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High house finance rate pushes sales

BY AMADO P. MACASAET
[ Malaya.com.ph ] March 6, 2012

DMCI is one property developer that does not borrow loans from any bank. Yet it is able to sell its middle-income and low middle-income apartments before construction is completed.

Joseph Ramil B. Lombos, the company’s senior vice president in charge of finance and operations, told Malaya Business Insight in an exclusive interview late last week that 80 percent of the apartments it sells are "house-financed" at 19 percent interest for a 10-year repayment period or about three times the prime rate in the present low interest rate regime.

Borrowers who pay in five years are charged 15 per cent.

Lombos said the default rate of borrowers is around 6 per cent while the property development sector is almost 12 per cent.

The company, according to Lombos and Elmer Civil, senior vice president for design and construction, must produce between P400 million and P600 million monthly as cash flow requirements. Yet it does not borrow from banks, not even for bridge financing.

Obviously, DMCI is able to generate enough cash for its operating requirements. Otherwise, if it had been borrowing it would pay an average interest cost of 6 per cent since the company is a prime client.

Instead of paying interest costs, DMCI makes money charging interest on its clients who buy the units before the buildings are constructed. It is also obvious that the buyers on installment pay on time although the default rate is 6 percent.

Asked how this "phenomenon" can happen in a regime of low interest rate, Lombos replied that DMCI may have two advantages competitors do not have.

The first, which Lombos said is most crucial to buyers who pay in advance, "is keeping your word to them."

Lombos pointed out that the other reason buyers are attracted to have the company finance purchases of DMCI apartments is the relatively easy way of getting approval.

He pointed out that in most cases, all the company requires is an identification card and an internal tax return. The ITR, he said, tells the capability of the buyers to pay.

He did not exactly say it but he probably believes that the numbers in the ITR are understated. They have the capability to pay.

Civil explained that the apartments pre-sold to the low and middle market are delivered at least three months ahead of the promised date.

The unsullied reputation of David Consunji, founder and principal stockholder of DMCI, who is still very active in horizontal and lateral construction, also helps a lot in keeping the reputation of the company.

Civil pointed out that at age 90, Consunji continues to visit the property projects. He hardly gets out of his car during such visits but, Civil said, he makes sure that the engineers gather around him and make them listen to the virtues of keeping the promise of delivery dates without sacrificing the quality of the apartment buildings.

He pointed out the two- and three-bedroom units DMCI promised to deliver to the buyers in September 2012 were finished in December 2011.

"We keep our word," he said, explaining "Mr. Consunji’s wealth, apart from a thick pile of money, is his word."

The apartments that DMCI builds are comparatively modest, according to Civil. It found itself in property development in 1999 when it discovered that it had to let go of a large number of its 20,000 workers.

Like the rest of the businesses, DMCI was hit by the Asian contagion which took its toll in the Philippines in late 1997. Its main business then was public and private construction.

To be able to keep as many workers as it could, DMCI started building in 1999 two-bedroom walk-up homes in its own 2.5-hectare property in Taguig City. The company figured the apartments would easily go for P500,000 each but discovered that the market was willing to pay between P700,000 and P1 million.

Three years later, from that start in property development, DMCI now has 26 projects and has built 3,400 units for the middle-income market.

The workforce, however, has been reduced to 3,400.

There are ancillary businesses generated by property development. Civil said the owners of the new apartments buy wood imported from Malaysia for cabinets and doors.

The hardware stores also make modest business selling door knobs, locks and key latches and a few more necessities.
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