Economy 4 MIN READ

Increasing real estate sector risks may affect asset quality of Philippine banks

August 14, 2023By BusinessWorld

Risks to the commercial real estate sector in the country may also pose threats to the asset quality of the banking industry given its exposure to the property sector, according to S&P Global Ratings.

“Given the banking sector’s sizable exposure at about 13% of total loans, any significant deterioration in the commercial real estate sector will affect the banks’ asset quality,” S&P Global Ratings Associate Director Nikita Anand said in an e-mail.   

Based on the latest data from the Bangko Sentral ng Pilipinas (BSP), the exposure of Philippine banks and trust entities to the commercial real estate sector stood at 63.08% as of end-March.

Commercial real estate loans went up by 4.5% to PHP 1.62 trillion in the first quarter from PHP 1.55 trillion in the same period a year ago. Meanwhile, residential real estate loans increased by 4.6% to P950 billion in the first quarter from PHP 908 billion a year ago.

Overall, the banking industry extended PHP 3 trillion worth of loans to the real estate sector in the January-to-March period. This is 5.3% higher than the PHP 2.85 trillion in the same period in 2022.

According to Ms. Anand, the office vacancy rate in Metro Manila is still elevated due to the supply overhang and continued hybrid work arrangements.

“This has not translated into asset quality issues so far as reflected by the low reported NPL (nonperforming loan) ratio of 2.1% for commercial real estate loans,” she said.

The gross soured loans in the commercial real estate sector dropped by 14.1% to PHP 34.1 billion as of end-March from PHP 39.7 billion in the same period in 2022.

This brought the gross NPL ratio for commercial real estate loans to 2.1%, lower than 2.56% a year earlier.

Joey Roi H. Bondoc, research director at Colliers International Philippines, said the office vacancy rate in Metro Manila is projected to increase to 21.2% this year. As of the first half, the office vacancy rate is at 18.4%.

“We’re projecting a 21.2% vacancy rate because there will be about 670,000 square meters of new office space to be completed in Metro Manila,” Mr. Bondoc said in a phone call interview.

For the retail property sector, the vacancy rate may inch up to 15% this year, from 14% last year.

“For the commercial real estate sector, that’s a big concern as this might stifle the growth of retail rents. We might see slower growth in rents for 2023,” Mr. Bondoc said.

Vacancy rates continue to rise as many companies do not renew or pre-terminate their lease contracts. Some companies are also rightsizing their office space requirements as workers continue to opt for hybrid work arrangements.

“There are companies that are rightsizing. For example, if they have two floors now, they’ll just occupy one floor instead of two,” Mr. Bondoc said. 

“Companies who are occupying brick-and-mortar space will also be gauging whether they will occupy the large spaces they used pre-pandemic, or will they be rightsizing given some headwinds that are being forecast,” he added.

Data from Colliers Philippines showed that office transactions in the National Capital Region in the first half reached 306,000 square meters, lower by 5% year on year.

Meanwhile, Ms. Anand said other segments within the commercial real estate sector, such as hotels and shopping malls, are performing better due to robust domestic consumption and a recovery in local and international tourism.    

“The BSP’s comprehensive collateral caps and stress tests for the real estate sector should lower ultimate losses. Since 2014, the Philippine central bank has adopted a preemptive stance to curb potential overheating in the real estate sector,” Ms. Anand said.

The BSP has mandated banks to cap real estate loans at 60% of their collateral values as appraised by an appraiser acceptable to the central bank.

The central bank has also adopted a real estate stress test limit of 25% write-off rates on exposure to the real estate sector so that banks may have enough capital buffers to be able to weather any property price corrections. — Keisha B. Ta-asan, Reporter

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