fin 103 first pass

8/14/2019 Fin 103 First Pass

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FAYE BANOGON, DANIELLE LIM, JEFFERSON ONG, LYSANDRA TAN, ABIGAIL

VILLAFUERTE, RENSON YU

FIN 103 JTA B

I. Overview of the Real Estate Market ( FAYE BANOGON )

A. What is a Real Estate Market?

The Real Estate Market is a market wherein land, and any other thing

permanently fixed to it, is sold, bought or rented out to owners, investors and developers

(Real Estate Definition). The Real Estate Market is not limited to residential living, it

also includes fixed and permanent properties used for commercial and industrial

purposes. Moreover, as the real estate market covers not only immovable properties

attached to the land, but also the land itself, it includes all the natural resources and

fruits that come with the land. Participants in the market include the following (Real

Estate Market):1. Owner

a. General Owner/Investor

General Owners/Investors are those who own the property but do

not use or consume it. This includes those who rent out apartments but

live in another area or vicinity and those who own condominium units but

have it rented out to renters. Imagine an uncle of yours owning a unit in

one of the condominiums in Serendra, and you begin to realize that he is

not the one living there. Basically, general owners/investors buyproperties and use them for profit.

b. Owner/User

An Owner/User is one who owns the property and at the same

time, uses it, or are tenants of the property. The best example of an

owner/user is one who owns a house and lives in it.

2. Renter

Renters are those who consume the property and pay rent to the

owner/investor on a regular basis. Renters are usually subject to terms put up bythe owner/investor.

3. Builders

Builders are those who buy raw lands and develop it through building

residential properties, commercial buildings and other immovable properties.


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Now, imagine a Chinese friend of yours, as business-minded as ever, buying a

lot because according to him, the land is a good business investment.

4. Renovators

Renovators are those who acquire real estate properties, renovate them

and resell them in the market.

B. Forms of Real Estate Property

1. Residential

Residential Properties include immovable property used for housing or

residential purposes. This includes homes, condominiums, apartments and other

properties used for similar purposes.

The rise of Residential Real Estate Market is correlated to the population

growth of a locality. As residential properties are a big chunk of the Real Estate

Market, most studies on the Real Estate Market focus on residential properties

and its development in different countries.

Forbes released a list just this year entitled, The Hottest Real Estate

Market on Earth (Rapoza), and listed Hong Kong as the best real estate market.

This is due to the fact that, in 2012, the housing prices rose up by 23.6% showing

immense growth in their real estate market. Dubai came in second with 19%

growth in housing prices. The real estate markets of both countries are booming

because of the rise of luxury condominium units situated in high-end or higly

urbanized locations. The study mainly focuses on the housing or residential side

of the real estate market as it is the biggest component of the market thus,

driving it to growth as a whole. Moreover, 7 out of 10 of those in the list are in

Asia. This is due to the continents overall economic growth. This purports the

population of the continent to focus their investments to the real estate market as

residential properties are a sure investments considering that housing is part of

everyones basic needs.

Another study also reveals that Dubai is the worlds top performing rental

market as rents in the country rose by 18.3% in 2012. This reveals that the real

estate market of Dubai is mainly composed of residential properties rented out to

people. As globalization and migration become prevalent, more and more people

just rent in prime locations rather than buy properties. The rise in global mobility

means that there is a bigger chance for one to move from one country to another


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thus renting a property is optimal. Because Dubai is an expensive country with a

prime location and a booming economy, more business people move to the

country to look for opportunities but as economic growth is seen in different parts

of the world, global mobility is considered by investors thus renting properties

becomes the popular option. (Deulgaonkar)

2. Commercial

Commercial properties refer to immovable properties solely used for

business purposes. This includes your favorite Ayala malls, office buildings, retail

stores, shopping outlets, convenience stores and even gas stations.More often

than not, investors own the commercial property and have it leased or rented out

to interested parties. This is also usually the case for malls like SM and

Robinsons wherein businesses only rent the space and do not own it

(Commercial Real Estate...). Unlike residential properties, income on

commercial properties is dependent on usable square footage. This means that

investors get bigger cash flow with the commercial properties. (7 Steps...)

As a result of the credit crisis in 2008, commercial property values

dropped by 10.6% (7 Steps...). However, as of 2013, investors have spent a

great deal on commercial properties because of the low interest rates. The low

interest rates coupled with the appreciating cash flow collected from renters are

also very attractive to investors (Look to Commercial Real Estate...). Another

study on commercial real estate shows that real estate transactions continue to

increase with 53% of those who participated in the study saying that they had

more real estate transaction in 2012 compared to 2011. (Bentley Forbes...)

3. Industrial

Industrial Real Estate Properties are properties solely used for

manufacturing, warehousing, research and development, distribution or

production processes (Woychuk). Industrial properties include economic zones

operated by the Philippine Economic Zone Authorities, as well as factories and

distribution centers of businesses.

Industrial Properties are usually tied up with a main branch of a certain

business which is involved in manufacturing a certain product. This happens in

the case of companies which need a property to conduct their manufacturing and

warehousing processes thus creating a need to buy or develop an industrial

property.


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4. Mixed-Use Developments

Mixed-use developments are all of the above, combined. It integrates two

or all types of real estate properties in one suburban development, or even one

building (Thrall). It utilizes all types of real estate properties and condenses them

in a single property.

Studies show that there is a preference for urban walkable communities.

This pushes investors and developers to convert properties and meet the

demand for communities, which can cater to more people rather than limit the

property for single-use (Fields). Mixed-use developments encourage the use of

bicycles and walking as everything is just in one place; thus, reducing the need to

use cars. This brilliant hybrid may be the solution to the scarcity of land in

urbanized places.

The rise of mixed-used developments have been prevalent in the world

as people continue to patronize venues which requires lesser travel time and

lesser energy consumption. The conversion of malls to mixed-use developments

is also prevalent and can be seen in the country through SMDC and the rise of

BPOs. Business Process Outsourcing Companies usually rent building space

and as the rise of employees created certain demands, food establishments are

now introduced usually to the first few floors of the building. In the case of SM,

they first created malls and when the opportunity and demand rose, they created

condominiums near or connected to their malls. The best example of mixed use

development on the Philippines would be the Bonifacio Global City wherein it

combines residential buildings and offices in one area or vicinity.

