CONVERSATIONS with Property Agents

[drbubb]

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% :

 

[AlexHK]

I really enjoyed reading this conversation. It reminds me the showrooms in Makati I visited few years ago. I stopped visiting them once I decided to focus on the secondary market, and probably also because I am not as patient as you DrBubb. A sentence like “Prices always go up” would be final for me

Majority of property agents here in Philippines are not trained to handle investors, or let’s say not trained to handle investors with financial & local knowledge. They are selling dreams, and several times I felt like being a joy killer with my questions about rental yield and contractual issues.
On top of that, info you get in showrooms can be misleading. Materials, settings, windows etc... presented in the showroom are only a possibility of what you might get, but without any guarantee. Completion date is also purely indicative.
When you leave the showroom you do not know exactly what you will get and when you’ll get it. You just know how much you’re going to pay !

In the case of this 26sqm unit for 7.2M I calculated that I could expect a rental yield of 3.4% net before taxation (considering P2600 mngt fees per month and P15,000 property tax and P26,000 property agent commission per year), and this is assuming that the unit is rented unfurnished since day 1. This is low, and how long will I need to wait to be able to get back 7.2M net for this 26sqm unit on the secondary market after CGT & agent commission?
 

[drbubb]

" this 26sqm unit for 7.2M I calculated that I could expect a rental yield of 3.4% net before taxation "

Yup.

There's no way to finance that, and make money - unless you are confident you can get a capital gain to cover a 2% per annum (or more!) loss on any money you borrow.  The guy who needs a Loan for 85% at completion may be facing two big issues:

+ It may be very hard to find a bank that will lend 85% (except at very high interest rates, if at all).  If the buyer can only get a 60% loan (Likely!), he will have to come up with another 25% (P 7.22M x 25% = P 1.8 million.  that might be a lot to come up with for someone who was playing a speculation, and loving the high leverage

+ Whatever he borrows is likely to require a monthly cash flow subsidy.  If he gets a 3.4% Pre-tax return on P 7.2M., that's P245k or just P 20,450 monthly. And at an assumed interest rate of 6%, this covers the interest only on a loan of P 4,083k - and that is only 56.5% of original P7.22M cost. 

This investment looks like a SURE LOSER to me, unless rents somehow improve to way better than "expected" levels.

If the owner decides to sell, the transaction costs will magnify his likely loss.  In a word: AVOID.  Because of this works, you would do far better with a well selected CHEAPER property acquired in the secondary market.

[AlexHK]

I fully agree. And on secondary market what you see is what you get, and you can start generating income immediately.

[drbubb]

MAKING IT LOOK CHEAP (monthly payments are not all that matters)

The fact that many Condos are now SOLD based on the Monthly payment ("Hey, I can afford that each month!") has opened the door for some trickery on the part of the developers.

Here are some examples:

Let’s take for example a studio unit measuring 20.50 square meters in a condo project along EDSA in Mandaluyong City that’s being marketed as “for as low as Php10,852.56.” The condo unit’s actual selling price is Php1,786,409.23 after all sorts of “limited-time-only” promotional discounts are deducted. If a buyer opts for the “no-down-payment 30/70” payment scheme, he or she will have to pay a monthly amortization of “only” Php10,852.56 for 4 years.

However, buyers must note that Php10,852.56 per month for 4 years will only total to 30 percent of the property’s value, and that after the unit is turned over, the remaining 70 percent (Php1,265.486.35) must be paid either in cash or through bank financing (hence, the term “30/70”). Not included here are other fees that the buyer must pay, such as stamp duty and taxes.

Lesson here: Some condos’ monthly amortization may look cheap and attractive offhand, but look at the bigger picture. You may only need to pay low monthly amortization over the next few years, but expect to pay more after the condo has been turned over.

2. If It’s Cheap, Then It Probably Is in a Not-So-Great Location

3. Cheaper Projects Usually Have More Units per Floor

> Source: https://www.zipmatch.com/blog/things-to-know-about-cheap-condos/