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Wednesday, May 11, 2005
Osmeña: The need to borrow
By Antonio V. Osmeña
Estatements
DILAPIDATED. Within Cebu City’s prime areas, many structures have become dilapidated, in spite of the fact that these properties have the potential to be put to productive use. Unfortunately, many of the property owners do not agree on the economics of mortgage financing to increase the income-producing power of their property.
A look around the city will show structures constructed six decades ago.
Borrowing against future income or for purposes of putting land to productive use is often an economic necessity. Care, however, must be taken to ensure that the project to be financed is well conceived and that reliance to meet the loan obligations is placed not only on the income-producing power of the property, but also on the financial integrity and ability of the borrower.
The personal factors in mortgage lending have rightfully merited greater emphasis in recent years. The success of mortgage lending, in the final analysis, depends on the intent of the borrower and his sincerity of purpose to carry out the mortgage terms.
It is true that many lenders consider the property as final security in terms of foreclosure, but remedy is often a costly “cure” and an admission that the symptoms of mortgage failure were present, to begin with, and that the capacity or intent of the borrower was not analyzed with care. In many instances, it is also difficult for borrowers and lenders to foretell what will happen, like the 1997 Asian crisis, and the political stability of the nation, which are major factors in mortgage failures.
When property is unimproved or inadequately improved, borrowing to erect a suitable improvement is invariably an advantage.
An annual loss or a very small annual return may be turned into annual income commensurate to the value of the property. The land may be valuable, but it will yield its economic rent only when improved with a building, and it is often a financial advantage to obtain a mortgage loan to pay all or part of the cost of such building.
HOME OWNERSHIP. The advantages of borrowing to buy a home are generally not measurable in monetary terms. The home is one of the most essential parts of family life, and the returns that flow from home ownership are rightfully classified as “psychic income” or amenities. It is there that the family head strives to provide shelter for his dependents on a basis as free and independent as possible. For this reason, the utopia of home ownership would include freedom from mortgage or other household debts.
Still, the advantages of home ownership to the Filipino people as a way of life are deemed of such great importance that home purchase plans, largely mortgage financed and often government approved, guaranteed or insured, are accepted as a national policy.
SLOW TURNOVER. Property owners should understand that real estate as an investment is characterized by a slow capital turnover. This means that even under favorable circumstances, many years are required before the aggregate annual gross income derived from a property equals the total capital investment. On the average, for most residential and commercial real properties, seven to 10 years are required for the capital to “turn over” once.
The risk involved in projecting estimates of productivity far into the future calls for expert analysis of real estate as an investment medium and as a basis for credit financing.
(May 11, 2005 issue)
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