Rising Rates No Problem for Philippine Property-Stock Traders

(Bloomberg) -- The most aggressive interest-rate tightening in the Philippines in 18 years has yet to shake the faith of local money managers in the nation’s property stocks.

Traders at Security Bank Corp. and ATR Asset Management Inc. are sticking with their overweight position for the sector, even as the central bank has jacked up policy rates by 150 basis points over four months. SM Prime Holdings Inc. and Ayala Land Inc. are among preferred builders on bets the tightening will not lead to a jump in mortgage rates and discourage home buyers.

“Favoring property stocks at a time of rising interest rates seems a paradox,” said Noel Reyes, who helps manage $1 billion as chief investment officer at Security Bank. “But this is an extraordinary situation since foreign inflows are helping drive residential sales and office leasing. The weaker peso has given foreigners and overseas Filipinos the firepower to buy property.”

Chinese buyers, foreigners and families of overseas Filipinos have been a driving force for the market: SM Prime, the biggest home builder by market value and largest mall owner, sourced 80 percent of its first-half reservation sales from the two latter groups. And most of the offshore online gaming licenses issued by the Philippines since President Rodrigo Duterte assumed office two years ago went to investors catering to gamblers from the mainland.

As a result, home-reservation sales jumped 23 percent to 215 billion pesos ($4 billion) in the first half of the year for the nation’s six biggest developers, AP Securities Inc. data show. Developers listed on the Philippine exchange delivered 16 percent growth in second-quarter earnings, one of the best sectors, according to data compiled by Bloomberg based on median income growth results from the companies.

While that’s not prevented the sector’s shares from falling, it’s certainly helped. The Philippine Stock Exchange Property Index has fallen 9 percent this year, less than the 15 percent plunge in the nation’s benchmark equity gauge.

The competition among banks is another reason to stay overweight property stocks, according to Julian Tarrobago, who helps manage $1.8 billion as head of equities at ATR Asset Management.

“It’s too early to be afraid that this increase in policy rates will adversely impact affordability when it comes to mortgages,” Tarrobago said. “It takes time for borrowing costs to reflect the adjustment in full, and banks can’t quickly raise mortgages because the environment is very competitive.”

So far, there are no signs that the central bank’s rate adjustments will throw off the property market or that growth is plateauing, according to Richard Laneda, an analyst at COL Financial Group Inc. who has a buy rating on the six builders he covers.

“We still expect at least two more quarters of strong take-up sales growth and strong earnings,” Laneda said. “Many major developers are also building up their leasing assets, so the impact of slower residential will not be as bad as in the previous down cycle.”

To contact the reporter on this story: Ian Sayson in Manila at isayson@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Cecile Vannucci, Kurt Schussler

©2018 Bloomberg L.P.