Has the Philippine Real Estate Bubble Already Burst?

Last May 2013, Eduardo Francisco, the President of BDO Capital and Investment Corporation - the country's largest investment house, urged the BSP to "tighten its watch over over lending activities by nonbank entities, including real-estate developers, to ensure that the country would avoid a bubble in the property market."  He said that "the major banks in the country have kept their credit standards unchanged and fears that banks might be over-aggressive in lending, especially to individuals trying to secure real-estate loans, were unfounded.  However, he also emphasized that non-bank entities, such as real estate developers, have also increased their real estate lending to individuals and that these activities should also be assessed by the BSP.

One such non-bank entity is the low-cost residential developer 8990 Holdings Inc (also known by its ticker "HOUSE").  HOUSE extends financing to the individual buyers of its residential units.  The financing is made in the form of Installment Contract Receivables or "...receivables from the sale of residential houses and lots, condominium units and timeshares which are collectible in monthly installments over a period of 2 to 25 years.  Receivables bear annual interest ranging from 8.5% to 20% for the period ended September 30, 2013 and 2012.  Titles to real estate properties are transferred to the buyers upon full payment of the contract price."

Based on its unaudited financial statements as of September 30, 2013, HOUSE has Php 8.166 billion of Installment Contract Receivables, which represents more than a years worth of revenue.

8990 Holdings Inc.
Installment Contract Receivables/Sales
In Php
	Audited	Unaudited
	December 31, 2012	September 30, 2013
Installment Contract Receivables	4,672,109,197	8,165,199,990
Sales*	2,888,596,423	4,367,429,533
Days Sales	437	505
* Sales Figures for 2012 are for the Nine Months ended September 30, 2012

Installment Contract Receivables (ICR) of HOUSE have jumped considerably in 2013, rising 74.76% from Php 4.672 billion as of December 31, 2012 to Php 8.165 billion as of September 30, 2013.  The bulk of the ICRs, around Php 7.110 billion are noncurrent, leaving Php 1.055 billion as current.

8990 Holdings Inc.
Installment Contract Receivables, Current and Noncurrent
In Php
	Audited	Unaudited
	December 31, 2012	September 30, 2013	% Change
Current	266,090,280	1,054,802,352	296.41%
Noncurrent	4,406,018,917	7,110,397,638	61.38%
Total	4,672,109,197	8,165,199,990	74.76%

Approximately 4.65% of the ICRs as of September 30, 2013 have been classified as past due.  The bulk of the increase in past due ICRs came from ICRs that were delinquent for over 90 days.  The 90-day delinquency rate jumped roughly 500% in the nine months since December 31, 2012.  ICRs over 90 days past due increased from only Php 39.365 million on December 31, 2012 to Php 236.008 million as of September 30, 2013.  Although this is a very substantial increase in such a short span of time, the "Group did not recognize any impairment losses on its trade and other receivables for the period ended September 30, 2013 and 2012."  

8990 Holdings Inc.
Installment Contract Receivables, Past Due but Not Impaired
In Php
	Audited	Unaudited
	December 31, 2012	September 30, 2013	% Change
Less than 30 days	76,438,532	102,996,723	34.74%
31 - 60 days	31,128,884	30,426,033	-2.26%
61 -90 days	26,930,290	10,163,708	-62.26%
Over 90 days	39,365,086	236,008,574	499.54%
Total	173,862,792	379,595,038	118.33%

The sudden jump in very delinquent ICRs indicates that credit quality of the portfolio may not have been very good to begin with.  Based on the payment terms described on HOUSE's website, it seems that buyers can basically put almost no money down to purchase a residential unit.  Thus, buyers have little or no equity in their properties and can easily walk away the moment they can no longer service their debt obligations.

