Previously, “fire sales” were defined as the discounted sale of smoke-damaged assets as a result of a fire. At the moment, fire sales pertain to the purchase and sale of properties at drastically reduced prices. Transactions are usually completed quickly and without incident.
Given the pandemic’s severe economic impact, it’s no surprise that fire sales are becoming more important than ever.
The Domino Effect
Assume a bank is experiencing large losses as a result of a nationwide economic crisis and has decided to reduce its risks by selling its assets at extremely low or fire-sale prices. Once its fire sale is deemed successful, the temporarily low market values it caused will prompt other banks to reassess their assets as well, resulting in a cascade of fire sales that can inflict greater damage on market participants’ overall asset prices and net worth.
In simple terms, a fire sale done by a single entity may result in a systemic and self-reinforced implication of financial risks.
As mentioned by a report of the US Treasury in 2009, “an initial fundamental shock associated with the bursting of the housing bubble and deteriorating economic conditions generated losses for leveraged investors including banks…The resulting need to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales.”
On a smaller scale, it’s easy to see how buyers have the upper hand during fire sales, owing to the fact that they’re getting heavily discounted deals that would otherwise be impossible to obtain during regular sales.
Research by Henri Servaes and Jean-Marie Meier of London Business School and The University of Texas, respectively, indicates that, rather than reflecting the destruction of wealth, the higher returns produced by fire sales actually reflect a redistribution of wealth from sellers to buyers. Fire sales represent society’s desire to preserve the value of its assets during times of economic distress, such as the current impact of COVID-19.
Fire Sales In Real Estate
With the global economic downturn caused by COVID-19, fire sales have been among the most common ways of liquidating assets within impressively short time-frames. The real estate industry, despite its non-liquid assets that may deem fire sale transactions challenging, is no exception.
A property purchased during a fire sale is not always a good deal. As a result, knowing prime and trendy locations is critical to ensuring that this once-in-a-lifetime opportunity does not go to waste.
Out Of The Metro
The adoption of remote working arrangements during the pandemic resulted in a shift in the local workforce’s residential preferences. This is known as the “doughnut effect,” and it refers to an out-migration in which people flock to the suburbs and away from the city center.
In the Philippines, a manifestation of the doughnut effect can be seen with home prices in Metro Manila contracting to 4.8% year on year during the fourth quarter of 2020. On the other hand, prices of residential properties in provinces rose to 5.9% in the three months to December.
Provincial cities and municipalities with close proximity to Metro Manila are spiking interest among property seekers and developers due to two main factors: one, relaxed lockdowns due to fewer COVID-19 cases, and; two, lower population levels.
In particular, during the first quarter of 2021, a report by real estate marketplace Lamudi identified Antipolo, Rizal as the top location of choice for house and land seekers. According to the report, the location alone accounted for 24.95 percent of all page views and 39.11 percent of all leads.
The quiet and pleasant green spaces of the city make it ideal for home buyers looking for relaxed locations but not too far from the metropolis.
Other areas outside of Metro Manila have seen a surge in buyer interest for their foreclosed properties. San Pedro, Laguna (26.74 percent); Bacoor, Cavite and Lucena, Quezon (20.93 percent); and General Trias, Cavite (20.93 percent) have shown the most interest (15.12 percent ).
Gearing Up For A Better Normal
Bangko Sentral ng Pilipinas’ latest Residential Real Estate Price Index (RREPI) shows a 27% year-on-year growth in the Philippines’ property prices, recording its highest percentage since 2016. According to BSP, a key driver in the increased average prices of high-end properties can be traced to their stronger demand.
This is not surprising, given that real estate firm Santos Knight Frank described in its webinar titled “Wealth Report 2021” about people’s desire in creating a “better normal”. Living in dense areas has increased demand for prime and luxurious residential developments such as Nuvali in the city of Santa Rosa, Laguna, as well as the coastal areas of Batangas.
Colliers Philippines, a commercial property estate agent, agrees that the luxury segment appears to be the “least affected during an economic slowdown.” With COVID-19 still a threat, more and more people are realizing the importance of having safer, more comfortable, and functional homes. This is exacerbated by the fact that employees and students working remotely will almost certainly require larger homes with built-in home offices.
Given the potential demand, Colliers Philippines anticipates more luxury projects being launched in the market, some of which will be under joint venture development. By the end of 2020, the average take-up rate for these projects had reached an astounding 85 percent. This reflects the agent’s cautious optimism for the luxury real estate market.
The Rise Of The Second Home Market During Fire Sales
Throughout the pandemic, many residents of densely populated urban areas, such as Metro Manila, have expressed an interest in real estate properties on the outskirts. While some are determined to relocate entirely, others are looking for a second home, with the latter being a driving force behind purchases by high-net-worth individuals. This is according to a recent study by Leechiu Property Consultants (LPC), a leading real estate services firm.
Gated resort communities in the province of Batangas, specifically along the Peninsula de Punta Fuego, Kawayan Cove, and Tali Beach, are popular second-home hotspots.
Because of their desire for healthier environments away from busy business districts, properties in coastal communities are appealing to second-home buyers.
Aside from personal benefits, newly completed roads and expressways have resulted in shorter travel times between Metro Manila and these picturesque coastal communities. Increased infrastructure activity in the province has resulted in a slow but steady rise in property prices since 2015. Furthermore, its improved internet connectivity with speeds of up to 100 megabits per second increased its attractiveness to property buyers.
