Real estate lending to require closer monitoring amid rising risks

Lending to the real estate sector will need tighter supervision amid emerging risks that could impact the financial system, a Philippine central bank report showed.

“Real estate loan (REL) exposures need closer monitoring amid evolving market conditions,” the Bangko Sentral ng Pilipinas (BSP) said in its latest financial stability report.

“The high-interest rate environment, shifting consumer preferences, remote work arrangements and recent government pronouncements banning Philippine offshore gaming operators (POGO) have implications on the sector’s loan quality.”

Latest data from the BSP showed Philippine banks and trust entities’ real estate exposure ratio rose to 19.75% as of end-December from 19.55% at end-September.

The central bank monitors lenders’ exposure to the real estate industry as part of its mandate to maintain financial stability.

Broken down, real estate loans increased by 7.9% year on year to P2.95 trillion at end-December. This as residential real estate loans climbed by an annual 9.6% to P1.1 trillion, while commercial real estate loans went up by 6.9% to P1.85 trillion.

The BSP also noted the rise in nonperforming loans in the real estate sector. Data showed the bulk or 62.5% of the NPL portfolio consists of commercial real estate.

“However, majority of the nonperforming RELs are residential RELs at 65.2% against commercial RELs at 34.8% as of September 2024,” it added.

The BSP also said that the rise in bad loans was driven by the mid- and low-cost housing segments as they account for a large share in residential loans.

“What does not show up as higher NPLs for commercial real estate are likely to be seen in the financial statements of real estate developers,” it added.

Joey Roi H. Bondoc, director and head of research at Colliers Philippines, said consumers could be struggling to pay back their loans, which is why developers are finding ways to offer more flexible payment terms.

“Based on anecdotes that we have been getting, a lot of buyers right now are scouting and looking for the most attractive payment terms or incentives, especially in the ready-for-occupancy (RFO) market,” he said in a phone call.

Mr. Bondoc said there is a “pretty substantial” number of unsold RFO units in the market, especially in the mid-income segment, which covers nearly 60% of unsold RFO units.

“Essentially, six out of 10 unsold RFO (units) are from the mid-income segment, which is heavily dependent on bank mortgages,” he added.

He noted some developers are extending downpayment terms among other measures to make financing more accessible.

“Banks should also be more cautious moving forward because the ready-for-occupancy (RFO) promos are getting sweeter, they’re getting extended, but you don’t want to see the market falling into that trap again,” Mr. Bondoc said.

The BSP noted the oversupply in the property market, especially in the condominium segment. It noted it would take 34 months for the current condominium supply to be sold.

“Despite recovery in prices, vacancies remain elevated amid the increase in residential real estate supply,” the central bank said.

The rise in new units is outpacing net take-ups in the secondary market, it added.

“It will be very interesting this first quarter because we’re seeing tepid launches. Developers are almost not launching new projects at this point,” Mr. Bondoc said.

OTHER RISKS

Meanwhile, the BSP also flagged other risks to the real estate sector.

“A potential risk is the buildup of in-house financing as reflected in the installment contract receivables of real estate developers. These contribute to revenues but also expose developers to credit risk.”

“Past due and impaired receivables remain elevated including in real estate developers exposed to POGOs,” it added.

While property developers are seeking ways to provide more enticing payment terms, Mr. Bondoc noted it is unlikely that there will be significant price reductions.

However, he noted that once the central bank continues cutting interest rates, this would result in lower mortgage rates.

“Probably that’s when we might start seeing low interest rates having a positive impact, kicking in and resulting in lower mortgage rates. Therefore, perhaps chipping in to greater take-up in the pre-selling sector.”

Housing prices rose by 6.7% year on year in the fourth quarter, according to the latest Residential Real Estate Price Index. This was a turnaround from the 2.3% decline in the previous quarter.

The Monetary Board cut the key rate by a total of 75 basis points last year.

While the central bank delivered a pause at its first meeting in 2025, BSP Governor Eli M. Remolona, Jr. has said it is still on an easing trajectory and has signaled further rate cuts this year.

Apart from lower interest rates, real estate loan demand could also be impacted by remittance flows, Mr. Bondoc said.

“I think that will be crucial because data from the central bank would also show that more remittance-receiving households are in fact allocating money for real estate requirements,” he said.