8990 Holdings Inc.
Payment Terms
Pavia Regular Unit Price
In Php
	Amount	%
Reservation Fee	5,000	0.59%
CTS Gold Processing Cost:	15,000	1.76%
Loan Value:	830,000	97.65%
Total Package	850,000	100.00%

In environment of constantly rising housing prices, this payment scheme can entice a lot buyers to buy and "flip" a property to another buyer for a quick profit.  Indeed this has been the case for a number of years:

Buyers who cannot pay the loan amortization can sell their properties into a rising market, thus keeping delinquencies to a minimum.  But the moment housing prices stall or financing becomes difficult, delinquencies can accelerate at a rapid clip.  This is what happened in the US subprime housing market and it could happen as well in the Philippines.

In the case of HOUSE, the company retains the title to the real estate properties until the buyer has fully paid the contract price, removing the need for the company to undergo an expensive and prolonged foreclosure process on the property.

If delinquencies continue to increase at an alarming pace, the company may have to recognize an impairment of a significant chunk of its ICRs.  According to the company's guidelines on accounting estimates, it:

"reviews its receivables at each reporting date to assess whether an allowance for impairment losses should be recorded in the consolidated statement of financial position and any changes thereto in profit or loss.  In particular, judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required.  Such estimates are based on assumptions about number of factors.  Actual results may differ, resulting in future changes to the allowance."

As it currently stands, management has determined that there should be no provision for credit losses on its ICRs.  But that may change once the delinquencies are too large to ignore.  And when that happens, the resulting adjustment to profits may eat into the stockholders equity of the company.  

As of September 30, 2013, ICRs represent 134.98% of stockholders equity, an indication of the risk  the company has undertaken to finance the sale of its real estate properties.

8990 Holdings Inc.
Installment Contract Receivables/Stockholders Equity
In Php
	Audited	Unaudited
	December 31, 2012	September 30, 2013
Installment Contract Receivables	4,672,109,197	8,165,199,990
Stockholders Equity	3,948,015,021	6,049,131,256
Installment Contract Receivables/Stockholders Equity	118.34%	134.98%

This risk, by itself, is not alarming.  But the company also carries another risk intrinsic to its business: a decline in real estate values.  

As of September 30, 2013, the companies real estate properties had a combined value of Php 5.827 billion or 96.34% of the company's stockholder's equity.  

8990 Holdings Inc.
Real Estate/Stockholders Equity
In Php
	Audited	Unaudited
	December 31, 2012	September 30, 2013
Real Estate Inventories	2,040,532,596	2,081,143,259
Land held for Future Development	1,010,474,241	3,605,811,050
Investment Properties	142,365,067	140,860,631
Total Real Estate	3,193,371,904	5,827,814,940
Stockholders Equity	3,948,015,021	6,049,131,256
Real Estate/Stockholders Equity	80.89%	96.34%

Thus, a real estate downturn has the potential to deliver a "double whammy" to the company's bottom line:

1. An Impairment of Installment Contract Receivables
2. A Decline in Real Estate Values

Just a 10% across-the-board decline in both ICRs and Real Estate Values  can wipe out as much as 23% of the company's capital.  A 20% decline will double that to almost 50% of the company's capital, a virtual death sentence for the company.

8990 Holdings Inc.
ICRs & Real Estate/Stockholders Equity
In Php
	Audited	Unaudited
	December 31, 2012	September 30, 2013
Installment Contract Receivables	4,672,109,197	8,165,199,990
Real Estate	3,193,371,904	5,827,814,940
Total	7,865,481,101	13,993,014,930
10% Losss	786,548,110	1,399,301,493
Stockholder's Equity	3,948,015,021	6,049,131,256
Impact of 10% Loss	19.92%	23.13%

Nevertheless, the company remains upbeat about its prospects and has, in fact, added around Php 2.2 billion to its existing landbank.  The company has hedged this expansionary bet with a follow-on offering of shares that is estimated to bring in Php 6.35 billion in cash to bolster the company's capital base.  However, the company's major stockholders and officers plan to cash out on Php 4.7 billion in shares in the same follow-on offering, bringing the company's free float of shares to the 20% level.

Do they know something we don't? That remains to be seen.

