubble Imminent? Oversupply of Condominium Units?

Read an insightful article on Inquirer asking whether we are again headed to another asset price bubble due to the booming property development (and seemingly oversupply of condominium and office space units). Read full article here.

Also, last year, I wrote about the increased visibility of SMDC (PSE: SMDC @ 5.95/sh , price back then was 8.38) along EDSA as they acquire prime properties for their SM Residences (and display their gigantic red and yellow logos). Well they haven’t stopped and construction in a number of sites is ongoing, not just along EDSA but in Makati, Global City, Ortigas, Mandaluyong, North Avenue, down south in Pasay, Bicutan, Paranaque, etc.

And the condominium construction craze (3Cs) is not just limited to SMDC. Empire East (PSE: ELI @ 1.08/sh), sister company Megaworld (PSE: MEG @ 2.80/sh), Ayala Land and affiliates Avida, Amaia (PSE: ALI @ 25.05/sh), DMCI (PSE: DMC @ 52.90/sh) and other developers also have lots of numerous projects ongoing (Robinsons Land (PSE: RLC), Filinvest (PSE: FLI), Vista Land (PSE: VLL), Century (PSE: CPG), Cityland (PSE: LAND) etc) all over Metro Manila and nearby areas.

Questions are, is demand still there for these units which will finish 2014, 2015 some even up to 2017? And is the property market heating up so fast with all these investment activities that anytime soon, price increases may just burst and do a free-fall?

Growth To Continue

Per the article, companies have been enjoying increased sales of units in the past few years, supported further by the growing economy and increased bank appetite to lend on real estate via home loans. Default rates may be increasing for the banks but remains on a manageable level, and since loan is secured, a secondary market for repossessed properties is another mitigant.

This party is expected to continue in the next few years. BPO offices and OFWs remitting money to the country are the leading consumers of the properties being constructed.


Bubble Imminent?

The article clearly pointed out the price increase does not always equate to price bubble. What we need to watch out for is excessive lending and selling. Excessive lending to those who can’t even pay, and excessive selling to those who do not have capacity to pay the amortizations for the long run, or to those who are into speculative purchasing.

Developers usually offer easy down payment terms at 0% for 24-48 months installment. Credit checking here is not that strict since in the event that you are no longer able to pay the down payments monthly, you lose the property (developer sells your unit to other customers and developer profits from your past payments). But for those who are able, this is an attractive offer since payments usually range from Php10k and below monthly. This way of selling is very enticing to the average consumer.

After this down payment portion comes the heavier part, when one will already need a home loan financing to pay for the balance portion of the property. Here banks will have to be more prudent, discerning and judicious in approving the home loans. Down payment amortizations of Php10k may translate to Php15k to Php20k a month in 3-4 years time once the customer is now paying the home loan. This is crucial as well for the customer since s/he should not only assess capacity to pay the down payment, but more importantly capacity to pay the home loan 3-4 years down the road.


Market Becoming Speculative?

Yes it is true that Filipinos generally still buy properties to live on them and as investment, rather than as speculative purchase and for resale once prices go higher. But Filipinos are also not financially illiterate, as there are now more and more Filipinos who buy and sell condominiums just to take advantage of the price increases. I’m sure there are more now than before.

Domino Effect and Regulation

Should a bubble occur and should it burst, then banks will be the first one to be affected since the customers will default on them. The economy will soon follow given tighter lending criteria from banks (less liquidity and credit, less economic activity), and fear from the market to spend given the uncertainty of the times. Developers will also have their share of unoccupied, unsold excess inventory of units. This has happened before in the Asian Financial crisis, hopefully this time, the Philippines is able to avoid it. This early BSP has already set in, putting a cap on how much banks can lend to real estate as % of their loans portfolio.

Regulators and market players all agree that a bubble is not yet imminent and not too probable, but acknowledge it as an ever present threat. Hopefully our market now is more mature and more responsible. As we have seen, even the first world countries fall to these traps, what more ours that is still developing?

PS. No endorsements and advertisements intended for stocks and brands mentioned in this post.

10 Other Business Risks You Must Know

As previously shared, life is a risk. On the same tone, business, no matter how big or small, is also a risk. It involves a series of big and small decisions and business calls and external factors that can make or break the business, and the business owners.

 

The sooner we are cognizant of the business risks that surround us, hopefully the sooner we take steps to address, mitigate and hopefully lessen these. Just like in life, business risks are here to stay. We cannot fully eliminate them but we can always lessen them to manageable levels.

0. Loss Risk

Probably the single most recognized risk by all businesses is the risk of a red bottom line. All businesses (I assume) are cognizant of this risk so I won’t dwell much on this. In fact, majority, if not all efforts, are actually meant to derive a positive bottom line eventually.

1. Operational Risk

May pertain to production errors, defective or substandard parts/supplies used that may cause a product recall later on or customer complaints and lawsuits, malfunction of equipment, system downtime, lack of inventory to meet scheduled demand, etc which may lead to financial losses. Businesses should ensure that back-ups and operational manuals are well in place, and that there are Plan Bs should there be unexpected operational disruptions.

