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Villar’s ₱20 B AllHome IPO and its implications for the residential property markets

) Allan Tripon |

The Philippine residential property market is primed and ready for rapid growth in the coming years. In fact, the former senator Manny Villar — real estate mogul and the country’s richest man — is willing to bet ₱21 billion ($404 million) on the industry’s growth prospects as he prepares to go public with AllHome Corporation’s shares in an initial public offering (IPO) slated for the last quarter of 2019.

AllHome Corp. (HOME) Initial Public Offering (IPO)
AllHome Corporation is the home furnishing, improvements, and construction materials retail arm of the Villar group of companies. Incorporated in August 2013, the company was set up to cater to the diverse set of needs of contractors, architects, interior designers, and homeowners alike — truly making AllHome a “one stop shop” for all home building needs (SEE: About Us: AllHome — Everything a Builder, Contractor, or DIY Homeowner Needs, AllHome). Fast forward five years to 2018, the company is already a major player in the industry — with 25 stores nationwide generating total sales revenue and net income of around ₱7.19 billion ($144 million) and ₱511.4 million ($11 million) respectively.

Looking to capitalize on AllHome’s rapid growth in the past five years and its bright future prospects for the coming years, Manny Villar is planning to offer 1.3 billion ordinary shares to the public at a price of ₱16 per share. When it is all said and done, he estimates to generate over ₱21 billion pesos ($404 million) through this initial public offering. The company hopes to be listed and traded in the Philippine Stock Exchange (PSE) by October 1, 2019 — with a stock ticker of HOME (SEE: Home furnishing chain of Philippines’ richest man files for up to $404 million IPO, Reuters). Interestingly, AllHome’s planned share offer would actually be the first IPO for the year.

Another interesting thing to take note of is the fact that AllHome’s largest competitor, Wilcon Depot Inc. (WLCON), also went public just two years ago in 2017 and raised a total of ₱7.03 billion from its initial public offering (1.27 billion shares at ₱5.05 per share). Wilcon used the proceeds to scale up its business operations and bring up its store count to 52 outlets nationwide (SEE: Wilcon prices IPO at ₱5.05 per share, The Philippine Daily Inquirer). Today, WLCON boasts sales revenues and net income of ₱21.04 billion ($420 million) and ₱1.83 billion ($36 million) respectively, which is almost three times higher than that of HOME.

Similar to Wilcon, AllHome will also use its IPO proceeds in order to scale up its current operations. To be more specific, the ₱20 billion IPO proceeds will be utilized for the capital expenditures of building new stores. The company’s top management plans to add 19 new stores by the final quarter of 2019 and another 19 new outlets by 2020. Once these plans materialize, HOME will have 63 branches nationwide — rivaling that of Wilcon (SEE: AllHome to expand into new markets, The Philippine Star).

Growth Prospects of the PH Residential Property Market
Now, what does AllHome’s ₱20 billion initial public offering tell investors about the future growth prospects of the residential property market?

The demand for the products of AllHome — house improvements, furnishings, and construction material — is a derived demand based mostly on the housing market. In simpler terms, the demand for these products is directly based on the demand for residential property. Therefore, the mere fact that Mr. Villar is planning to spend ₱20 billion pesos in order to more than double AllHome’s store count by 2020 can only mean that he is extremely confident and optimistic that the residential property market will grow significantly in the near future. Otherwise, this IPO would not make sense.

There are three macroeconomic factors which support this optimistic view of the residential property market’s growth prospects: (1) Rapidly growing Philippine economy, (2) Robust government infrastructure spending, and (3) Expansionary BSP monetary policy.

Rapidly growing Philippine economy
Despite a disappointing first half, the Philippines is still on track to grow at an average rate of 6% to 7% and become one of the largest economies in the world within the next decade (SEE: Market hopeful that PH GDP will bounce back in the 2nd half of 2019, PropertyAccess). In fact, most economists forecast that the Philippine GDP is on pace to become a trillion dollar economy (₱50 trillion) by 2032 (SEE: IHS Markit: Philippines to be a trillion dollar economy by 2032, The Philippine Daily Inquirer). This rapid growth in the economy is expected to significantly improve the country’s per capita disposable income — allowing the population to spend more on big ticket items such as houses.

Robust government infrastructure spending
Several big ticket infrastructure projects — both inside and outside of the Metro — are expected to be completed within the next decade. Some of these projects include the ₱350 billion Metro Manila Subway System and the ₱225 billion Manila Malolos Clark Railway System (SEE: Infra expenditure to GDP ratio doubles to 5.5% in 2018, PropertyAccess). These projects, once they materialize should significantly increase the property prices within its vicinity.

Expansionary BSP monetary policy
In 2019 alone, the Bangko Sentral ng Pilipinas has cut its reverse overnight reverse repurchase rates (RRP) by a total of 50 basis points — 25 basis points in May and another 25 basis points in August. These rate cuts have brought down the BSP’s policy rates to 4.25% (after starting the year at 4.75%). Moving forward, BSP Governor Benjamin Diokno plans to trim the policy rates by another 125 basis points to its pre-2018 level of 3.00%. In addition to cutting the policy rates, the Bangko Sentral has also slashed the reserve requirement ratio (RRR) for banks to 18% last April. Diokno also plans to bring down these rates to less than 10% in the coming years (SEE: BSP cuts key rates; More to come in the near future, PropertyAccess).

All of these rate cuts are in line with Diokno’s plan to inject liquidity into the financial markets and bring down the market interest rates. Lower market interest rates and high liquidity should then in turn heavily benefit the residential property market through higher asset prices.

(Cover photo from allvalue.com.ph)