C. Instruments

1. Deed of Trust

A Deed of Trust or Trust Deed is a legal document which facilitates a

structure of real estate transactions. The title to the property will be held in trust

until it is paid off. Basically, the instrument serves as a security for a loan. (Trust

Deed Definition)

A Deed of Trust includes three parties: a trustor, a trustee and a

beneficiary. The legal title is transferred to the trustee by the trustor. The trustee

then holds the title as a security for the loan between the trustor and the

beneficiary. In case of default, the trustee, through the Deed of Trust, has the


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power to sell the property and, in turn, pay the lender to pay off the debt. The

said power to sell the property by the trustee is called foreclosure by power of

sale. (Deed of Trust)

2. Mortgage and Notes

Investopedia defines Mortgage as, A debt instrument that is secured by

the collateral of specified real estate property and that the borrower is obliged to

pay back with a predetermined set of payments. A mortgage has two parties the

mortgagor or the debtor and the mortgagee or the lender.

A mortgagor pledges his/her property to the mortgagee for a certain sum

of money. If the debt is not paid off by the mortgagor, the mortgagee would get

the title to the property and gain rights over it.

In the Real Estate Market, the mortgagee is usually a bank which

provides a loan to an individual mortgagor. The mortgagor gets the loan from the

bank and at the same time pledges his property as a security for the loan he has

acquired. Once the loan is paid off by the mortgagor then the bank sets the

mortgaged property free. In case the mortgagor fails to pay the loan, the bank will

gain the right to foreclose or use the property to pay off the debt.

3. Interest

a. Fixed Interest Rate

Fixed Interest Rate is the rate which remains fixed for the entire

term of a mortgage or a loan of a property. Once a buyer acquires a real

estate property at a fixed interest rate, then he is secured that no

fluctuations regarding the rate will occur he is also free of all the risks that

come with economic overturns. (Fixed Interest Rate Definition)

This type of interest rate usually attracts and encourages buyers

to acquire real estate properties for longer terms. However, if certain

externalities make market rates better, the fixed interest rate would

remain and the buyer would have no choice but to follow the interest rate

until the end of the term, trapping them in the end.

b. Floating Interest Rate

Floating Interest Rate or Variable Interest Rate is the rate which

moves according to the market rates. If market rates go up or down,

Floating Interest Rates would just follow the trend and it would just be

spread above or under the market rate. Unlike the Fixed Interest Rate,


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the Floating Interest Rate does not remain for the whole of the term as it

is dependent on the market rates or industry index, which, in turn, are

subject to externalities. (Floating Interest Rate Definition)

Floating Interest Rate can be beneficial to buyers if the market

rates or industry index are good. However, once the industry goes down

and market rates fluctuate, then the buyer will be hit and would be

subjected to a rate similar to the market rate.

This type of interest is attractive to buyers who will invest for a

shorter period of time especially if economic conditions are good.

II. Local Real Estate Industry ( LYSANDRA TAN )

A. Philippine Real Estate Market

1. Economy

A round of applause for the Philippines because its economy is doing

extremely well for the first quarter of 2013. The economy achieved a growth of

9.8% compared to the last quarter of 2012; as well as, an increase in GDP of

6.6%. (1Q13) The growth of GDP tells us that there are more investments in the

Philippines as there are more activities and projects done in the Philippines

compared to before. Colliers International believes that the BBB investment rate

given by Fitch (which is the highest that the Philippines has gotten) could be

improved on given more time (1Q13).

Real estate appears to be the main channel for investment in the country

that helped push the countrys economy, given the multiple projects being

constantly churned out at the moment. Another push for the economic growth is

the remittances given by the Overseas Filipino Workers (OFW), these

remittances bolster domestic consumption thus pushing forward the economy.

(4Q12)

2. Office

The office sector of the real estate industry has been experiencing major

growth due to the continued growing strength of the Business Process

Outsourcing (BPO) Industry and the Outsourcing and Offshoring (O&O) Industry.

(4Q12)


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The BPO industry experienced an 18% growth in the first quarter of 2013

and is predicted to grow to a 25 billion US dollar industry by 2016. At present, the

BPO industry is worth around 13 billion US dollars. (1Q13)

These two industries drive other countries to invest in the Philippines,

which lead to sustainable demand from these industries and drops in the

vacancy rates with regards to offices, especially in Makati CBD (1Q13).

Another trend is of the increasing rental charges due to the landlords

confidence, which leads to their increase in pricing power and higher rental

charges. (4Q12)(1Q13)

There is a trend in increasing the supply of office spaces for 2013. Nearly

half of the new inventory for the first quarter of 2013 was developed in the Fort

Bonifacio area to suit the demands of the BPO and O&O Industry. (1Q13)

3. Residential

The residential sector has also been doing exceedingly well for the first

quarter for 2013. There was an increased demand in the premium segment for

premium condominiums which led to a continue growth of 1.6% (4Q12). There

are currently 18 new condominium projects ongoing for 2013. A notable trend is

the decrease in the residential vacancy rate in Makati CBD. (1Q13) This means

that there are more and more people investing in residential property.

A trend with regards to the Residential escorts is the creation of units

which are simpler, studio or one-bedroom condo but expatriates continue to

prefer a unit with 3-4 bedrooms. (1Q13).

There continues to be a high demand for leasable properties in Rockwell,

Makati and Bonifacio Global City but expatriates appears to be changing their

preferred destination to the Pasay-Manila area, especially those expatriates

particularly engaged with the Pagcor Entertainment City. (1Q13)

4. Hotel and Leisure

The hotel and leisure industry also received some growth due to the

constant development of new hotels or the improvement of old hotels. The

development of the hotel and leisure industry is based on the Governments

forecast that 2013 will bring great tourist arrivals, which this sector is trying to

address. These has been a 30% increase in terms of hotel rooms supplies

though the tourism growth remained positive due to the 4.2 million visitors arrival.

