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Biggest Philippine manager keeps faith on pricey property stocks

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Philippine real-estate stocks will extend a market-beating rally, the country's biggest money manager is betting, unfazed by the most expensive valuation in four years.

[MANILA] Philippine real-estate stocks will extend a market-beating rally, the country's biggest money manager is betting, unfazed by the most expensive valuation in four years.

The Philippine Stock Exchange Property Index has climbed 24 per cent this year as investors became more sanguine about President Rodrigo Duterte's pivot to China and his US counterpart's insular approach to trade, which could hurt outsourcing companies. The measure now commands the highest premium since 2013 over the stock benchmark, which is up 17 per cent.

Driving demand for houses and office space is an accelerating economy, rising remittances from Filipinos abroad and government incentives to draw offshore businesses. Complimenting that is lawmakers' plan to lower some taxes and boost spending on roads and bridges, a move cheered by investors.

"Property stocks will continue to move higher and even outperform as the sector continues to grow with the economy," said Fitzgerald Aclan, who helps manage about US$20 billion at BDO Unibank Inc. as the head of equity investments. "There are still some property companies that offer good value and attractive potential upside." The fund manager, whose BDO Sustainable Dividend Fund has gained 16 per cent this year, pointed to Ayala Land Inc. Its shares have increased about a third in value in 2017 but are still trading at a price-to-earnings ratio that's 14 per cent lower than the five-year average. Mr Aclan said he turned "bullish" on the sector this year, cutting holdings of consumer and energy companies to buy real-estate shares.

Perception has changed, according to COL Financial Group, amid an increase in home bookings and new residential developments, while the office segment is benefiting as the government lures overseas outsourcing companies and those that run gambling websites.

"It doesn't look like this will be over anytime soon," said Richard Laneda, an analyst at COL. "Sentiments have improved." Earnings at Philippine developers have been climbing to records as Filipinos working and living abroad send money back home while outsourcing companies continue to expand. Mr Duterte's plan to reduce income taxes and spend US$166 billion on infrastructure has led to a better economic outlook. Gross domestic product is forecast to expand 6.5 per cent annually in the next three years after averaging 6.4 per cent between 2014 and 2016.

To be sure, the rally is facing hurdles such as a government plan to scrap tax incentives that subsidize housing for some people. Demand could also be hurt by rising borrowing costs and rising prices that make affordability an issue, according to Astro del Castillo, managing director at First Grade Finance Inc.  "Property looks attractive but it pays not to be aggressive particularly when interest rates are inching higher," Mr del Castillo said.

The impact of reversing exemptions on value-added tax for low-cost homes should be minimal because of the "huge" housing gap, BDO's Aclan said. The Philippines has a 5.7 million housing backlog, according to Vista Land & Lifescapes Inc.

"There will be future headwinds like rising interest rates but there's always natural demand as a function of a growing economy," said Mr Aclan, whose top picks in the sector include Ayala Land, Megaworld Corp and Filinvest Land Inc. "As long as there's economic growth, the whole sector isn't going to suffer."