Good Governance - Take Home Exam

7/31/2019 Good Governance - Take Home Exam

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Archie D. Guevarra Dr. Arlyn S. Villanueva

A531 Good Governance

The Philippine property market has been one of the best performing industry in the country for the year.

The country is currently experiencing a property boom as evidence by the number of property projects

that were being launched and offered by the real estate companies. The property sector of the

Philippine Stock Exchange (PSE) has a year-to-date return of approximately 40%. The property boom the

country is experiencing is being attributed to the robust demand of office spaces by the Business

Process Outsourcing (BPO) industry in the country along with the strong demand for residential property

from the young professionals and the Overseas Filipino Workers (OFW) market. With these growth

potential for the property sector of our country many real estate firms are embarking on major capital

expenditures to gain a foothold in the industry. For Ayala Land, Inc. (ALI) alone, it had embarked an

estimated Php47 billion in capital expenditures for 2012, as it continuous to bet on the property

segment of the country and for it to achieve its goal of 5-10-15, in 5years it will have an annual net

income of Php10 billion and a return on equity of at least 15%. The property sector was further boosted

by the recent monetary policies that were issued by the Monetary Board (MB) as it had cut 75basis

points in benchmark interest rates in the country for the current year thus increasing the liquidity in the

domestic market.

There is currently a doubt on the industry that it will have a correction sooner or later as evidence by the

growing supply for the property market. Let us remember that, United States of America and other

European countries were hit by a credit crisis that continuous to affect the world market nowadays that

was brought by a property bubble. Historically low interest rates in the country had boosted the

demand for property segment in the country thus creating a larger default risk as buyers most often

than not finance their property acquisition through credit. Another problem is that OFW market is being


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threatened by the financial crisis that is being experience by the industrialized nations especially in

Europe wherein Filipino labor force are currently employed.

Mitigating the Risks

In order to mitigate the risks of oversupply in the property market, real estate companies should

carefully plan their projects through thorough feasibility studies. They shouldnt be dragged by the hype

in the property market and be spontaneous on its real estate projects. They must diversify their project

offerings and not concentrate in one customer base.

It would be advantageous for the real estate firms to optimize the low interest rate environment by

having its projects financed by leverage as it will boost their bottomline. It will be advisable for the real

estate firm to renegotiate their existing debts in order to take advantage of the low interest

environment and excess liquidity. One way to execute this plan is to issue new debt papers that will bear

a much lower interest rates as reflected by the market and used the proceeds to buyback the existing

debts of the company thus reducing the finance costs of the company.

Another option that real estate firms may embark is to issue or negotiate a foreign denominated debt.

As Philippine Peso is one of the best performing Asian currency, it would be an alternative for real estate

firms to take advantage of this scenario. Although this will expose them to foreign exchange risks, real

estate firms may employ different hedging instruments such as options wherein the firm will have the

option but not the obligation to purchase foreign currency at lower price since the outlook is that Peso

will continue to appreciate. Or it may choose to take the opposite side of the deal by betting that the

Peso will devalue and negotiate a forward contract wherein it will sell foreign currency at much higher

price.


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For the financial institutions that were engage for the mortgages of the real properties, it would be

advisable to utilized credit default swaps (CDS) in order to mitigate the default risks they are facing with

the growing number of borrowers brought by the low interest environment. In order to execute this, the

financing company can purchase CDS from an insurance company or other financing companies and will

allocate certain portions of its interest income as premiums to the CDS it bought, as this will guarantee

that the principal amount owed to the company will be repaid. The only downside will be the spread it

earns through the mortgages will be lessened.

For the investors of the real estate firms esp. those which are traded in the PSE, it will be advisable to

take a short position of the stock and enter the market during the correction period with a long position.

It can be done by executing a short sale agreement with other investors. The short sale is a process

wherein you will borrow certain number of shares from an investor or trader with a promise to return

the same amount of shares at a certain period. Then the borrowed securities will be sold and the

proceeds will be used to acquire securities that you bet that will rise. Come the day of the agreed date

that you will return the stocks you borrowed you will sell the position you enter with the other securities

and buy the securities that youve borrowed. Your earnings will depend on the outcome of your stock

position. If your short sale is effective, it will now be advisable to acquire the shares of the real estate

firms that youve short because technically they are in correction period meaning they are at a discount.

Sources:

http://www.businessmirror.com.ph/home/properties/22551-a-2011-philippine-real-estate-industry-

perspective

http://www.pse.com.ph

http://www.philstar.com/Article.aspx?articleId=831533&publicationSubCategoryId=66
http://www.businessmirror.com.ph/home/properties/22551-a-2011-philippine-real-estate-industry-perspectivehttp://www.businessmirror.com.ph/home/properties/22551-a-2011-philippine-real-estate-industry-perspectivehttp://www.businessmirror.com.ph/home/properties/22551-a-2011-philippine-real-estate-industry-perspectivehttp://www.pse.com.ph/http://www.pse.com.ph/http://www.philstar.com/Article.aspx?articleId=831533&publicationSubCategoryId=66http://www.philstar.com/Article.aspx?articleId=831533&publicationSubCategoryId=66http://www.philstar.com/Article.aspx?articleId=831533&publicationSubCategoryId=66http://www.pse.com.ph/http://www.businessmirror.com.ph/home/properties/22551-a-2011-philippine-real-estate-industry-perspectivehttp://www.businessmirror.com.ph/home/properties/22551-a-2011-philippine-real-estate-industry-perspective

Good Governance - Take Home Exam

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