Bernardo M. Villegas
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Rebalancing Strategy
published: Mar 31, 2017



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Competition Neglect

           With the feverish rate of construction of condominium units all over Metro Manila and to a more limited degree in other urban areas like Metro Cebu, the question of the possibility of a real estate bubble is now more frequently asked.  It is difficult to give an answer without an accurate estimate of the potential supply and the approximate demand for these units over the next three to five years, the average construction period.  Answers given by real estate brokers or the real estate developers themselves are usually suspect because of potential conflicts of interest.  My intuitive answer is that at the low to medium-cost level of, say 800,000 pesos to about 3 million, the danger of a bubble is remote because the ones buying the units are the same ones who occupy them. I know for a fact that a good number of those who buy these low and medium-cost units are OFWS and their families or employees of Business Process Outsourcing outfits who want to live in the middle of the city where the BPO offices are.  Also among the buyers are a good number of families with houses in the suburbs but whose children studying in Manila-based universities need dormitory space close to where their schools are.    Only when the speculators outnumber the home occupiers should we start worrying.  This situation may apply to the expensive residential units that are worth fifteen million pesos or more. 

          I obtained some insights into why certain sectors like real estate can be subject to a boom and bust cycle by  reading a recent best seller entitled "Thinking Fast and Slow" by  Nobel laureate in economics, Daniel Kahneman,  a psychologist who received the 2002 Nobel Prize for his seminal work that challenged the rational model of judgment and decision making.  In one of the chapters of the book, he referred to the concept of "competition neglect" coined by Colin Camerer and Dan Lovallo.  This concept was illustrated by a quote from the then chairman of Disney Studios.   Asked why very many expensive big-budget movies are released on the same days (such as Memorial Day and Independence Day), he replied:  "Hubris.  Hubris.  If you only think about your own business, you think, 'I've got a good story department, I've got a good marketing department, we're going to go out and do this.'  And you don't think that everybody else is thinking the same way.  In a given weekend in a year you'll have five movies open, and there's certainly not enough people to go around.'

          The big real estate developers are owned by very entrepreneurial individuals who in the last two to three years have been encouraged by what they perceive as a booming demand for vertical residential units and the eagerness of the banks, oozing with liquidity, to finance their projects.  In this euphoric mood, hardly anyone thinks of competition.  Everyone thinks he has the best projects to offer to the public.  As Kahneman says in his book:  "The candid answer refers to hubris, but it displays no arrogance, no conceit of superiority to competing studios (still in reference to the Disney Studios case).  The competition is simply not part of the decision, in which a difficult question has again been replaced by an easier one.  The question that needs an answer is this:  Considering what others will do, how many people will see our film?  The question the studio executives considered is simpler and refers to knowledge that is most easily available to them. Do we have a good film and a good organization to market it? "   The competition is completely ignored!

          Although the competition is very visible to the eyes of the real estate developers, they generally choose to ignore the obvious.  Thus, the consequence of competition neglect is excess entry:  more competition enter the market than the market can profitably sustain, so that average outcome is a loss.  The outcome is disappointing for the typical entrant in the market, but the effect on the economy as a whole could well be positive.  What could be disastrous at the micro level could lead to faster growth at the macro level.  A lot of investments in the construction of expensive, high-rise apartment units will obviously stimulate employment and sale of construction materials.  GDP can grow robustly.  But the moment of reckoning will sooner or later come when a glut is experienced in the market.  This is what I saw with my own eyes in  Spain during the heyday of the construction boom during the years leading to the Great Recession.  Competition neglect just blinded many developers to the impending glut in the market.

          I don't really know to what competition neglect will lead in the case of the Philippine high-end real estate market.  What thing is sure:  it will help if the leading developers would commission a completely independent study of supply and demand condition, at least in such major districts as Makati, Fort Bonifacio, Ortigas Complex, New Manila and other parts of Quezon City. Let me point out here that I am not worried about office buildings in these same sites because the BPO and KPO industries are projected to grow at double-digit rates annually for the next five years. There will be sufficient demand for office space.  What real estate developers have to worry about are residential units at the high-end level.  Filipino millionaires may not be growing at the same rapid pace.

       I know that Dr. Stan Padojinog, who has studied the real estate market in the Philippines for the last twenty years, is being approached by some of the leading developers.  Those who would want to be part of the study may want to contact him at his email address winston.padojinog@uap.asia.   For comments, my email address is bernardo.villegas@uap.asia