(4Q12)


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5. Industrial

The industrial sector of the real estate industry is also improving over time.

Colliers International noted a slight increase in the average land leasehold rate

(4Q12). Global business confidence is slowly coming back, especially in the

USA and Europe, where they have started to recover from their poor economy in

the past. The improvement of their economies, lead these countries to increase

their demand for export products. (4Q12)(1Q13)

Another driver for the progression of the industrial corporation is

Japanese firms expressing their interest of relocating to the Philippines. Some

firms have already started developing in the Philippines. There is also minor

expansions happening in Batangas, Laguna and Cavite. (1Q13). These

investments from other countries drive the industrial real estate industry to

progress further and improve.

B. Major Players in the Market

1. Ayala Land, Inc.

Ayala Land can be considered to be the largest real estate developers in

the Philippines based on its nine billion peso net income in 2012 . Incorporated in

1988, Ayala Land Inc has since diversified into different real estate projects. It is

currently developing projects for residential, commercial and industrial spaces,

mall and hotel operations, construction, as well as, property management

services. (Histroy & Heritage)

Ayala Land Inc specializes in the sales of residential and industrial land,

as well as, leasing of shopping centers and office spaces. It is from these two

activities that Ayala Land Inc takes 62% of its revenue. (History & Heritage)

One of Ayala Lands projects for 2013 is in collaboration with the

Philippines Racing Club Inc. to convert the Sta. Ana racetrack into an

entertainment hub in Makati aiming to become an interactive entertainment

venue targeting families. Ayala Land also plans to convert the Food Terminal Inc.

in Taguig into an Information Technology (IT) Park that targets the business

district. (The Builders)

Ayala Land Inc.s ever-so-effective strategies is to create different brands

to target all classes of people. For example, they originally were known for high-

end developments like the Garden Towers in the Ayala Center; the also have


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brands targeting middle to upper markets like Alveo Land. They have also

ventured into brands that target the mass markets like Avida and Amaia Land.

(The Builders)

As mentioned earlier, Ayala Land Inc. also leases office spaces such as

Vertex One in Manila, UP-Ayala Land Technohub on Commonwealth Avenue,

One Evotech Nuvali in Laguna and Solaris One in Makati. These office buildings

cater to IT and BPO companies. (The Builders)

Part of Ayala Land Inc.s leisure projects includes Raffles Residence and

Fairmount Hotel in the Ayala Center as well as the Seda Hotels in BGC, Davao,

Nuvali and Cagayan de Oro. (The Builders)

2. SM Land, Inc.

SM decided to venture into real estate development because of it already

had experience in buying land for its malls, which gave birth to SM Land Inc. SM

Land Inc focuses on residential development but also dabbles into the

development commercial and leisure properties. (SM Land)

SM Land Inc.'s residential arm is listed as SMDC which focus on creating

"affordable, yet luxury homes;" their residential properties often include five-star

amenities and are strategically located near schools, malls, transport hubs and

other commercial institutions which make them attractive to the buyer. One of

their strategies is to focus on targeting the premium middle market by creating

high rise condos but they also plan to create more medium-rise projects to target

overseas homebuyers. SMDC posted a net profit of three point three billion

pesos (Php 3.3 B) in the third quarter of 2012 (SM Land) (The Builders)

SM Land Inc's commercial projects include developing various office

buildings around the Mall of Asia Complex, as well as in key cities to promote the

growth of the business process outsourcing (BPO) industry. The BPO industry is

currently one of the drivers for the improvement of the Philippine economy and is

growing at a steady pace. (The Builders)

SM Land Inc also developed an eco-tourism and leisure project in

Nasugbu, Batangas called Hamilo Coast. This leisure resort includes SM Land

Inc.'s signature five star amenities like the beach and country club, sports

facilities, restaurants and even a ferry service. This resort is merely an addition to

SM Land's other leisure properties like the Taal Vista Hotel in Tagaytay, the


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Radisson Blue Hotel in Cebu and the Radisson Hotel in Manila Bay, among

others. (The Builders)

3. Megaworld Corporation

Megaworld Corp. is recognized internationally as the country's top

residential condominium developer by The Colliers International and CB Richard

Ellis. Megaworld Corp focuses mainly on residential properties and has

developed around 200 buildings since 2005, though their portfolio also includes

developments in hotels, resorts and leisure projects. (Projects Launched)

The strategy that makes Megaworld Corp unique is their incorporation of

mixed-use developments into their projects by combining different kinds of real

estate projects, such as residential with entertainment or office. (The Builders)

One of Megaworld's main and notable projects is the Eastwood

Cyberpark. Megaworld Corp. employed a mixed-use development strategy for

this project by combining residential condo towers, malls and the cyberpark in

close parameters for one project. The project targets the demand of BPO firms

and has turned the Libis area into an emerging business district. (The Builders)

Other notable projects under the Megaworld Corporation include the

development of the breathtaking McKinley Hills and Forbes Town Center in

Taguig which cater to the higher end markets as well as other international

buyers. McKinley Hill also houses multiple office buildings and a small mall,

which further promotes the emerging business district in the area. (The

Builders)

Although Megaworld Corp focuses on luxury real estate developments, it

also has subsidiaries (Empire East Land Holdings and Suntrust Properties) that

cater to the low to middle-income sector. Examples of these projects are the

Suntrust Capitol Plaza in Diliman. (The Builders)

4. Robinsons Land Corporation

Robinsons Land Corp was named as the best-managed company in Asiaby Euromoney Magazine based on a real estate poll in 2012 of 130 equity

analysts in the Asia Pacific region. They reported revenue of Php 10.56 billion for

the first half of 2012. (The Builders)

Robinsons Land Corp. appeared to have focused their strategy on

projects with recurring income bases, such as shopping malls, hotels and office


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developments. Part of that strategy was to promote public services in their

establishments like opening offices for NBI Clearance or passports in their malls

so as to increase foot traffic. Government agencies like NBI, SSS, GSIS,

PhilHealth, Pag-Ibig, DFA, LTO, LRA, and DOT currently have satellite offices

present in different Robinsons Malls for convenience. Profits coming from these

recurring income based projects make up around 81% of the total revenue. (The

Builders)