Charting the US Jobs Recovery State by State

Yesterday, in her first testimony to the House Financial Services Committee as Chairman of the Federal Reserve, Janet Yellen said that:

"...recovery in the labor market is far from complete...Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed and the number of people who are working part-time but would prefer a full-time job remains very high...These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market."

Although the US economy is a year or two away from recovering the millions in jobs lost since the economic recession began, the rate of job growth has been anemic and has not kept pace with population growth (See chart from the blog Calculated Risk below).

The sharp drop in the Unemployment Rate, from an average annual peak of 9.9% in 2009 to only 6.6% as of January 2014, was mainly a result of people dropping out of the labor force altogether.  The Labor Force Participation Rate currently stands at 63% as of January 2014, a level not seen since the late 1970s when many women started entering the workforce in droves.

The Civilian Employment to Population Ratio (E/P Ratio), which is a better indicator of true labor market conditions because it includes people who have dropped out of the labor force, has barely budged from its lows of 58.3% as of 2009 and 2010.

But how have these measures played out on a state-by-state basis?  Both Labor Force Participation and Unemployment rates have dropped across the board on a state-by-state basis and with a few exceptions, still continue to drop.  But in terms of the Civilian Employment to Population Ratio (E/P Ratio), some states have bottomed out and are starting to come off their lows.

The states that have bottomed out are as follows:

1.  California:

The E/P Ratio for the golden state bottomed out at 56% in 2011 and now stands at 57.1% as of December 2013.

2.  District of Columbia:

DC's E/P Ratio also bottomed out at 60.8% in 2011 and now stands at 62.6% as of December 2013.

3.  Florida:

Florida's E/P Ratio bottomed out at 54.5% in 2010 and now stands at 55.9% as of December 2013.

4. Hawaii:

Hawaii's E/P Ratio bottomed out at 57.6% in 2012 and now stands marginally higher at 57.9% as of December 2013.

5.  Idaho:

Idaho's E/P Ratio  bottomed out at 59.5% in 2011 and now stands at 60.2% as of December 2013.


6. Indiana:

Indiana's E/P Ratio bottomed out at 57.3% in 2010 and now stands at 58.4% as of December 2013.

7: Iowa:

Iowa's E/P Ratio bottomed out at 65% in 2012 and now stands at 66.4% as of December 2013.


8. Louisiana:

Louisiana's E/P Ratio bottomed out at 55.2% in 2011 and now stands at 55.8% as of December 2013.


9.  Maine:

Maine's E/P Ratio bottomed out at 60.0% in 2010 and now stands at 61.2% as of December 2013


10.  Michigan:

Michigan's E/P Ratio bottomed out at 53.6% in 2010 and now stands at 54.9% as of December 2013.


11. Missouri:

Missouri's E/P Ratio bottomed out at 59.5% in 2009 and now stands at 60.4% as of December 2013.


12. Montana:

Montana's E/P Ratio bottomed out at 59.3% in 2011 and now stands at 60.3% as of December 2013.


13. Nebraska:

Nebraska's E/P Ratio bottomed out at 68.1% in 2010 and now stands at 68.9% as of December 2013.


14. New York:

New York's E/P Ratio bottomed out at 56.4% as of 2011 and now stands at 56.9% as of December 2013.


15: North Carolina:

North Carolina's E/P Ratio bottomed out at 56.5% in 2011 and now stands at 57.0% as of December 2013.


16. North Dakota:

North Dakota's E/P Ratio bottomed out at 69.1% and now stands at 69.6% as of December 2013.


17.  Oklahoma:

Oklahoma's E/P Ratio bottomed out at 58.5% in 2010 and now stands at 58.7% as of December 2013.


18. Pennsylvania:

Pennsylvania's E/P Ratio bottomed out at 58.2% in 2011 and now stands at 58.6% as of December 2013.


19. South Carolina:

South Carolina's E/P Ratio bottomed out at 53.7% in 2011 and now stands at 54.2% as of December 2013.


