Optimism and pragmatism are the buzzwords for Philippine real estate over the next six years
The political cycle is said to impact the economic cycle. The relatively peaceful and decisive national elections last May bodes well for sustaining the country’s robust economic growth. Although President Rodrigo Duterte wrested the support of the voters from the current ruling party, there was a smooth transition of power. Political realignment at the national and local levels has been observed in recent weeks, laying the ground for a fresh presidency with a strong mandate from the electorate.
Likewise, the state of the economy has impact on the real estate market. One major economic phenomenon in the Philippines is the sustained growth of the business process outsourcing (BPO) industry. Revenue-wise, BPO industry leaders are projecting that the industry will overtake the dollar remittance from overseas Filipinos.
What is more relevant is the intertwining of political policies with the economy. With the enactment of Republic Act No. 10844 creating the Department of Information and Communications Technology, more departmental focus may be given to the industry and sector drivers like the BPO industry. Another political intervention that may sustain growth is the commitment of the incoming Finance Secretary Carlos Dominguez to revisit the REIT Law and its implementing rules and regulations based on an interview by the Manila Times published on June 12, 2016.
Since the current political climate has a positive impact on the economy, it is also instructive to evaluate the macroeconomic indicators to understand and project the growth of the real estate market in the months and years to come.
The Philippines’ gross domestic product (GDP) grew 6.9% during the first three months of the year, which is a big boost from the annualized GDP growth of 5.8% in 2015. This jump was expected due to election-related spending and ever-increasing consumer spending.
Latest figures from the Bangko Sentral ng Pilipinas (BSP) show that the net foreign direct investment reached almost $6 billion in 2014 and 2015. Based also on latest BSP statistics, the average bank interest rate for the month for May 2016 increased to 4.82% as compared to 4.0% by end of 2015. The average Philippine peso to US dollar exchange in May 2016 is at Php46.8023, as compared to the average of Php45.5082 as of last year.
Remittances from overseas Filipino workers have also been stable. Total remittances for 2015 reached $25.77 billion compared to $24.63 billion for 2014. Remittances for the first three months of the year reached $6.56 billion. Inflation rate for the months of January to May 2016 is a slightly lower 1.3% compared to 1.4% in 2015 according to BSP.
Total visitor arrivals in 2015 reached 5.36 million, registering an increase of 11.67% over the arrivals in 2014. Tourist arrivals already reached 1,602,253 by end of March 2016. For three consecutive months, the country’s tourism grew by double digit at 13.17% in January, 20.42% in February, and 11.86% in March. These tourist arrivals generated a total revenue of about Php67.74 billion.
The growth of the BPO industry has been phenomenal in the last decade, making it the main driver of the demand for office space during this period. With a target of 1.3 million employees and annual revenue of more than $25 billion in the next couple of years, real estate developers are building to deliver over 1 million sqm of office space in the next two years in major business districts in Metro Manila, on top of the existing 6 million sqm.
The new trend in the office market is the strong selling market, especially in Bonifacio Global City (BGC). While corporates typically prefer leasing as compared to buying office spaces due to financial and tax benefits, the strong demand for office space and increasing rents have compelled some companies to simply acquire office spaces. Pre-selling of office real estate was re-started by Ayala Land with its High Street South (HSS) Corporate Plaza Tower 1 in 2012, at a selling price of Php130,000 per sqm. Its success was immediately followed by the launch of HSS Tower 2, and other Ayala developments, which are now selling between Php180,000 to Php230,000 per sqm, depending on the building. Ayala subsidiary Alveo Land also launched its Alveo Financial Tower in Makati CBD with a tag price of Php240,000 per square meter. Pre-selling of office spaces is indeed back.
Servicing the estimated demand for housing at 5.5 million units for this year (even just a small portion of it) is a key driver of growth. Supply-wise, the highest number of approved licenses to sell is just a little over 200,000 housing units per year. If left unchecked, the housing backlog is steadily increasing every year. This is the reason why real estate developers have been targeting to deliver 1 million housing units to narrow the gap between undersupply of housing units and increasing demand.