Robinsons Land Corp also decided to open another hotel branch (Go

Hotel) in Puerto Princesa, Tacloban, and Bacolod due to the success of the pilot

Go Hotel in Mandaluyong City. Robinsons Land Corp. aims to own an extensive

chain of budget hotels. At present, Robinsons Land Corp has hotels managed by

the International Hotel Group, such as Crowne Plaza Galleria, Inn Galleria Manila

and the Summit Circle Hotel in Cebu and Tagaytay. (The Builders)

To address to BPO boom, Robinsons Land Corp plans to expand into

more office spaces. Currently, Robinsons Land Corp dominates the Ortigas

Business District with its multiple office development projects (such as the

Robinsons Equitable Tower and the Galleria Corporate Center) (The Builders)

With regard to the residential projects that Robinsons Land Corp holds,

they have 4 different brands (Robinsons Luxuria, Robinsons Residences,

Robinsons Communitites and Robinsons Homes) to cater to different target

markets. (The Builders)

III. Risk and Return ( RENSON YU )

A. How to Lower Risk

In the real estate market, these are the measures that may be taken to lower risk:

Location. You can lower risk when investing in real estate by looking for areas

that have low cost of living, low cost of housing, and low average rental price. In other

words, the entry cost must be low and the monthly cash flow is high. However, factors of

risk like consistent move-outs, high costs of repair, etc. are still present so it does not

mean that when an investor finds a location that has low cost, the risk is already

automatically low. (Real Estate Investing)

Base the Purchase Price on Historical Performance. Another way for an

investor to lower risk in real estate investing is to study the propertys historical financial

performance. The investor must get at least the previous years income and expenses.


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By doing this, you can be assured that you are not overpaying for the property. The

investor should do this instead of basing the purchase price solely on the brokers

financials of the property. (Cullor)

Perform Thorough Due Diligence. An investor can reduce risk by thoroughly

inspecting the property both physically and financially. The investor must hire

professionals when necessary to inspect the property to get through and audit every

lease, bank statement, bill, and any other financial information that may be relevant.

Other than financial inspecting, the investor should also do a physical inspection of the

property itself to find out if there are damages that need to be repaired or other relevant

information regarding the physical condition of the property. Doing a thorough inspection

might seem like a big burden and hassle but it will definitely reduce the potential

surprises that you will eventually face; thus, reducing the risk. (Cullor)

The AVP for Asset Management Operations Group of Philippine National Bank,

Mr. Adalzon Banogon, suggests that you should enter into a joint venture with a well-

established, track record positive construction company to share the capital burden and

ensure quality of projects (Banogon).

B. How to Maximize Return

In order to maximize returns, investors should understand and assess the

numbers and financials associated with the investment deal. You can renovate and

improve the existing property to make it more attractive to lessors. To ensure optimum

capital gains, you should find a property that is well-located; and the deal should be

made at the right time - in other words, matching with the prevalent market sentiments.

The investor should also keep in mind the local economic conditions and infrastructural

developments since these are the main factors that influence on real estate investment.

Therefore, having a good knowledge about this can give the investor an advantage and

he will be able to use this information to get good returns on the investment. Lastly, you

should maximize cash flows since generally and usually, the higher the cash flows, the

higher the expected return. (Sharma)

C. Debt and Equity Structure


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With regard to debt-equity structure, your choice of whether to use equity or debt

to invest depends on how much risk the investor is willing to take. Investing in equity is

riskier but it generally yields more reward. (Woychuk)

When investing in debt, it is like the investor is lending money to the owner of the

property or the buyer of real estate. The investor earns money by receiving interest from

the borrower. At the end of the term of the loan, you get back the balance of the principal,

just like how bonds work. (Woychuk)

When investing in equity on the other hand, you are most likely to be the owner

of the property. When the propertys value increases, you will earn a lot of money. But

when something goes wrong, like when you lose tenants and you are not able to pay

your mortgage payment, the mortgagee may make you forfeit your equity position to

satisfy their security. Investing in equity is like owning common stock of a certain

company. (Woychuk)

IV. Real Estate Bubble ( DANIELLE LIM )

A. What is a Real Estate Bubble?

A real estate bubble occurs when there is a rapid increase in housing prices due

to the increase in demand and the assumption that current market trends will continue in

the future, without taking into consideration the long-term rates of price appreciation and

mean reversion. Mean reversion would refer to situations in which markets that

experience rapid price increases or decreases will eventually fall back to a point where

their long-term average rates specify they should be. In a real estate bubble, properties

are not fairly valued. Prices do not rise gradually with the rate of inflation or the rise in

average income. Instead, they rise to unforeseeable heights until they reach

unsustainable levels and eventually decline. (Why Housing Market Bubbles Pop)

Real estate bubbles generally begin with an increase in demand despite limited

supply. People start investing in the market believing that short-term buying and selling

can raise profit. However, there comes a point in time when demand stagnates or drops

but supply continues to increase. When this problem is not addressed, the bubble bursts.

Prices tumble, causing the eventual collapse of the real estate market. (Housing

Bubble)


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B. Causes of A Real Estate Bubble

The driving force that causes a real estate bubble is the relationship between

supply and demand. In the real estate market, there may come a time wherein there is

an increase in the demand for properties but there is limited supply. The limited supply is

mainly due to the fact that it takes awhile to build houses, buildings, condominiums, and

other forms of real estate properties. A long-term increase in demand eventually pushes

the prices up to above average rates. (Why Housing Market Bubbles Pop)

The next question now is what causes the increase in demand? The most

obvious answer would be the possible increase in economic prosperity in the country

(Why Housing Market Bubbles Pop). If the economy is doing well and most of the

population is employed, people generally would have more money to spend. Since they

have more money, they may allot some for the investments in certain properties that

they believe will allow them to earn even more income. Another factor that could lead to

the increase in the demand is the increase in the population (Why Housing Market

Bubbles Pop). Increase in population would mean more possible consumers interested

in the real estate market.

