Condo sector slowing down, adviser says

INSTEAD of putting money in condominium developments, new entrants in Cebu’s real estate industry are encouraged to redirect investments into horizontal projects, which remain resilient and future-proof assets, a business adviser said.

Professor Enrique Soriano, executive director at W+B Advisory, advised boutique real estate players in Cebu to veer away from developing more condo projects and start pivoting to house-and-lot projects, where Cebu still has an unmet demand.

“Condominiums are no longer a good business for new players,” said Soriano, who observed that those that entered late should reconsider a shift in investment preference or revisit their business model and road map, as well as incorporate contingencies.

While a bubble remains uncertain, Soriano warned that the country’s property sector is already on an overextended run for almost three years now, from the usual 10-year cycle.

“Whatever gains we are making in the extended two-year-period is already a bonus for the property sector. But, any extension will always have some some point, it will slide,” said Soriano, who has witnessed the ups and downs of the property sector since 1987.

Close to 4,360 condo units are sold in Manila at any given month. Cebu accounts for an equivalent of 10 to 13 percent of Manila’s volume.

But Soriano, who is also a real estate consultant for strategy and policy in Southeast Asia, already noted some “red flags” in Cebu’s condominium sector, where supply has gone up.

Collier Philippines said it still expects over 17,000 units to be completed between now and 2020.

“There is already a slow uptick in the condo sector and it is further slowing,” said Soriano, noting that the slowdown has started last year and that the overall vacancy rate for condos will increase owing to a future surge in supply.

Trouble brewing

Soriano cited a herd mentality even among inexperienced real estate players, which has resulted in tougher competition, lousy project concepts or absence of value proposition, among other factors that make condo-selling difficult these days.

“There’s a brewing inventory supply and the issue of lessening demand. Big guys that have deep pockets will not be affected but this is a dangerous trend for new developers,” said Soriano. Some of today’s small developers don’t really have a game plan to carefully navigate the dynamics of the real estate business, he observed.

An oversupply is happening when sales velocity is no longer as robust as before, he explained. Second, if buyers are already coming from outside Cebu or as far as Mindanao and third, if overseas Filipino workers (OFWs), who are mostly the main target buyers, are no longer buying.

“We now have a tougher market,” he said.

But a pivot to horizontal developments could save these newly-minted developers.
“They need to expand their portfolio and not focus on one asset class, which is condo. They need to think strategically and come up with a new product that delivers competitive value.”

He said that the horizontal segment remains unscathed and is something that players should not worry about. This segment, he said, will continue to thrive on the back of the housing backlog, which remains unmet.

For boutique players who have crafted their five-year plan, Soriano suggested they revisit their plan and change their business model. He stressed there is a need for them to do “internal cleaning”, innovate and make their business more professional.

He also suggested for players to consider exploring progressive growth centers like Cagayan de Oro, General Santos, Iloilo, Bacolod, and Davao.

“Land prices (there) are still fairly reasonable,” he said.

It also high time for boutique players to consider creating projects that are compelling, emotional, relevant, powerful and sustainable.

“You’ve got to build a community and not just an edifice,” he said, adding that projects should have elements like sociability, uses and activities, comfort and image, and access and linkages.

“Boutique players are less compliant, that’s why when a market softens they are the first casualty. They’ve got to do something, otherwise, it would be uphill for them,” said Soriano.
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