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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

THE BIG SCARE

Manila investors' fears of a repeat of Bangkok's property meltdown will not be easy to banish

By Sangwon Suh and Assif Shameen


HOLD YOUR BREATH. THAT has been good advice for investors in the Manila bourse these days. Especially those who bought shares in tycoon Andrew Tan's Megaworld Properties and its subsidiary Empire East Land Holdings. On April 22, both these stocks fell about 30%, hit by rumors that Megaworld was about to declare bankruptcy. The bourse itself lost a tenth of its value in six days, amid fears that the Philippine property market was about to go the way of Thailand's famously punctured bubble.

With investors pulling out in droves, one would have to possess nerves of steel not to join the exodus. Well, those who swallowed hard and bought in at the bottom saw a quick pay-off. On May 6, the Manila composite index leapt nearly 5%, putting a brake on the recent slide. Megaworld surged 19.3% that day, and Empire East 13%. Ayala Corp., which controls developer Ayala Land, rose 21%. The three stocks were leading gainers in Asian trading that day. But seasoned market players know the roller-coaster ride is not over. After all, the two words at the center of the recent loss of confidence are still around: property and Thailand.

The Philippine real-estate market has boomed over the past few years, propelled by the economy's rebound, foreign investment and easy credit. Prices have skyrocketed and banks have been handing out property loans at frenzied levels. Then along came Thailand's recent real-estate meltdown: a huge property glut in the overheated market collapsed prices and brought dozens of finance companies to their knees.

DEVELOPERS DIG A HOLE

ASEAN property-stock indexes have sagged in recent months amid Thailand's real-estate and lending woes

(Source: Datastream)

In the wake of Bangkok's bust, investors and analysts shuddered around the region, wondering who would be next. With its phenomenal property spurt since 1994, the Philippines started to look awfully similar to Thailand before the crash. Disappointing first-quarter corporate results didn't help: lower-than-expected earnings seemed to indicate economic woes ahead. As in Bangkok, investors in Manila panicked.

Built by Tan on high-profile, high-end, high-rise condo and office projects, Megaworld and Empire East seemed to represent the perceived weakness of Philippine real estate. Among the star performers in 1996, the two stocks were dogged this year by persistent rumors of financial problems. Megaworld, it was whispered, had defaulted in obligations to some banks and top contractor DMCI Holdings, which denied any problem.

Besides the bankruptcy talk, there was speculation that a top officer of Megaworld had flown the coop with company money. The talk apparently began with a holiday in Thailand by Tan's family. The Securities and Exchange Commission and the Philippine Stock Exchange have formed a panel to investigate the rumors and who might be behind them. Back in Manila, Tan said "Empire East is in a very strong and stable financial condition," with assets of $450 million and $280 million in stockholders' equity, against bank debt of $31 million. He declined to be interviewed for this story.

Even without the rumors, however, analysts found reasons to be concerned about Megaworld. They pointed to the sheer number of its high-rise projects: 15 are ongoing, while five more are planned, bringing the total cost to 40 billion pesos ($1.5 billion). "Megaworld raised only [$19 million] from its [initial share offering] and demands a 50% downpayment on its pre-selling for the units," says Noel Reyes, vice president for research at Anscor Hagedorn Securities. "With the slowdown in high-rise sales," he contends, "Megaworld clearly does not have enough cash to finance its projects."

Others think stories of cash-flow problems have been blown out of proportion. "[Megaworld] is not the healthiest company in the world, but to say it will go bankrupt soon and there are lots of other companies like it is an exaggeration," says Maria Ivy Cayayan, property analyst for Philippine Asia Equity Securities. "If you look at their balance sheet, you could argue that there is some creative accounting, but then, there is a bit of that in every property company. I have looked at their balance sheet over and over, and I can't find symptoms of a company about to go bankrupt."

If the state of Megaworld and Empire East is not as bad as it appears, what about the Philippine property market? It's much the same story: while there is no reason to panic, the real-estate sector, like two of its hottest players, has seen dizzying growth and should perhaps ease to a more sustainable pace. Iva Gutierrez, property analyst for DBP Daiwa Securities in Manila, believes real estate is undergoing a market correction: "After a few years of very strong growth, we are seeing prices stabilizing, supply catching up with demand, and property companies' earnings growth slowing to more realistic levels."