With the increase in real estate property prices, there is a general low level of

interest rates (Why Housing Market Bubbles Pop). This increases demand because it

makes the property more affordable. The lower interest rates encourages people to take

on more risky debts that may seem manageable at the present but will eventually work

to their disadvantage in the future. Another factor that may lead to the increase in

demand is the general easy access to credit. This is possibly due to the lowering of

credit underwriting standards which attracts more consumers into the market (Why

Housing Market Bubbles Pop).

Different mortgage packages may also lead to the increase in the demand of

real estate properties. Mortgage bonds that promise high yields and more credit and

mortgage products with low initial monthly payments appeal to the consumers and

encourage them to invest in the real estate market. There are also instances wherein

mortgage lenders misprice risk, creating more credit for debtors. Short-term relationships

between the broker and borrower also encourage the latter to accumulate even more

risks (Why Housing Market Bubbles Pop). Generally, all these make it seem like real

estate properties are affordable which, in turn, encourage the buyers to start investing or

buying on credit.


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Lastly, what really contributes to the occurrence of a real estate bubble is the

idea of speculations. Both the sellers and the buyers make a mistake with regard to

forecasting the future trends. Sellers drive their prices up to unsustainable standards just

because of the increase in demand. On the other hand, buyers keep relying on risky

credits in order to invest in supposedly affordable property. Eventually the reliance on

risk leads to losses. The losses cause the decrease in demand. On the part of the seller,

since there was originally an increase in demand, they have strived to increase supply.

However, due to the losses incurred by the investors, demand suddenly decreased,

which leads to a surplus of properties that are not being sold. This eventually results to

the decrease in prices and the bursting of the real estate bubble.

C. Forces that Cause the Bubble to Burst

As was mentioned already, taking on more risks eventually leads to the

collapse of the real estate market and the bursting of the bubble. The sellers experience

losses since no one is buying their properties. Buyers incur their own losses since they

invested too much on credit. The question now is what factors trigger the sudden losses

experienced by the consumers that become detrimental to the very state of the general

real estate market?

One factor that may suddenly drive down purchasing power is the general

economic downturn (Why Housing Market Bubbles Pop) Unemployment rates may be

rising which means less people have jobs. Since less people have jobs, they no longer

have enough money to spend on more expensive properties. They cannot even repay

their debts. This decreases demand for properties but increase the available supply,

which is actually not a good sign for the producers.

Another factor that leads to the sudden losses is the exhaustion of demand.

Eventually supply and demand reach an equilibrium, slowing the rapid increase in prices.

This increase in prices was originally what the buyers depended on to make their

purchases affordable. When prices suddenly stop rising, those who rely on the price

appreciation suddenly lose their investment, once again, increasing the supply of

property. (Why Housing Market Bubbles Pop)

Lastly, the sudden increase in interest rates and tightening of credit standards

would also affect the consumers purchasing power. The reasons why buyers were

originally willing to invest on the real estate properties were because of the lower interest

rates and lenient credit standards. Increasing the rates and tightening the credit


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standards would make the properties suddenly unaffordable to others. Hence, this

decreases demand and increases supply. (Why Housing Market Bubbles Pop)

In a nutshell, when the aforementioned factors suddenly occur, losses may be

incurred on the part of the buyer. This takes away their ability to purchase the property.

Demand decreases. Supply increases. The buyers leave the market. The properties

decrease in value. Prices drop. The real estate market collapses. Recession occurs.

D. Effects of A Real Estate Bubble To The Consumer

Generally, people should only allot about 25% of their income for housing

expenses. When people invest too much on housing, they are often forced to rely on

credit to pay the real estate property and for their other expenses. In the beginning, they

may believe that they have a stable financial status since their investment is appreciating

in terms of value. However, the truth is that they are actually being charged large interest

rates. More often than not, payment is long-term so people do not realize that they are

paying large amounts since they only pay a small portion every year. (Real Estate

Bubble or Boom?)

Eventually, when things take a turn downhill like the sudden increase in interest

rates or an economic recession, those people who invested on credit can no longer

afford the properties they have been paying for on installments. Their credit for many

years end up becoming ruined. They end up incurring more losses than the actual value

of the property they invested in. Those who already had the property in their possession

are forced to give it up because they can no longer pay for the mortgage. (Real Estate

Bubble or Boom?)

E. Avoiding A Real Estate Bubble

In order to protect yourself from suffering the consequences of a real estate

bubble, below are things to take note of when you want to invest in the real estate

market. Some of the information below are derived from Deborah Fowless article

entitled, Real Estate Bubble or Boom?

DO NOT OVERDO THINGS. You have to know your limits. Invest only in what you can

afford. As much as possible, go for ordinary mortgages wherein you have the principal

and interest payments at a fixed interest rate.


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LIMIT YOUR HOUSING COSTS. Ideally, the amount of money you should spend on

your housing expenses should be limited to 25% of your income. A little more would not

hurt. However, it should not go overboard. You have to remember that you have other

things to spend for aside from housing.

DO NOT ASSUME. RESEARCH. Do not assume that your property will rapidly

appreciate in the next couple of years. Anything can happen. The problem with most

people is that they speculate without doing actual research. There is nothing wrong with

seeking the advice of mortgage professionals but it would be better to do your own

research as well. Keep in mind also that the economic conditions in the country may

change any time. No one really has any control over it so everyone must be prepared for

whatever circumstances may occur in the future.

THINK LONG-TERM.When it comes to finance, you should not only consider what may

happen a week, a month, or a year from now. You should be able to think of what may

occur, for example, in the next five years. Do not choose a home because you think its

price will appreciate quickly. Choose a home because you think it will actually last long

despite the changes in the economy.

IV. Land, Sea, and Air Real Estate ( JEFF ONG )

Land real estate, apparently, has two sisters: sea and air real estate. As surprising as it

may be, these two fancy types of real estate are apparently just as important as the former.

