‘High property prices pose risk to banks’
Credit to Author: Mayvelin U. Caraballo, TMT| Date: Wed, 08 Jan 2020 16:19:42 +0000
THE Philippine banking system is facing rising risks amid a sustained surge in property prices in the past three quarters, Fitch Ratings warned on Wednesday.
“Recent data point to speculative activity that could affect market stability if unchecked,” the credit ratings agency said in a statement.
It underscored that residential property prices in the country had experienced some of the strongest growth of any major real estate market since 2010, in real terms. However, the pace of increase has accelerated in recent months.
Citing Bangko Sentral ng Pilipinas data, Fitch Ratings said national residential real estate prices rose by 10.4 percent year-on-year in the third quarter of 2019, with condominium prices in Metro Manila leaping by an “unsustainable” 34 percent year-on-year.
While acknowledging that the surge partly reflects the combined 75-basis-point interest rate cuts that the central bank implemented last year, it also attributed the price growth to strong demand from Philippine offshore gaming operators (POGOs).
The debt watcher said anecdotal reports suggested that POGOs accounted for around 30 percent of Metro Manila office demand over 2018 until the third quarter of 2019.
“Fitch believes this activity is likely to have had spillover effects on nearby residential property prices,” it added.
Fitch Ratings said Philippine banks’ exposure to the real-estate sector had remained broadly stable to date at about 20 percent of total bank loans since 2015, but credit growth had been high in general.
Moreover, commercial real-estate lending saw a notable pick-up in growth in recent months, it added.
That said, the credit rater explained: “A higher reliance on the POGO sector to drive real-estate demand exposes banks and property firms to greater policy risks.”
It added that such risks could emanate from increased scrutiny or a clampdown on the sector by the Chinese or Philippine government, highlighting that in July 2019, Chinese authorities signaled an intention to crack down on POGOs, which are reported to employ many Chinese and provide services to Chinese clients.
This, Fitch Ratings noted, “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.”
However, it said some major property developers have placed internal limits on their direct exposure to POGO operators, which should help mitigate downside risks to the sector.
The credit watchdog, nevertheless, pointed out that credit implications of the surge in property prices for Philippine banks will depend partly on their underwriting standards.
“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 toward excessive loan tenors, could negatively affect our assessment of their rating profiles, particularly if coupled with weakening loss-absorption buffers,” it said.