GDP growth rate drops by 16.5%, lowest since 1981
The Philippines’ Gross Domestic Product (GDP) contracted by 16.5% in Q2 2020, the slowest growth recorded since 1981. According to the Philippine Statistics Authority (PSA) the main contributors to the decline were manufacturing, construction, and transportation and storage. Only Agriculture, forestry, and fishing increased among major economic sectors with a 1.6 percent growth. Meanwhile, Industry and Services both declined by 22.9 percent and 15.8 percent, respectively. On the expenditure side, household spending contracted by 15.5% while Investments as represented by Gross Capital Formation decelerated by 53.5%. It was only government spending that posted a growth of 22.1%.
The pandemic’s impact on the economy and property is becoming more apparent. The Philippines is now in a technical recession, or two straight quarters of GDP contraction. A stricter lockdown has been implemented in Metro Manila and nearby growth areas such as Laguna, Cavite, Rizal, and Bulacan. Based on PSA data, these areas are likely to cover 50% of the Philippines’ annual GDP. In the property sector, the pandemic and lockdown have been resulting in slower leasing and construction of office and condominium buildings. In our opinion, slower private sector construction in Metro Manila is due to manpower shortage, anti-COVID measures in construction sites, slow pre-commitment and pre-selling performance of some office and residential buildings, and developers’ cost-cutting measures. During the Asian Financial Crisis of 1998-1999, office lease rates declined by 21.6% per annum while average condominium prices dropped by about 20%. The Philippine government’s economic departments, credit ratings firms, and multilateral agencies are one in projecting that the country’s economy will contract in 2020. The Philippine GDP is now projected to decelerate between 1% and 8%. Despite this, an upside is that the central bank is projecting some form of economic recovery starting in Q4 2020 and a faster growth in 2021. This should support growth in demand for property segments such as office and condominium. A recovery starting 2021 should also prop up consumer spending and help lift retail demand across the country.
Sustained housing demand lifts 8990 profits up 12%
In Q1 2020, the net income of 8990 Holdings, Inc. reached PHP1.32 billion (USD26.9 million), up by 12% annually. Consolidated revenues also grew by 15% to PHP3.47 billion (USD70.8 million). Both real estate sales and rental income improved by 17% and 8%, respectively. Despite the sustained growth during the period, the developer expects slower performance in Q2 2020. Alexander Sotto, Acting President and Chief Operating Officer of 8990 Holdings, highlighted that the gloomy outlook was due to the temporary stoppage of real estate works during the lockdown. The company added that it plans to focus on preserving cash for the remainder of 2020.
In Q1 2020, residential projects under the affordable to mid-income segments (PHP1.7 million to PHP5.9 million or USD34,700 to USD120,400) made up 59% of take-up or around 5,800 units. Developments under the segment also contributed more than 60% of new project launches during the same period. Considering that the residential market in Metro Manila is supply-driven, we expect demand for these projects to lead the recovery in 2021. Developers with upcoming residential developments, particularly under the affordable to mid-income segments, should constantly coordinate with the government in terms of expediting Licenses To Sell (LTS) and approval of extended completion schedules.
Evidence mounting for remittance collapse as repatriations top 100,000
Repatriation of Overseas Filipino Workers (OFWs) has reached 102,000. Alvin Ang, Director of the Ateneo Center for Economics Research and Development (ACERD) noted during an Asian Development Bank (ADB) webinar that based on April 2020 projections, some 300,000 to 400,000 OFWs may lose their jobs. The government also projected that additional repatriations may reach 100,000. In a policy brief recently released by the ADB, remittances may likely decline by 20.2% or a loss of around USD5.79 billion (PHP283.7 billion), assuming a worst-case scenario. About 8.4% of all households will likely feel the impact. According to the Bangko Sentral ng Pilipinas (BSP) or central bank, May 2020 remittances reached USD2.11 billion (PHP103.4 billion), down by 19% annually or the largest drop since the -33.5% in January 2001.
In 2020, we expect residential vacancy to peak at 14.6% partly due to a decline in OFW remittances. We project vacancy to improve starting 2021 on the back of economic recovery and the pick-up in residential demand. We recommend that developers carefully monitor the developments in host countries that are the main sources of remittances, such as the United States and the Middle East. Given that OFW remittances continue to be one of the main drivers of residential demand, developers should continue catering to the market. Offering flexible payment terms should also help attract potential investors and prop up investor and end-user demand.