Starting off with air real estate, you should be familiar with the theory that the space above your

property should be limitless and unending. With all your common sense, you might ask, But

dont we only benefit from a few stories of space above my house? There are two common

types of air real estate: one is the literal space above your property, and the second is the space

or air where planes fly around. Unfortunately, the latter forces civilians to waive their rights over

this real estate. So, unless you are a VIP, you can never invest on it. You have to remember

though that space is limitless, vertically, so no matter how high the plane is, if our rights are not

waived, we technically have rights of it. The concept is applicable to the military air force

trainings of different countries. Some countries need to go beyond their air space for their

military training. Once they do pass their air space or air real estate, they would already be

renting the air space they are using. Each country has its own boundaries on air too. You should


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not underestimate air real estate because although it is often new or unnoticed, you can also

earn a whole lot from your air real estate.

The picture above practically screams the entire concept of air real estate. Imagine

that Mr. Parlan owns the small brown building on the right corner of the photo and is benefiting

from his air real estate. The tall building beside it has a portion directly above the brown building.

As mentioned, air real estate is literally the space above your property. In this case, the tall

building has to pay rent to the brown building because of his air real estate. This kind of setting

is more common in metropolitan places such as New York where this photo was taken. Now

you realize that you can actually earn from air real estate. Compared to the other two, creativity

is needed in order to benefit from air real estate(Home Buying Hub).

Sea real estate, on the other hand, is actually more similar to land real estate compared

to air real estate. The concept is the same in such that there are also boundaries in the sea. The

difference would be on the purpose of the real estate. In land real estate, houses and

commercial areas are built; but in sea real estate, the space is used for fishing, studies, and

discovering new things. Although people have started to build houses on sea, it is limited.

V. Whats in it for you? ( JEFF ONG AND ABIGAIL VILLAFUERTE )

A. Buying a House or a Condominium

In the Philippines, individual houses and condominiums are the two most

common forms of housing. According to the 2008 National Statistics Office Annual

Poverty Index Survey, 93% of Filipinos live in houses while residential condominiums


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come in second with almost 4%. The remaining question is this: Which of the two is a

better option, considering the Philippine setting? In the next paragraphs, the benefits of

both housing options and its major differences will be discussed. It should help you in

deciding whether or not you should invest and buy a house or a condominium.

One of the factors you have to consider is your civil status. Are you single or

married? If you are single and marrying is still not yet part of your plan, buying a

condominium might be better and more practical for you. One of the advantages of

having a house is its big space, but if you are living alone and having a family is not yet

part of your future, you would not be able to maximize the size of the house as well. You

will also have common areas such as hallways, elevators, swimming pools, gym, and a

good-looking lobby where you can build and foster this community. On the other hand, if

you have a family or you plan to have a family, having a house might be a better option

for you. The greatest advantage of having a house is the freedom and control you have

over your own property. You have freedom in everything legal when you have a house

unlike when you own a condominium, you might be restricted with the rules inside the

condominium.

After all is said, location still remains to be the greatest factor when it comes to

choosing your residence. Houses are everywhere, unlike condominiums, which have a

specific location. Condominiums are normally seen near offices, malls, schools or busy

areas. If you are working in one of the busy areas in Manila like Ortigas, Makati, and

recently Fort Bonifacio, you might consider looking into nearby condominiums. This will

make it easier for you to go to work by escaping the horrible traffic going to work and the

long ride home. Another benefit in living in a busy area would be everything will be

accessible. A mall might be in walking distance when you live in a condominium in a

busy area. Most of the condominiums use the nearest mall as their selling point.

Condominiums around Serendra and The Fort use the close proximity of the two as their

main selling point since it makes everything accessible. The One Shangri-la in Ortigas is

actually right beside the Shangri-la mall and it has an access from the condominium to

the mall as if the mall is part and an extension of your house.

The next factor involves your very own sophisticated taste and classy preference.

Together with lifestyle, your very own personality should also be considered. Are you the

kind of person who likes a relaxed-paced lifestyle or are you the type who does not

waste a minute? Houses are more suited for slower lifestyles. Condominiums are built

for faster-paced lifestyles. Their easy access to different locations is a great benefit for


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fast paced people. The small space they have like kitchens show that they do not use

the kitchen that much and prefer eating take outs or eating out.

Lastly, you have to look at your financial capacity. This will also help us transition

later on in comparing the two as investments and not as personal residences. Houses

are generally more expensive than condominiums. One of the reasons of this would be

in houses, you do not only buy the house, but you also buy the lot. You can look at this

better by comparing houses and high rise condominiums. In a same space, the price of

the lot will only be divided into one in houses, unlike in high rises the same price will be

divided into many houses. Houses are also generally bigger than condominiums. You

have to consider the space being occupied by backyards, gardens, parking lots which

we all see in a house and not in a individual condominium. It is also more expensive in

maintaining a house compared to a condominium. Your pipes, wires are all made and

built under your supervision unlike in condominium where experts and engineers were

the one who designed the systems of the building. But then again, in a house, you have

ultimate freedom, as long as it is legal, to do whatever you want. At the end of the day,

buying a house is a long term goal and needs to be planned ahead of time. For those,

who have not yet reached that point, they may settle for a condominium unit for the

mean time.

Now you look at the two as investments. Start off by looking at the location.

Location is key when choosing your investment. Investments in terms of property are

only good when youre able to either develop it or you can sell it to other people. This

means the property must have value and is sellable. For condominiums, you would more

likely invest in one that is built on a busy place since that is the charm of condominiums

as mentioned. You would also likely want to invest on a house built in a village or a

residential area where the basic needs are 15 minute drive away. In both cases, you

have to be able to see the diamond in the rough. You have to see the value of the place

five to ten years before everyone does. This will help you buy the property at a low price

and by the time everyone sees the value of it, youll be able to sell it at an extremely

higher price or you can develop your own in that property if you have the resources. An

example would be the Taguig, specifically Fort Bonifacio area, ten to fifteen years ago, it

used to be an army base camp with hectares of plain grass. Land there back then was

cheap and people who have owned lots since then until now have surely made a fortune

today. You also have to consider the fact that unlike houses, condominiums can be

turned into a commercial building or a mix of both commercial and residential. You can


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allot the first few floors as commercial or office space and then rent out the top floors as

condominium units. In this way, you get different sources of income and the commercial

spaces below do not only pay rent, but also add value to your residential units. You also

have to consider that houses and property lots appreciates over time as mentioned in

the case in Taguig where lands have appreciated together with the development of the

city and the area. Condominiums, on the other hand, are subject to depreciation since

you do own the land.

