Wednesday, June 25, 2008 [ manilatimes.net ]
ANALYSIS
By Likha C. Cuevas-Miel, Reporter
SOARING prices of food and oil, accompanied by rising interest rates and a slowing economy are pushing real-estate developers to scale back their expansion plans, putting a brake on what has so far been one of the hottest property sectors in Asia.
Keppel Philippines Properties Inc. (KPP) said it is reviewing the market “as of now there are sudden concerns about the economy so we would like to see how the economy would pan out and then make some decisions on expansion. Construction cost has risen sharply. We were very bullish at the beginning of the year but given the recent developments, we are now getting a bit cautious,” Lee Foo Tuck, KPP vice president for finance, told reporters on the sidelines of the firm’s stockholders’ meeting.
Lee said the expansion of Phase 3 and 4 of its middle income subdivision Palmdale Heights in Pasig City is still on the table, with the company “evaluating the situation” regarding its other plans. The company told its shareholders that “subject to market conditions” KPP may participate in the development of the 600-hectare Metro North Township in San Jose del Monte, Bulacan.
“What I can say is if the price of steel continues to go up, it’s going to cause us a lot of concern. The only way we can overcome this is to increase our selling price. We will have to look at whether the market can take the increase. We are looking at what the market can take and the indications are there. Market prices have not risen as sharply as construction costs,” he said.
Recently, Baosteel, China’s largest steelmaker, paid Anglo-Australian Rio Tinto almost double the price for iron ore—the basic raw material for steel—sparking fresh concerns about skyrocketing steel prices around the world.
Earlier, Hans Sy, SM Prime Holdings Inc. (SMPH) president, said the company is downscaling plans for its new malls as it anticipates a slower economic expansion. The executive of the country’s biggest mall operator and developer said that instead of building malls with sizes that could accommodate customer traffic good for five years, SMPH is opting for a size good for three years.
“We are reviewing the sizes, downsize a little. As the revenues come in we can continue the expansion. Normally, they would make a study that in a certain area would need a 60,000-square meter mall. Before we would have built a 100,000-square meter [mall] to anticipate the growth for five years. Instead of spending the capital right now [in a few projects], we sort of spread it out,” Sy said.
Megaworld Corp. is also rethinking its development priorities by pushing back its joint venture project with Fil-Estate Land Inc. The property unit of the Alliance Global Group Inc. said it would prioritize projects with market demand, such as middle income housing, a safe bet for property firms during tough times.
“We temporarily put that on hold. What is selling right now are the primary homes. Let’s say you already have a house with the way things are, are you going to buy an hacienda? You think twice,” Kingson Sian, Megaworld executive director, said.
Eton Properties Philippines Inc. is also pacing its development projects depending on the amount and price of raw materials it could lock in. The company already bought 10,600 metric tons of steel from local sources to cover for its first four projects this year. These include TERG, Eton Baypark, Eton Cyperpod Corinthian and One Archer’s Place.
Protecting the bottom line
J. Erwin Balita of SB Equities Inc. told The Manila Times that it is hard to gauge the behavior of commodity prices these days making the general economic outlook uncertain. Companies are protecting themselves from this uncertainty, which would minimize the on their bottom lines in the long run.
Companies have also learned their lessons from 1997, Ricardo Puig of ATR KimEng Securities, said. “It is a prudent move on the part of the companies. They are gauging the demand since they might end up with a lot of supply. We don’t know if this [economic situation] is just transitional or may last,” he said.
The Asian financial crisis of a decade ago have taught companies to observe caution. Building low-rise clusters of buildings can bring faster revenues since these are more saleable so property firms are shifting to these projects, and postponing high-rise developments.
“If they continue to accelerate without taking into account the recent developments, they may become headless chickens in the long run,” Puig said.
Despite tough times, the property firms remain bullish about revenues. KPP said it hopes that revenues would grow this year as the need for homes exists. The same goes for Eton, which has yet to see demand for its projects slowing despite the price hikes it implemented.
Sian of Megaworld also said the situation today is different from a decade ago given that interest rates are still low, and banks are still willing to lend. He said lenders recently slashed their nonperforming loans, giving them elbowroom to take on more accounts.
“Demand is still rising, the basic need for homes is still there given that the population is rising and people have money to pay with the help of relatives abroad,” Puig said.
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