Real estate market heading to a recession?

The Philippine real estate sector has been a key driver of the country’s economic growth. For over a decade, it has contributed significantly through investments and job creation.

However, just as every growth story has its limits, the sector is now showing signs of strain, with rising vacancy rates, increasing inventory and weakening demand, which suggest that the market may be nearing a tipping point.

According to British economist Fred Harrison, who famously predicted the 2007-2008 financial crisis, property prices tend to follow a relatively predictable pattern of rises and falls over time.

Based on his research and observations, which spans over 100 years, Harrison concluded that real estate cycles typically last around 18 years on average, although the duration of these cycles can be longer or shorter depending on prevailing economic and social conditions.

Using the real estate cycle theory as a framework for understanding property markets, Harrison explained that the cycle is divided into four phases: recovery, expansion, hyper-supply and recession.

The recovery phase, which begins after the real estate market bottoms out following a crash, occurs when property prices reach their lowest levels while vacancy rates remain high with minimal construction activity.

But as confidence slowly returns to the market, demand begins to pick up, which paves the way for the expansion phase. In this phase, banks become more open to provide financing for real estate projects as property values rise.

This expansion typically lasts for many years, depending on the strength of economic growth, until the market enters the hyper-supply phase, a period when the real estate market becomes overheated.

When property prices peak, demand weakens and vacancy rates rise as the market struggles to absorb the excess inventory. Eventually, the market transitions into the recession phase.

During a recession, the oversupply becomes unsustainable and leads to market corrections. Property prices fall, construction activity slows and developers face financial challenges as revenues shrink, while banks and financial institutions exposed to real estate loans incur losses.

Given the current market conditions, it is possible that we are in the hyper-supply phase of the real estate cycle. A review of historical data from seven major property developers listed on the Philippine Stock Exchange—Ayala Land, SM Prime, Megaworld, Filinvest Land, Robinsons Land, Century Properties and Vista Land—shows a consistent decline in inventory turnover over the past decade since 2014.

The average inventory turnover ratio in the property sector has declined sharply from 0.39 in 2014 to just 0.15 in 2024. This means the time required for the property sector to sell its inventory has risen dramatically from 31 months in 2014 to 82 months, or nearly seven years, by 2024.

Because of slower inventory turnover, the average number of months for the property sector to collect receivables has also increased from 17 months in 2014 to 31 months in 2024.

In a hyper-supply market where demand continues to weaken, developers burdened with unsold inventories might face delayed or partial payments from buyers. To attract buyers, they might also offer longer installment schemes, which further slow the collection of receivables.

This trend reflects the increasing financial pressure on the property sector, as lower receivables turnover signifies slower cash inflows. This limits liquidity and increases reliance on debt to sustain operations, both of which raise the sector’s overall financial risk.

In 2009, when the property sector was in the recovery phase following the financial crisis, interest rates were also high, with the 10-year bond yield at 8.1 percent. However, the implied risk premium was only 6.3 percent, which priced property stocks at an 11.9 price-to-equity (P/E) ratio.

During the expansion phase, which peaked in 2019 when interest rates were historically low at 4.3 percent, the implied risk premium was only slightly higher at 8 percent. This led to a median P/E ratio of 12.9 times for the property sector.

Today, as we enter the hyper-supply phase at a 10-year bond yield of 6.4 percent, the implied risk premium has risen significantly to 22.9 percent. This sharp increase in the risk premium has caused a higher required return for investors, which has reduced the median P/E ratio for the sector to just 4.3 times.

Historically, the hyper-supply phase can last for several years, depending on how quickly the market absorbs the excess inventory. According to this framework, the real estate sector may need to pass through the recession phase before returning to the recovery phase, as the market typically requires a correction period to resolve the imbalances created during hyper-supply.

Given this outlook, the prospect of a recession suggests heightened market volatility in the months ahead. As the real estate sector faces the challenges of excess inventory and weaker demand, addressing these issues will require careful strategic decision-making.

While this period may present considerable risks, it could also create opportunities for well-prepared investors to capitalize on undervalued assets as the market moves toward eventual recovery.

Source: Inquirer

PHL may need 50M sq.m. of industrial space by 2035

The Philippines may need at least 50 million square meters (sq.m.) of industrial space by 2035, with an estimated average price of P30,000 per sq.m., to accommodate surging demand from the manufacturing, logistics, and data center sectors, according to commercial real estate consultancy firm PRIME Philippines.

“By 2035, the major backbone of the Philippine economy will be the industrial sector. Industrial real estate is no longer just an asset — it’s the key to unlocking the Philippines’ economic future. The demand is here; the supply must follow,” PRIME Philippines Founder and Chief Executive Officer Jet Yu said.