Moving on to the regular taxes and fees incurred in the two properties, you can

refer to the table below as reference for the following fees and taxes:

Table 1

Taxes and Fees incurred in the Two Properties

Condominiums Houses

VAT

12% of Purchase

Price VAT (B)

12% of Purchase

Price

Document Stamp

Tax

1.5% of Purchase

Price

Document Stamp Tax

(B)

1.5% of Purchase

Price

Local Transfer

Tax

0.5% of Purchase

Price Transfer Tax (B)

0.75% of Purchase

Price

Association Dues P75-P90 per sqm. Real Property Tax (B)

2-3% of Purchase

Price

Maintenance

Fees

Capital Gains Tax

(S)

6% of Purchase

Price

In the end, given all these factors, you have to weigh each, from price to

preference. You cannot base your decision by considering only one factor. Both options

have their individual pros and cons and each fits a different style.

B. Buy vs Rent

To rent or to buy? As seemingly and deceivingly simple as it may appear, the

question happens to be critical in your life-long decisions, financially and personally.

Imagine the ever-so-sophisticated Victoria Beckham in her high Christian Louboutins


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driving around Corinthian Gardens. She stands in front of a very charming house, with a

sign right beside the mailbox. She stares at the sign for a while, takes off her Chanel sun

glasses, and smiles. What does the sign say? Was it a FOR SALE Call 0917 -838-

1009? Or was it a FOR RENT Call 0917-838-1009? Now imagine the young and

talented country singer Taylor Swift, in her bright red lipstick, walking around the

condominiums in Serendra. Would she buy or would she just rent? Buying and renting

property concerns different people from different ages, different races, different faces,

and different classes. These people will, at one point in time, face the inevitable

question: to rent or to buy?

Pride of ownership is usually why people long to own their own house. It means

freedom to unleash your creativity in having the walls of your kitchen painted with a

classic nude color, or a bold pink color. It also means attaching permanent fixtures, and

anything else that would gve you a sense of stability and security. Most of the time,

those who buy houses are accomplished, and are ready to build a family. On the other

hand, renting suits a lot of people as well. Dependents are more likely to rent a

condominium, while they attend a university located far from home. Those freshly

graduated would also choose this option as they may be uncertain about their career

and pay scale. The rationale is obvious; if you are not sure of your job, or when your job

demands that you move to different places, then you will need a place to stay with all the

flexibility available. Most of the time, it is the bachelors and bachelorettes trying to

escape long-term commitments, who rent.

Whether you are to buy or to rent property, your decision will have to be thought

of thoroughly because the decision may be the one to determine your happy, or tragic,

ending. Here are some factors to consider before buying and renting:

First, you should consider your own financial health and credit. Are you

financially able to buy a home? Is now the right time for you to buy a home? Is your

income and credit good enough to have a mortgage approved? The better your credit,

the better your interest rate will be. If your credit is not good enough, then renting might

be a good idea for you to improve on your credit rating.

Second, and as quickly mentioned earlier, it is important to consider how long

you plan to stay in the area and the home, especially in todays real estate market. If you

are unsure how long you will remain in the place then it is better for you to just rent. If

you purchase a house and then get a job transfer, or if you decide to move out after only

a few years, then you could end up losing money. The value of your property may not


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have appreciated enough returns to cover the costs you paid upon purchasing, and the

costs you will pay in selling it.

Third, you should keep in mind and in heart that there is power in

homeownership. Quoting Spiderman, With great power, comes great responsibility.

Homeownership is a big, fat, responsibility, and a big, fat, commitment. Therefore, you

should ask yourself whether or not you are ready. One of the painful responsibilities in

owning a property is the required maintenance. If you are not prepared to keep up with

the home repairs, and if you are not at all interested in cutting the grass, then you would

probably be better off renting.

Lastly, and finances aside, the most important factors may be those of the more

personal ones. How is the neighborhood around your house? Does the public amenities

suit your needs? What are the crime rates in the community? And how is the location

affected by natural disasters?

Take out your most trusty pen and grab a piece of paper that is at least clean and

blank in one of its sides. Sometime in history, an incredibly genius logician named John

Venn, once invented the Venn Diagram. To aid you in your decision making, here are

the pros and cons to buying and renting property for your personal use:

As for buying, owning a house would mean that its value may increase over time.

It means that when one day, you decide to sell, you should be able to get more than

what you paid for. You can start using that equity to buy an even bigger house. This may

not always be the case but the possibility is undeniably exciting. Once you pay off your

mortgage, then the house will be completely yours and you will be living a rent-free life. It

is an investment after all. Also, owning a house has tax benefits. You can claim your

mortgage interest on your income taxes. And since mortgages are at a fixed rate, you

can expect the same monthly payment and housing costs. In addition, paying mortage

means that you are building on your equity. People like Victoria Beckham who do not

like to be controlled by landlords, or anybody else for the matter, will be able to enjoy

improving the property and increasing its value. (Murray)

However, buying a house is not all rainbows and butterflies. There are several

cons and warnings to take into consideration. For example, according to Mr. Adalzon

Banogon, the AVP for Asset Management Operations Group of Philippine National Bank,

buying a house entails a high initial cash outlay. This includes reservation fee, 10%

downpayment, real property tax, and a whole lot of paperwork. You should be ready to

pay for that, as well as for maintenance costs such as for fixing a leaking roof. In an


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online article for the Pittsburgh Post-Gazette, Heather Murray says, Its a big financial

commitment - you need to be sure you can afford what youre taking on (Murray). Also,

owning rather than renting gives you less flexibility because estate agency and legal

fees are costly. Furthermore, selling property is never easy and it is dependent on the

market. We better hope that Victoria does not split up with his all-star husband, David

Beckham, for the process of sorting out the property is very complicated and expensive,

Now as for renting, the pros and cons would generally just counter the above-

mentioned statements. Perhaps the favorite benefit of many in renting property is that

you are not required to come up with the massive amount of money for your initial cash

outlay. In fact, most of the time, no down payments are necessary. Maintenance may

cost less and you will not be subject to real property tax. If there comes the unfortunate

event of having pipe leaks and electrical problems, then you will not have to stress about

it so much because maintenance will be taken care of. Your rent includes maintenance

fees, which would keep your landlord in charge of these problems. And ultimately, you

get the chance to invest your money somewhere else, like in the stock market.

