Adjusting the Sails: Supporting the Sustainable Growth of the Real Estate Sector

Adjusting the Sails: Supporting the Sustainable Growth of the Real Estate Sector 3 rd 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 2010-2010- 2010-2010- 2011-2011- 2011-2011- 2012-2012- 2012-2012- 2013-2013- 2013-2013- 2014-2014- 2014-2014- Table adapted from 2014 IMF Article IV Consultation Staff Report Vacancy Rates (Makati) In percent 14.0 12.0 10.0 8.0 6.0 Office (all grades) Residential 8.1 4.0 2.0 1.9 0.0 Source: Colliers International Philippines 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 8.0 4.9 7.3 5.7 4.9 4.8 5.3 5.0 4.9 4.6 5.6 5.7 6.1 5.6 6.0 5.5 5.5 5.3 5.7 5.8 6.2 1 0.5 6.0 0 4.0 2.0 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 5.9-0.5-1 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

peso/ sq. m. peso/ sq. m. peso/ sq. m. peso/ sq.m. Capital and rental values continue to rise. Capital Values: Office (Grade A) 2008-2014 100,000 95,000 90,000 85,000 80,000 75,000 70,000 Capital Values: Luxury Residential 2008-2014 150,000 140,000 130,000 120,000 110,000 100,000 90,000 80,000 65,000 60,000 Office Capital Values (Grade A) 70,000 60,000 Residential Capital Values (Luxury) 2008 2009 2010 2011 2012 2013 2014 Source: Colliers International Philippines Research; DER Staff Computations 2008 2009 2010 2011 2012 2013 2014 Source: Colliers International Philippines Research; DER Staff Computations Rental Values: Office (Grade A) 2008-2014 900 850 800 750 Rental Values: Luxury Residential 2008-2014 900 850 800 750 700 700 650 650 600 600 550 500 450 400 Office Rental Values (Grade A) 2008 2009 2010 2011 2012 2013 2014 550 500 450 400 Residential Rental Values (Luxury) Linear (Residential Rental Values (Luxury)) 2008 2009 2010 2011 2012 2013 2014 7 7

India Greece Italy Singapore Spain France Portugal Japan Norway Hong Kong Philippines Korea Netherlands Indonesia Switzerland Thailand Austria South Africa Canada Germany United States Malaysia Colombia Brazil China New Zealand Turkey Iceland Australia United Kingdom But prices remain comparable to peers House Prices Around the World Annual Percentage Change, 2014 or latest 10 8 6 4 2 0-2 -4-6 -8-10 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

Percentage Point PH economy s growth supported by broadening growth drivers Percentage Point Gross Domestic Product, 2011-2014 At Constant 2000 Prices Growth Rate (%) Positive economic growth for 64 consecutive quarters 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1.6 1.4 1.0 0.5 8.4 8.9 7.7 7.9 7.3 7.3 7.2 7.0 6.9 6.4 6.1 6.3 6.3 6.4 5.6 5.3 4.6 average growth = 4.9 3.8 3.2 3.1 Year-on-Year Growth Rate (%) average growth ( 1999-2014) Trend 2009 2010 2011 2012 2013 2014 20.0 15.0 10.0 5.0 Demand-side drivers: Private consumption, exports and government spending Contributions to GDP Growth, 2008-2014 Expenditure Side 5.5 6.9 Supply-side drivers: Services and industry sectors, particularly manufacturing Contributions to GDP Growth, 2008-2014 Production Side 10.0 8.9 8.4 7.7 8.0 7.9 7.3 7.3 7.2 7.0 6.9 6.4 6.1 6.3 6.3 6.4 5.6 6.0 5.3 5.3 4.0 4.3 4.6 3.8 3.3 4.0 3.1 3.2 3.1 0.0-5.0 3.7 2008 2009 2010 2011 2012 2013 2014 2.0 0.0 1.6 3.1 1.4 1.0 0.5 0.5-10.0-2.0 2008 2009 2010 2011 2012 2013 2014-15.0 Household Consumption Government Consumption Capital Formation Exports Imports GDP Growth -4.0 Service Sector Industry Sector Agri., Hunting, Forestry, & Fishing GDP Growth 10