2. Calamity Risk

Especially in our country. Fire, earthquake, typhoon, tsunami, flash floods, landslides, sink holes, drought, pests, etc which may disrupt operations or completely destroy business premises and property. For small businesses, this is a big deal. Insurance companies refer to them as acts of God, whether you agree is another story. Best we can do for these kinds of risks is have insurance coverages, back-up and calamity plans. Regular precautionary drills, which are often ignored, may actually prove helpful.

3. Security and Fraud Risk

Risk of loss due to theft, intentional deception, identity takeover, misrepresentation and other fraudulent activities. Endangered lives due to security breach, robbery in a branch or inside job theft carried out by certain personnel. CCTV may come into mind but this only addresses a small part of the risk. As they say, prevention is always better than cure. At the very least, security of the business premises must be ensured, not just secured against robbery and theft, but also against natural disasters. Insurance, when affordable is also a good investment. Likewise, measures should be in place to detect fraud which may range from fake monies to poser customers, identity theft, account takeover etc. Checks and balances should be in place. Knowing your customer plays a big part in minimizing security and fraud risk.

4. Information Risk

In business, certain information and data are intentionally kept hidden from the customers and competitors. Examples are product costing and pricing, trade secrets, soft copies of templates, contracts, manuals, recipes, big deals you are working on, customer information and all other confidential items. The risk of exposing these information to unintended viewers and audiences can pose a risk and a loss to the business. Ensure that these items are well safeguarded, sometimes even from the eyes of our own personnel. After all, these trade secrets are what makes our business unique and competitive, and these customer information were given to us by customers in trust that these shall be handled carefully. Failure to handle information properly can lead to financial and other further losses.

5. Credit and Default Risk

The risk of the business not meeting its financial obligations (payables), or on the other hand, poor collection of business receivables. Either way, cash flow management will be key to handling this risk. When left unchecked, this risk can easily shut down business operations due to poor circulation of its lifeblood: cash. This can lead to lawsuits and reputational risks as well.

6. Legal and Reputational Risk

Risk of getting lawsuits, court cases and tarnished reputation, negative public image, loss of customers and their confidence, in the course of running the business. Failure to secure the necessary permits and clearances, pay any government dues, unknowingly engaging in illegal or anomalous deals, customer complaints blown out of proportions, failure to deliver on agreed timelines, food poisoning, etc. At this age of word-on-web, it is so easy to spread rumors and negative feedback. Aside from bottom line, it is important to take care of one’s reputation, of the company’s branding since customers value branding highly. Most of the time, company branding and reputation are valued by customers even higher than product quality and affordability.

7. Concentration Risk

Especially true for small businesses is the fact that operations may only be centered and concentrated in one location, one subject matter expert (personnel), only one equipment, data and inventory is stored in only one place, only one supplier etc. Well for practical reasons and due to the fact that small businesses cannot always afford to put up back up locations, equipment or more personnel. Just the same such set-up breeds concentration risk and as you’ve anticipated, it can be dangerous for the business. What if something happens to the location, or the expert personnel leaves the business without proper turnover or documented procedures? Or goes on extended sick leave, incapable of working for days? What if the equipment malfunctions or the storage devices are suddenly uncooperative? These definitely disrupt our business operations which can have snowball effects on other risks. Documentation of procedures, back-up copies, contingency plans must be in place. Cross-posting, rotation and skills sharing, when possible, are also good practices. Similarly, business outings and traveling together can also pose concentration risks, especially when, knock on wood, something happens…

8. Labor/ Human Resource Risk

Small businesses may not have labor unions but that does not mean its personnel don’t have anything to say. This risk may pertain to both the safety of the personnel while working for your business (any occupational hazards, tied to operational risk), or the risk of your personnel engaging in work stoppage and mass strike due to unaddressed concerns and needs. Just like inventory which runs out or equipment which malfunctions, personnel and your manpower may also decide one day to walk-out on you. Lesson is, keep them happy and satisfied. After all, your people is your best business asset.

9. Political and Regulatory Risk

You may not feel this much in your business right now but this is actually a risk very much present. Imagine if your dealing with countries experiencing political crises, power struggles etc. Won’t you be concerned of your future dealings with them? Of default risk? Or what if other countries don’t want to deal with you because you are from the Philippines? Product quality becomes immaterial because you are already branded as from the Philippines. What if certain laws are passed prohibiting this and that, or allowing this and that such as higher tariffs, controlled interest rates and pricing, or revised government contracts? These changes may have an impact on your business, may it be on operations, your suppliers or customers, and the legal bounds within which you have to operate.

10. Economic and Market Risk

Probably one of the risks that is hard to mitigate and almost always out of control, the only thing we can do is sink or swim with it. Economic downturns, recessions are somewhat cyclical. They happen from time to time and given the globalized world, a recession in Europe or US can very much affect us here in Manila. Export businesses are usually the biggest victims, but note that these events also dampen consumer confidence, which then affects domestic spending. Again the best thing we can do is be prepared to swim, find other means to generate revenues, and see opportunities in these downturns.

Quite a number of risks I listed above and for sure, there are a lot more risks out there. Certainly you have already realized that these risks are very much intertwined, adding more complexity to the risks we face. Regardless of the size of your business, there are a lot more other things that you should be on the lookout for, aside from profitability, customer satisfaction and sustainability.

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