In contrast, one of the very reasons why people end up regretting their decision

of renting property is because of the natural fluctuations of prices. You would not have

control over it. Another major setback in renting is that you cannot freely drill a hole on

the walls of your new bedroom to attach your iconic Audrey Hepburn frame, and neither

can you turn the house into a glass house. Basically, your design and dcor options are

limited. You could imagine Taylor Swift writing a song about her most loathed landlord,

because that is the truth about renting. If you have a landlord who is not patient or

friendly, then you will most likely have to deal with his rules and decisions that are not in

your favor.

Finances aside, the decision on whether or not to rent or buy a home ends up

being a personal one. At the end of the day, it all comes down to who Victoria Beckham

and Taylor Swift are, what they have, and what they want. If they are financially stable,

confident in their employment (and relationship) status, and ready for the added

responsibility of homeownership, then buying a house is for them. It is only safe and

smart to be financially prepared no matter what future housing plans hold.


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C. Developed vs Undeveloped Land

Now suppose Victoria Beckham grabs her Chanel, leaves Corinthian Gardens,

and agrees to go on a roadtrip to Tagaytay with you. You end up facing the elegant Taal

Volcano, and her heels start to sink on the ground. You are both standing in an empty

land. Suddenly, surprisingly, she does not yell. She takes out a paper towel and wipes

off the mud covering her Louboutins, and she lets out a sigh. She is in love with the

parcel of land beneath her and she decides, I will buy this land and you begin to worry

that her decision to buy might be of sheer impulse, so you ask, Are you sure?

Looking for a home of your own does not automatically suggest that you are to

buy an established property. There are those who would rather buy a vacant land and

have a house built according to their own preference and plans. This often means

buying a lot for sale in a subdivision. A hundred factors should be considered while

debating on whether or not the purchase of that beloved land of your is intelligent or not.

Here are some, and the first three are gathered from the Government of Western

Australias Department of Commerce:

First, there are the inescapable costs. Site costs are the expenses from having

the lot prepared for the foundations of the house or other buildings. Then, you also pay

for title insurance, protecting you against any property loss or damage that may arise

from defects in the title of the property. Other costs incude utilities, where you pay for

ensuring that the septic system is in order, as well as building costs.

Second, there are restrictions known as encumbrances to be aware of. These

may hamper the future use of your land and it includes easements and restrictive

covenants. An example for the first is having an adjoining landownerhave the right to

cross your land. An example for the latter is having precise restrictions on building

heights. The lands in Urdaneta Village are likely to have restrictions already placed,

which you should know about before buying. Following the rules of the association could

dictate where you park your car and what kind of pets you have.

Third, you should consider the risk of having your money tied up. Off-the-plan

sales include the sale of vacant land, wherein a contract is signed before the subdivision

is finalized. Usually, the buyer pays the developer a deposit upon signing the contract.

By this time, you are still not the owner of the land. Ownership is transferred upon the

issuance of the Certificate of Title. The sale contract is merely a conditional promise by


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the seller to deliver a parcel of land, at some future time. The greatest risk is if the

developer is unable to proceed with the development within the time specified in the

contract. This means that your money gets stuck, sometimes even for several years.

And even if the development falls through, you will have missed out on other

opportunities in letting your money grow. (Australia)

Fourth, and the most obvious factor to consider is the location. There is a reason

why Victoria laid her eyes on that piece of land in Tagaytayeither she decided that her

family could build a home there, right in front of the most breath-taking scenery, or she

decided that she could put up her own ultra-posh shopping mall. No matter what your

reasons are for purchasing a parcel of land may be, nothing is more important than

location. If you are making an investment, then you avoid lands without resale value. If

you are planning to start up a business, then you do not buy land completely isolated

from potential customers. And if you are looking to build a house for yourself, you do not

land you can't build on.

Last, but probably the most sensible to even a ten-year old boy, you should know

if the land you are eyeing is subject to flooding. Unless you want your new lot to be a

swampy swimming pool, you have to inquire about past occurrences.

Now with regard to your build-a-house-on-developed-or-undeveloped-land, you

should take out your trusty pen and another clean sheet of paper to draw another lucky

Venn Diagram. In the simplest sense, developed land is fully prepared for home building,

while undeveloped land is not. Each has its own advantages and disadvantages.

Vacant land has its earning potential. If you develop your raw land, it can

increase its value in a short time. You can convert it into a recreational facility, with

Ferris Wheels, carousels, and all. You can rent it as farmland, with cows, pigs, and all.

You can also build a house, with David Beckham, kids, and all. Developing your raw

parcel can increase its value by three to five times its original price (Taylor).

It also comes with freedom of choice and expression. You will have so much

freedom in deciding what you want to do with your precious property. You get to decide

what your house will look like and what it will be made of. Undeveloped land is usually

the canvas of the most sophisticated architects today, as options are far less limited.

However, buying a lot in a subdivision means buying into layers and layers of

government regulation including building departments and homeowner associations.

Both groups will have a say about the size, location, design, types of exterior finishes,


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and maintenance of your house (Taylor). Also, building on undeveloped land could mean

providing your own private septic system and water well, because there may be no

utilities anywhere nearby.

If you decide to buy a land that is developed though, you will have fewer

headaches in finding the utilities you need. Owning a lot in a new subdivision typically

includes bringing all utilities onto the site, where the new house is easily connected to

them. Electricity, gas, water, etc. will be readily available for use. In addition, a house in

a subdivision may have a temporary price advantage over stand-alone homes, since

according to Ohios architect Taylor, Its [land] value will be related to the selling prices

of other homes in the area. (Taylor)

If you value predictable price appreciation, a close community, and want less

hands-on involvement in the building of your house, build it on a developed land for

building on undeveloped land will require more from you, your architect and your builder.


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