in percent 2007 2008 2009 2010 2011 Sustained output growth of the Philippine economy attained in a stable inflation environment 2012 2013 2014 2015 2007 2008 2009 2010 2011 2012 2013 2014 2015 Inflation within the government s target range for the 6 th consecutive year since 2009 Headline Inflation (2006=100) January 2007 - January 2015 12.0 12.0 Calibrated monetary policy actions contributes in warding off inflationary pressures RRP Rate and Average Bank Lending Rate (in percentage) January 2007 January 2015 10.0 10.0 8.0 8.0 6.0 Jan 15: 2.4% 6.0 Dec 14: 5.7% 4.0 4.0 Jan 15: 4.0% 2.0 2.0 RRP Rate Average bank lending Rate 0.0 0.0 11

Increasing third-party recognition of the Philippine economic performance Projected 2015 growth rates (%) of international financial institutions Credit ratings 6.6 25 Mar 2014 12

Sound and stable banking system an efficient intermediator of funds 12 10 8 Total Resources of the Banking System 2003-2013 PhP10.4 Trillion 24.7 % 30 25 20 40 30 M3 and outstanding loans of U/KBs 2007-2014 (y-o-y g.r.; in %)) Domestic liquidity (M3) Outstanding loans of U/KBs (Net of RRPs) 6 4 15 10 20 16.8% 2 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Level (in Trillion PhP; lhs) Growth rates (in %; rhs) 5 0 10 0 9.6% 2007 2008 2009 2010 2011 2012 2013 2014p 20 15 10 5 0 Gross Non-Performing Loans (Net) and Non- Performing Assets Ratios (%) of PH Banking System, 2001-2014 NPL Ratio NPA Ratio End-Nov 2014 GNPL 2.0% NPA 1.9% 20 18 16 14 12 10 8 6 Capital Adequacy Ratio (%)* 2001-2014 BSP Standard: 10% BIS Standard: 8% CAR consolidated basis Jun 14: 16.7% CAR Solo basis Jun 14: 15.9% *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 800 742.90 797.99 826.11 885.43 914.73 976.41 1,038.09 600 400 200 0 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 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 800 Real Estate Loans (REL) 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

Circular No. 839 Series of 2014: BSP policy directions 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

Circular No. 839 Series of 2014: BSP policy directions 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

Circular No. 855 Series of 2014: Guidelines on Sound Credit Risk Management Practices BSP policy directions 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

Primary bond issuances of property firms grew at an average of 65 percent from 2008 to 2013. Since 2010, the level of corporate bonds/notes have surpassed bank loans as a source of financing. Prospects: Improving Access to Local Bond Markets Corporate Indebtedness of 14 PSE-Listed Property Firms 2007-2013, in million pesos 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - Corporate Bonds/Notes Total Bank Loans Total 2007 2008 2009 2010 2011 2012 2013 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

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 A. Total Loanable Funds Generated ALL BANKS Percent Compliance UKBs Percent Compliance THRIFT BANKS Percent Compliance RURAL/ COOP BANKS 1,985.599 1,783.494 152.203 49.903 Percent Compliance B. Minimum Amount Required to 1. 10% AGRA i.e. Agrarian Reform 2. 15% AGRI i.e. Other C. % of Compliance vs. Required D. % of Compliance vs. Required E. Total Compliance 1. Direct Compliance 2. Alternative Compliance 3. Total 198.560 178.349 15.220 4.990 297.840 267.524 22.830 7.485 1.56 1.07 1.77 18.34 15.40 15.24 9.14 40.17 178.503 8.99 137.217 7.69 12.523 8.23 28.763 57.64 158.161 7.97 153.638 8.61 4.089 2.69 0.434 0.87 336.664 16.96 290.855 16.31 16.612 10.91 29.197 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 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 2015 32