20. Texas:

Texas E/P Ratio bottomed out at 60.6% in 2011 and now stands at 61.0% as of December 2013.


21. Utah:

Utah's E/P Ratio bottomed out at 62.9% in 2011 and now stands at 66.0% as of December 2013.


22. West Virginia:

West Virginia's E/P Ratio bottomed out at 49.8% in 2011 and now stands at 50.2% as of December 2013.


23. Wisconsin:

Wisconsin's E/P Ratio bottomed out at 63.3% in 2012 and now stands at 63.7% as of December 2013.


The E/P Ratio of a few states have moved sideways off their lows.  The States that are going sideways are as follows:


1. Kentucky:

Kentucky's E/P Ratio bottomed out at 55.4% in 2010, moving up to 56.3% in 2012, only to touch the low of 55.4% as of December 2013.

2. Minnesota:

Minnesota's E/P Ratio bottomed out at 66.5% in 2009 and has moved 66.9% as of December 2013.


3. Virginia:

Virginia's E/P Ratio has also remained flat at 62.5% since 2010.


The E/P Ratio of many states are still on a marked downtrend.  Those states that are still on a downtrend are as follows:

1. Alabama:

Alabama's E/P Ratio hit a new low at 52.% as of December 2013.


2. Alaska:

Alaska's E/P Ratio continues its march downward to 63.0% as of December 2013.


3. Arizona:

Arizona's E/P Ratio is still declining, reaching 54.2% as of December 2013.


4. Arkansas:

Arkansas' E/P Ratio is also at a new low of 53.8% as of December 2013.


5. Colorado:

Colorado's E/P Ratio has hit a new low of 63.0% as of December 2013.


6. Connecticut:

Connecticut's E/P Ratio now stands at 59.6% as of December 2013.


7. Delaware:

Delaware's E/P Ratio now stands at 56.5% as of December 2013.


8. Illinois:

Illinois E/P Ratio now stands at 59.4% as of December 2013.


9.  Kansas:

Kansas' E/P Ratio now stands at 64.2% as of December 2013.


10.  Maryland:

Maryland's E/P Ratio now stands at 62.6% as of December 2013.


11. Massachussets:

Massachussets' E/P Ratio now stands at 59.9% as of December 2013.


12. Mississippi:

Mississippi's E/P Ratio now stands at 51.6% as of December 2013.


13. Nevada:

Nevada's E/P Ratio now stands at 57.1% as of December 2013.


14. New Hampshire:

New Hampshire's E/P Ratio now stands at 65.4% as of December 2013.


15. New Jersey:

New Jersey's E/P Ratio now stands at 59.3% as of December 2013.


16. New Mexico:

New Mexico's E/P Ratio now stands at 53.9% as of December 2013.

17. Ohio:

Ohio's E/P Ratio now stands at 58.7% as of December 2013.


18. Oregon:

Oregon's E/P Ratio now stands at 56.7% as of December 2013.


19. Rhode Island:

Rhode Island's E/P Ratio now stands at 58.9% as of December 2013.

20. South Dakota:

South Dakota's E/P Ratio now stands at 67.2% as of December 2013.


21. Tennessee:

Tennessee's E/P Ratio now stands at 55.0% as of December 2013.


22. Vermont:

Vermont's E/P Ratio now stands at 65.4% as of December 2013.


23. Washington:

Washington's E/P Ratio now stands at 59.1% as of December 2013.


24. Wyoming:

Wyoming's E/P Ratio now stands at 64.6% as of December 2013.


Puerto Rico's employment situation has been a basket case for a long, long time.  It has had a chronically low Labor Force Participation Rate that has never gone above 50% since 2000 and that now threatens to breach below the 40% level in 2014, having reached an all time low of 40.11% as of December 2013.  The same holds true for its E/P Ratio, which now stands at an unheard of 34.70% as of December 2013.  The Unemployment Rate, which peaked at 16.55% in 2010, is still at 13.49% as of December 2013 or double the US national average of 6.7% as of the same period.