The BSP’s latest Consumer Expectations Survey also showed that 5% of households plan to buy or acquire real property in the next 12 months, up from 4.8% a year ago.

Source: Business World

The cyclical nature of the property sector

Over the last few weeks, discussions surrounding Metro Manila’s condominium sector have taken on a more cautious tone.

Concerns over a reported oversupply and extended absorption periods—owing to elevated interest rates and the exit of Philippine offshore gaming operators, among other factors—have prompted questions on the real state and health of this industry.

A necessary recalibration

Another perspective, however, explains the current situation as a “necessary recalibration”—one that steers the market away from speculation and toward long term sustainability.

After years of rapid expansion especially before the pandemic, this shift now offers an opportunity to reshape Metro Manila’s condominium landscape into one that is more resilient, more demand-driven, and more aligned with real end-user needs.

“Metro Manila’s condo oversupply signals a maturing and stabilizing real estate market. Increased competition is driving developers to prioritize quality, innovation, and differentiation. Rather than a setback, this oversupply acts as a natural filter, eliminating weaker projects and raising industry standards,” said Prof. Enrique M. Soriano III, executive director of W+B Advisory Group.

The current landscape, in fact, presents a number of silver linings: developers are enhancing their offerings, buyers are getting better and more attuned options, and investors are finding new opportunities in a market that is moving toward a more balanced environment.

In a real estate cycle, downturns are not roadblocks but are “resets”. And those who understand the nuances of this transition will be best positioned to thrive in the market’s next phase.

Emerging districts like Bridgetowne are expected to see sustained demand in premium residential space.

Long term value

Amid this scenario, developers are now “moving away from speculative projects and toward sustainable, mixed-use, and community-driven developments that emphasize long term value,” Soriano said.

At the same time, high-net-worth individuals, affluent empty nesters, and discerning buyers are also increasingly favoring well-located, low density, and amenity-rich developments.

This highlights the continued demand for premium properties in key business districts like Makati CBD, Bonifacio Global City (BGC), Ortigas Center and Cebu City, as well as emerging districts like Bridgetowne and Parklinks—while reinforcing the notion that prime-location investments remain among the safest bets.

Janlo delos Reyes, head of Research and Strategic Consulting at JLL Philippines, concurs, pointing out that such markets—Makati CBD and BGC—are well ahead in terms of market maturity.

“These two districts have continued to register solid take-up and stable price growth despite current market conditions,” he said, adding that other areas in the metro, which recorded periods of significant growth in the past, may still be considered as maturing.

“Nonetheless, we can expect the situation to stabilize over the long run,” delos Reyes added.

No signs of panic, just patience

Sheila Lobien, CEO of Lobien Realty Group Inc., meanwhile assured that they haven’t observed prevalent “speculative behavior” in the market.

“We sense no widespread panic among developers and those who have condo mortgages. There is no flood of second-hand condos for sale, increase in real estate non-performing loans (NPLs) or surge in repossessed condo inventory for sale in the market,” she explained.

The situation is thus unlike overheated markets, where investors offload properties en masse at the first sign of trouble.

Lobien even waxed optimistic in saying that demand is expected to “recover once benchmark rates are possibly down to 5 percent, which is expected this year or early next year. Recovery in demand is just a matter of time.”

Major CBDs are seen to continue thriving.

From oversupply to opportunity

Similarly, another expert stressed that the perception of an oversupply overlooks a crucial point: that the Philippine real estate market is no longer driven purely by speculative investments but by strategic, end-user-oriented growth.

Andoy Beltran, VP and head of Business Development at First Metro Securities Brokerage Corp., said this is a sign of a more disciplined market.

Beltran explained that in a maturing market, sustainable price growth and rental yield stability take precedence over rapid boom-and-bust cycles.

“A maturing market is characterized by developers responding more strategically to demand rather than building just for the sake of launching. The current supply situation indicates a shift from speculative development to data-driven, end-user-focused projects. This means inventory is better aligned with real demand, reducing the risk of oversupply-driven price crashes,” he said.

Instead of viewing the present inventory levels as problematic, seasoned investors and developers should recognize this as a cycle in which strategic positioning and patience will ultimately yield long term gains.

“The key is recognizing the transition points—when stabilization turns into the next growth phase,” Beltran added.

Source: Inquirer

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