“Right now, we believe that there is no asset bubble in the property sector. The increase in property prices and the growth in the sector has essentially been demand driven,” BSP Governor Amando Tetangco Jr. told participants of the 2015 Public Governance Forum (organized by the Institute for Solidarity and Institute of Corporate Directors, and which forum concluded Wednesday, October 21).
He added that monetary authorities continued to monitor the loans extended by banks to the property sector through a quarterly stress test. The Monetary Board required stress tests for banks to determine if their capital will be enough to absorb credit risk that may arise from their exposure to the property sector.
“Historically that is a source of problem. Not that we have that problem now but what we want is try to avert a potential problem in the property sector,” Tetangco said.
The BSP earlier explained that universal, commercial, and thrift banks would need to meet a capital adequacy ratio of 10% of their qualifying capital following the stress test results.
Moreover, universal and commercial banks, along with their thrift bank subsidiaries will also need to keep a Common Equity Tier 1 level of at least 6% of their qualifying capital. Stand-alone thrift banks, meanwhile, are required to maintain a Tier 1 ratio of 6% of their qualifying capital.
Data from BSP showed banks’ exposure to real estate increased 17.3% to P797.67 billion ($17.19 billion) in end-July 2015 from P685.38 billion ($14.76 billion) in the same period last year.
Results from BSP’s Department of Economic Research’s third quarter 2015 Senior Bank Loan Officers’ Survey also showed a net tightening of overall credit standards for commercial real estate loans for the 13th consecutive quarter based on the diffusion index approach.
The department’s Deputy Director Dennis Lapid said that respondent banks attributed the net tightening of overall credit standards for commercial real estate loans to perceived stricter oversight of real estate exposure of banks by the central bank.
“In particular, respondent banks reported stricter collateral requirements and loan covenants along with wider loan margins, reduced credit line sizes, shorter loan maturities, and increased use of interest rate floors for commercial real estate loans,” he said.
Lesson learned
Banks have already learned from the Asian financial crisis in 1997 and 1998 and that they have have changed their business models, Tetangco said.
Unlike before, he said property developers are more conservative in their construction activities.
He added the country’s business process outsourcing (BPO) sector continued to provide strong demand for office spaces, while more Filipinos are opting to live near their workplace sustaining the robust demand for condominium units.
The BSP is set to release a residential real estate price index (RREPI) later in the year.
As early as 2014, the BSP started considering launching the index that would track property prices in Metro Manila and nearby provinces. The monitoring would be expanded to cover other key cities in the country.
The RREPI would also help the central bank in addressing concerns of a “bubble” in the country’s booming residential real estate sector brought about by the improving purchasing power of Filipinos.
The BSP stepped up its watch over the real estate sector as early as 2012 by ordering banks to disclose more comprehensive reports on their exposures to property industry. – Rappler.com