Overall, many analysts remain upbeat about the Philippine economy's prospects. "In 1997, there will be sustained growth due to robust macroeconomic trends, stock bull runs, improving credit rating and infrastructure developments," predicts Frederick Santos of the realty appraiser Cuervo. Bankers association president Rafael Buenaventura points out that the Philippines has had just two years of 6% growth, against a decade of 10% gains for Thailand: "The Philippines still has a long way to go." Joseph Yap, executive VP of developer Filinvest Land, concurs: "The property bubble has not burst." Filinvest raised its land selling prices 5% to 10% this year, on top of a 25% hike last year. He blames the current scare on "wrong perceptions."

It is widely accepted, however, that there is a glut developing in lucrative high-end condos and offices. Total available office space in Metro-Manila is expected to double between 1997 and 1999. Scenarios forecast vacancies in the capital area reaching between 15% and 30% of available space by the end of 1999, up from 5% to 10% today. An estimated 21,000 new condominium units will enter the market in 2000 (last year: 4,000 units).

Still, top economist Bernardo Villegas says: "Manila has a competitive edge in the global competition for office-intensive sectors because of an abundant pool of highly educated managers or knowledge workers." Analysts also see little problem with medium- and low-end housing; they add that the overall housing situation is not as bad as doomsayers think.

"Oversupply in the high end will filter down -- but not tomorrow morning," says Gutierrez. "There is still high demand in low- and medium-end housing, keeping up with supply as the economy is still growing." Cecil Castro of Anscor Hagedorn agrees: "It would take at least four years -- probably more, if the economy doesn't slow -- before supply outstrips demand in medium-end housing."

So there won't be a Thai-style meltdown? Probably not. "You can't compare Manila to Bangkok," argues Cayayan. "In Thailand the government acted too late, the building boom continued long after the glut had developed, and demand is such a miniscule portion of supply." Gutierrez points out that Thailand, unlike the Philippines, had very low booking fees for property sales, which made it cheap for speculators to drop a deal. In the Philippines, deposits range from 20% to 30% of the price for most buyers.

Gabriel Singson, governor of the Philippine central bank, cites yet another factor: real-estate loans make up less than 11% of total credit, compared with 30% in Thailand. "What caused the problem in Thailand," he says, "is the overexposure of finance companies to property development. Here, finance companies don't have that kind of overexposure."

Nevertheless, following a cautionary report by New York credit-rating agency Moody's Investors Service about the sizable property loans of Philippine banks, the Bangko Sentral last week announced limits on real-estate credit. Financial institutions must now keep their loans to the property sector -- including developers and homebuyers -- to no more than 20% of total loans. According to the central bank, only two local institutions currently exceed the 20% limit. Banking sources say, however, that at least one bank's exposure was closer to 30%.

Speculative fever may already be receding. Just look at the drop in pre-completion sales of offices and condos. Eighteen months ago, a new condominium complex would be sold out soon after its launch. But now, projects put on the market just before last Christmas are still only 50% pre-sold, despite aggressive marketing. Castro now worries that the Bangko Sentral's market-cooling measures may have been overdone and have scared away genuine homebuyers.

But the real worry is whether investor confidence can be restored before the damage becomes irreparable. Perceived property woes affect the stock market, which in turn dampens the real-estate sector. The resulting vicious cycle of negative sentiment could eventually lead to a self-fulfilling prophecy of a disaster. People stop buying homes and offices, the banks call in loans, and developers, hit by poor sales and dwindling credit, go under -- making the public and the lenders even more jittery. To calm investors, President Fidel Ramos spoke publicly in defense of the real estate and financial sectors, before leaving on May 6 for a tour of the Americas. Still, many fund managers think the bourse may remain a laggard for the next 12 months or so.

The larger question raised by the property scare is whether it is healthy, at this critical stage in the nation's economic recovery, for so much of its resources to go into the cement, glass, marble and steel of luxury edifices instead of more productive projects in infrastructure, manufacturing and social development. Healthy or not, Raphael Manalaysay of SocGen-Crosby UBP Securities thinks that kind of resource allocation is unavoidable in a recovering economy. "People initially pour money into sectors where they see the most upside," he explains. "Property is almost always the first thing they look at."

Manalaysay feels that the Philippines may have become a victim of its own economic optimism. "Most Filipinos have not seen such strong growth and sustained property boom in their lifetime," he says. This can lead to two contrasting reactions, both undesirable. One is the excessively bullish sentiment of investors, lenders and developers who believe the party will never end. The other is the exact opposite: people who cannot explain the boom become overly skeptical and predict an imminent collapse. Hopefully, Filipinos can find a middle road to steady, if not always spectacular, growth.

-- With reporting from Wilhelmina Paras/Manila


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