drbubb Posted August 19, 2018 Report Share Posted August 19, 2018 CONVERSATIONS with Philippines Property Agents (& Investors) / Some readers might find these conversations, real & simulated, to be of use and interest. They show what people may think, and how they reason, and could even be used for training purposes./ #1 / YIELD is Not Mentioned : How real is the Fairy Tale of ever-rising Prices? " I am always amazed by people investing in real estates with the glossy brochure of the developer & developer’s agent fairy tale as only reference." - AlexHK, on bottom of page 15, of the DATA thread I have a new habit. Covering numbers with my hand, when someone shows me crazy numbers. (see Conversation, below.) Occasionally, I still allow myself to be drawn into a showroom to have a chat with one of the young agents who passes out brochures. This is partly to keep abreast of prices, partly to see if anything is new in the showroom, and partly to see if there might actually be something worth buying. Once you have had a look around the showroom, the agent(s) will typically run a spreadsheet, showing the price of the unit, and the monthly payments It might look something like this: In summary, the developer in this case is selling a 26.04 sqm unit for Total price of P 7.22 million.That's P 277.3k per sqm. This price is 41% above the Makati Prime price index for Q2.2018 of 195,950. When I see this sort of (expensive) product on offer, I might have a conversation along the following lines: Me: That's pretty expensive, it is well over the prices I am seeing for average Makati Properties now PA: (Property Agent) That's because it will be completed in 202?, and prices will be a lot higher then. Me: How do you know that? PA: Prices always go up. They have risen every year since I have been in the business. They should rise 10-15% p.a. Me: (with a chuckle.) Maybe you are too young. Do you know what happened in 2000-2004? PA: No. But even if they go down, they will go up again, since costs are rising. BTW, you pay only 15% over the next 4 years, that is a long time. Prices can drop and go back up again. Shall I explain the payments?.The payments are really Low, only about P22,500 a month. That's just US500. Most people can afford that. And there's no interest for you to pay. Every payment you make reduces your balance due. Me: (chuckling) You want me to pay interest before you even hand the unit over? That's crazy. No one is going to pay interest on a property where the developer is still building the property. PA: Our developer pays interest on the bank loans he takes to build the property. Me: Sure, but you add the financing cost into the Total Price you charge for the property, right? PA: We do, sir. But this payment is really, really Low. Only 15% paid over 47 months. And you can make money on the whole property, including the 85% you have not paid for.Me: (Here's my new tactic - I put my hand over the spreadsheet at this stage, and say):The Agents all want to talk about payment structures. But that is not what I want to talk about. By the way, I might pay cash, if the cash discount is big enough. (The agent registers surprise because he rarely hears this. I might continue with my hand still covering the paper.) Here is my real concern: What will the rent be in 202?, or whenever I actually get the Key? That's what I want to know. What is MY return going to be over all the years I own the property. The payments going in are a smaller concern for me, than my actual return on investment. PA: (Shocked, since no one ever asked this question of him before.) The rent should be higher than today by 202?, sir. Me: Do you know what yields are today? (agent shakes his head.) I'll tell you: About 5 -6% Gross Yield, if you are lucky. PA: But rents will rise, sir. They rise every year. Me: No, they don't. They fell in 2000-2004, and they fell again for luxury flats over the past two years. PA: Rents are being pushed higher by all the Chinese tenants looking for property Me: Maybe that's true right now. But we cannot be sure the Chinese will keep coming. And some areas of Manila have very big supply. For instance, Supply of completed flats in the Manila Bay area will double over about 3 years PA: You are the first one to tell me that. My clients say it is easy to get a tenant now, sir. Me: Let's hope that continues. But here is the real problem: YIELDS are Down, they are only about 2/3rds what they were just a few years ago. And interest rates are starting to rise. My target is to get a Gross Yield of 8-10% pa. What Yield are you projecting for this property? PA: I don't know, sir, but it should be easy to rent. It is a very convenient location. Me: Can you run some numbers for me. (He/she will look confused, as if uncertain what yield is.) That's okay, I will do it. Let's use P1,000 psm. That might be reasonable now, with the chinese demand. That would be P26,000 per month. Are you okay with that? Let me use P25,000 per annum, since the numbers are easier to do in my head. (PA is visibly uneasy.) In a year of 12 months rent, you will get P300,000 per annum. On a P7.2 Million price that's only about 4.2% per annum. That is just half, or less than half my target return. PA: (disappointed) Rents will rise, sir, but you may not get a yield that high here, sir. Me: Here's the thing, when I bought my other Condos 3-4 years ago, I ran numbers and it really looked like I might get my target of 8-10% returns. But market yields on new properties are only about 2/3rds today what they were back then. The numbers just do not work for me now. They are not even close. PA: That's okay, sir. Most of my clients do not look at it that way. They but a property if they like it, and if they can afford the payments. Me: Okay. So, I will wish you good luck with the properties you have for sale. Thanks for your time. ========= * updated to Q2.2018 CONDO Prices - Q2.2018 ... (chart w/o Yield) P 195,950 psm : + 5.4% vs. Rents P810 psm + 0.6% vs. Gen'l Price Inflation + 1.1% Yr.- Qtr : CondoPsm +Chg: Rent, +Chg: Yield : Index, +Chg.%: 2010.Q4 : 102,300 +0.7% : 560, +0.6% : 6.51% : 2011.Q4 : 109,200 +1.9% : 658, +4.8% : 6.79% : 2012.Q4 : 118,000 +1.7% : 720, +1.7% : 7.32% : 2013.Q4 : 134,900 +2.2% : 805, +0.6% : 7.16% : 2014.Q4 : 144,500 +1.2% : 838, +1.2% : 6.96% : 2015.Q4 : 151,000 +0.2% : 883, +0.9% : 7.02% : 2016.Q4 : 150,600 +0.8% : 837 - 0.4% : 6.67% : 2017.Q4 : 174,706, +4.6% : 800, - 0.0% : 5.49% : 113.1, +0.9% : 2018.Q1 : 185,825, +6.4% : 805, +0.6% : 5.20% : 115.5, +2.1% : 2018.Q2 : 195,950, +5.4% : 810, +0.6% : 4.96% : 116.8, +1.1% : Link to comment Share on other sites More sharing options...
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