Warehouse supply grew by 4% to 37.6 million sq.m. in 2024, driven by new developments in Laguna, Batangas, and Cebu.

PRIME Philippines projected that supply would breach 40 million sq.m. this year, with upcoming expansions in Rizal, Cavite, Laguna, Pampanga, Cebu, and Davao.

Mr. Yu noted that about a third of the projected demand will come from the development of data centers, with over 100 data centers expected to go live in the country within the next three years.

“The 50 million sq.m. is a conservative-to-optimistic estimate. In just one or two years, we’re going to see many countries, including the Philippines, localizing and housing their own data domestically,” he said.

Mr. Yu added that the country’s manufacturing and logistics sectors are also expected to fuel industrial space demand.

“There has been a rapid decentralization across the Philippines. Logistics players have strategically positioned themselves over the past three to four years,” he said.

“On manufacturing, when many companies from China sought to diversify their operations to other ASEAN neighbors, we somewhat missed that opportunity. However, over the next ten years, we expect significant demand,” he added.

Meanwhile, Mr. Yu said the country’s manufacturing sector could continue to thrive amid geopolitical tensions.

“As long as we play it strategically and carefully, it’s safe to say that the manufacturing sector will continue to thrive in the Philippines,” he said.

“In 2025 alone, we have already received interest from companies looking to expand their existing manufacturing facilities in the Philippines. These are secondary hubs as a way for manufacturers to diversify and mitigate potential risks,” he added.

The United States paused its planned 25% tariffs on Mexico and China in exchange for concessions on border and crime enforcement.

However, US President Donald J. Trump said he is not rushing efforts to defuse a trade war with China, which was triggered by a 10% tariff on all Chinese imports.

In response, China imposed targeted tariffs on US imports and placed several companies, including Google, on notice for possible sanctions.

Source: Business World

Recovery in consumption seen to fuel PHL growth

A recovery in household consumption could drive Philippine gross domestic product (GDP) growth to the 6% range this year, HSBC Global Research said.

“We think household consumption in the Philippines should return, bit by bit, to its regular levels, bringing overall gross domestic product growth back to the range of 6% or more,” HSBC economist for ASEAN Aris D. Dacanay said in a report.

The Philippines’ GDP expanded by 5.2% in the third quarter, its weakest growth in five quarters. This brought the nine-month growth average to 5.8%.

The government is targeting 6-6.5% growth for 2024 and 6-8% for 2025 to 2026.

“Consumption should also be boosted over the near term with the recent depreciation in the Philippine peso against the US dollar boosting the purchasing power of every US dollar remitted.”

HSBC also cited a stronger recovery in non-durable consumer goods.

“Non-durable spending may be improving fast, but spending on big-ticket items, such as cars and real estate, will need more time to return to normal.”

“These goods are large expenditures by nature, potentially requiring households to acquire credit. To optimize one’s borrowing costs, households may be waiting for the central bank’s easing cycle to end before eventually deciding whether to borrow money or not.”

Mr. Dacanay said household consumption is unlikely to be affected by the Trump administration’s aggressive tariff policy.

“Remittances, demographics, and services exports — three sectors of the economy that drive consumption — are subject to minimal tariff risks, at best. So, to monitor the Philippine economy in 2025, watching household consumption will be key,” he said.

“The economy does have some layer of insulation; household consumption remains the country’s main growth driver, and no other economy can put a tariff on consumption.”

Markets are pricing in the impact of US President Donald J. Trump’s aggressive tariff proposals. He has pledged to impose tariffs of up to 60% on China, 25% on Canada and Mexico as well as a 10% universal tariff.

Mr. Trump also said he planned to slap tariffs on imported computer chips, pharmaceuticals and steel as part of efforts to encourage manufacturers to make these products in the US.

“With all the headlines on trade and tariffs, there is a sense of relief that the Philippines is the least affected in ASEAN (Association of Southeast Asian Nations),” Mr. Dacanay added.

HSBC noted that household consumption has slowed amid elevated inflation and interest rates, which dampened purchasing power.

Private consumption grew by 5.2% in the third quarter of 2024, improving from 4.7% in the second quarter.

“But all this is already behind us. Inflation is back to within the central bank’s 2-4% target band, while monetary policy is amidst its gradual easing cycle,” Mr. Dacanay said.

Headline inflation averaged 3.2% in 2024. The BSP also expects inflation to remain within the 2-4% target band from this year to the next, as its baseline projections are at 3.3% and 3.5% for 2025 and 2026, respectively.

The central bank began its rate-cutting cycle in August last year, delivering a total of 75 basis points (bps) worth of cuts as of end-2024. This brought the key rate to 5.75%.

The BSP has signaled further rate cuts this year.

HSBC expects the central bank to bring down the benchmark rate to 5% by the third quarter of 2025.

Source: Business World