In the past years, most developers have been offering developments in Metro Manila. At present, most top developers and even the second-tier developers are targeting other locations, especially the highly urbanizing regions, since competition in Metro Manila has been tighter in recent quarters, and land prices have been soaring.
Mass-housing developer 8990 Holdings is targeting the affordable segment and building in locations outside Metro Manila as well. It is launching some 14 new projects all over the country in 2016 with a total of 12,453 housing units: 46% would come from Luzon, 30% from the Visayas, and 24% from Mindanao.
Given the level of real estate development, the Bangko Sentral ng Pilipinas recently launched its Residential Real Estate Price Index (RREPI) to evaluate housing developments and prices. Based on its three-quarter monitoring, housing prices increased by 9.2%. This increase is said to represent a vibrant housing industry in the Philippines that is confirmed by the trends in consumer prices and the recent result of the consumer expectation survey. Asset price inflation is quite remote because it is driven by robust demand, not oversupply, according to BSP as reported by ABS-CBN News website on June 5, 2016.
The retail real estate market will likewise be boosted if the REIT Law is eventually implemented and developers will list their income-generating retail properties as REIT companies in the stock exchange. The investing public would enjoy dividends from the 90% net operating income of these retails spaces. As earlier reported, the SM Prime has 58 malls, Robinsons Land has 40 malls, and Cosco/Puregold Group has 36 stores. Ayala Land intends to reach the 3-million-sqm mark in shopping mall footprint by 2020, while Megaworld will launch an average of 60,000 to 70,000 sqm of retail space every year until 2019. Vista Land intends to open six to seven “AllHome” annually over the next five years that would be integrated with their residential developments.
Hotel and gaming market
Philippine tourism has been benefitting from the steady growth of tourist arrivals in recent years. While the 6-million-per-year mark has yet to be reached, tourist arrivals for the first three months already reached over 1.6 million. More importantly, the government through the Department of Tourism and its attached agency the Tourism Infrastructure and Enterprise Zone Authority (TIEZA) have been devising ways to prop up the country’s tourism sector.
Like the REIT Law and Philippine Economic Zone Authority, TIEZA has been empowered to give incentives to investors and developers in the tourism industry to accelerate developments. The implementing rules of these incentives have been, however, stalled due to President Aquino administration’s suspicion on tax and other fiscal incentives. While waiting for the final verdict on the incentives, TIEZA designated many tourism enterprise zones.
Special economic zone status and Philippine Economic Zone Authority (PEZA) accreditation have been motivating investors and developers to build more industrial-cum-commercial spaces. PEZA even accredits Information Technology Parks/Centers, Tourism Economic Zone, Medical Tourism Economic Zones, Retirement Economic Zones, Agro-Industrial Economic Zone, Facilities Economic Zones, and Utilities Enterprise Economic Zone.
Filinvest Land is pushing its advantage in integrating mixed-used developments around the Clark Special Economic Zone (CSEZ). The group won the development rights on the 288-hectare Clark Green City and long-term lease of the 201-hectare former Mimosa Leisure Estate. Filinvest would presumably take advantage of the pent-up demand for industrial spaces, and blend in other commercial and residential developments to increase the level of success and profitability.
Ayala Land is developing the Alviera Industrial Park in Porac, Pampanga. The group is likewise positioned to capture the demand for industrial spaces between CSEZ and Subic Bay Freeport Zone. The 31-hectare industrial park has reported its brisk sales.
There is no doubt that the economy and the various real estate sectors are growing. Since everyone is anticipating President Duterte’s administration, it is important to benchmark growth from the current state of affairs. Immediately after he was elected, President Duterte released his own 8-point economic agenda, which in essence is not very different from the Aquino administration’s policies, with some refinements perhaps. Probably, the major departure is ensuring the attractiveness to investor. There is also a subsequent pronouncement on REIT Law by the incoming Finance Secretary. Businessmen are already anticipating positive news on the REIT and the incentives provided by PEZA, TIEZA, Bureau of Investments, and even the Philippine Retirement Authority.
After more than a decade of economic growth and several years of real estate boom, everyone is anticipating the positive political climate to sustain this growth. While growth may not be phenomenal due to higher base, stable growth is more than welcome.
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