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How the escalating US-China trade war can benefit the PH property markets

) Allan Tripon |

Over the past twelve months, the United States and China have been embroiled in a bitter trade war, with the United States levying over $550 billion worth of tariffs on imported Chinese Goods. In response, Chinese President Xi Jinping has ordered for $185 billion worth of retaliatory tariffs to be imposed on imports from the United States. As the trade tensions between the two global superpowers continue to heat up, investors from around the globe have been looking for attractive alternative investment opportunities, outside of the United States and China, wherein they can relocate their funds.

One of the attractive alternative investment opportunities that these investors have identified, it seems, is the Philippine property market. The attractiveness of the country’s real estate industry is anchored on the confluence of three key macroeconomic variables: (1) Robust economic growth potential, (2) Low levels of interest rates, and (3) Planned big ticket infrastructure spending.

Robust Philippine Economic Growth Potential
Despite the lackluster growth in the first half of 2019, many analysts still believe that the economy will regain its momentum in the latter half of the year and regain its position as one of the fastest growing markets in the world (SEE: Market hopeful that PH GDP will bounce back in the 2nd half of 2019, PropertyAccess).

Even with the slow start for 2019, the country is still on pace to double its gross domestic product to around $700 billion within the next six years (SEE: GDP seen doubling by 2026 as Philippines “set for dynamic growth”, The Philippine Star). By 2032, the Philippine economy is poised to breach the one trillion dollar mark (SEE: HIS Markit: Philippines to be a trillion dollar economy by 2032, The Philippine Daily Inquirer). These projections imply a GDP growth rate of between 6% to 7% year on year for at least the next decade.

The projected economic growth in the coming years is expected to translate to higher levels of personal disposable income. Industry estimates show that annual per capita income is expected to reach approximately $5,000 by 2030. For comparison, annual per capita income in 2018 was only at around $2,500.

The overall growth of the economy is a key driver for capital appreciation due to two main reasons. First, higher economic growth often translates into higher levels of disposable income of individuals. This increase in personal income can drive the demand for residential real property such as houses and condominium units. It also drives final consumption, which in turn drives the demand for commercial property. Second, higher economic growth encourages more investment – leading to higher demand for office spaces and warehouse spaces across the country.

Low Interest Rates
Ever since becoming the governor of the Bangko Sentral ng Pilipinas (BSP), Benjamin Diokno has not been shy about his intentions to reduce the tightness in the financial market through cuts in some of the key banking rates. True to his word, he has already slashed the policy rates twice in 2019, with a 25 basis point in April and another 25 basis points in early August (SEE: BSP cuts key rates; More to come in the near future, PropertyAccess).

Currently, the reverse overnight repurchase rate – the main policy rate of the BSP – stand at around 4.25%. Moving forward Governor Ben Diokno plans to bring this figure down even further to 3.00% -- thus, fully reversing the 175 basis point rate hike which occurred in 2018. Aside from the repo rates, Diokno is also looking to reduce the reserve requirement ratio of banks to below 10%. For comparison, the reserve ratio requirement currently is at 18%, which is the highest in the Asia Pacific region.

Low interest rates benefit real estate investors in three main ways. First, it allows them to finance their asset acquisition using cheap debt. Second, interest rates generally have an inverse relationship with asset prices. Meaning, as rates go down, the value of assets such as land increases. Finally, low interest rates also improve the liquidity of real estate assets – allowing investors to more easily sell their property. This phenomenon is due to the fact that prospective buyers often use debt to finance their acquisition.

Planned Big Ticket Infrastructure Spending
Finally, the third key factor which could ultimately make or break the momentum of the country’s rapidly growing real estate market is the success – or failure – of the current administration’s “Build Build Build” initiative. Currently, there are multiple big ticket infrastructure projects worth billions of pesos in the pipeline which, when completed, will have a significant impact on property values both within and outside of the National Capital Region (NCR). Three of these projects include the (1) Bulacan International Airport, (2) Metro Manila Subway System, and (3) Manila Malolos Clark Railway.

P734 B Bulacan International Airport Project
The proposed Bulacan International Airport – to be built and operated by Ramon Ang’s San Miguel Corporation – is a world class airport which could accommodate over 100 million passengers per year. For comparison, the Ninoy Aquino International Airport can only handle 31 million annually (SEE: DoTr taps San Miguel to build P734B Bulacan International Airport Project, PropertyAccess).

P350 B Metro Manila Subway System
The proposed Metro Manila Subway System is a world class train system, which would connect the entire capital by train. Once completed, it will run for 36 kilometers and will connect seven cities and three central business districts through fifteen stations (SEE: Infra expenditure to GDP ratio doubles to 5.5% in 2018, PropertyAccess). The government hopes to have the subway fully operational by 2025.

P225 B Manila Malolos Clark Railway
The proposed Manila Malolos Clark Railway is a 106 kilometer long railway system – with 17 stations – which will connect the Clark Freeport Zone, Bulacan, and Tarlac with the National Capital Region. Once completed, the travel time between Manila and Clark will be cut to just a fraction under an hour (SEE: Clark: The Next Metro, PropertyAccess). This railway project is in line with the government’s effort to stimulate economic development in the neighboring provinces of Metro Manila.

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