Recently, the BSP (Bangko Sentral ng Pilipinas) announced that FDI (foreign direct investment) inflow in the country increased by 116% on September, breaking the previous FDI record. The huge jump in FDI is an indication of foreign investors’ trust in the country’s economic principles. This surge is important to the property sector as much of the FDI received is channeled to real estate. In particular, the main driver of demand in office real estate comes from the BPO sector (business process outsourcing). Many multinational companies have invested more in the country because of our maturing BPO industry and existing talent pool.
However, despite the large increase in FDI, the country is still considered as one of the nations with the lowest FDI. It has been a common and reoccurring pattern in the country, that despite the sharp spikes, our FDI still cannot compare to that of our neighboring countries. In fact it was reported in mid-2014, that the Philippines remains having the second lowest FDI in SEA (Southeast Asia).
In ULI’s (Urban Land Institute) Emerging Trends in Asia Pacific 2015, the Philippines was ranked eighth in investment, dropping from fourth place in last year’s report. With the country’s real estate sector as an important attractor and beneficiary of FDI, what are the factors in real estate that prevent more foreign investments to enter the country?
Foreigners cannot fully own properties
For one, the report cited that despite the country having an attractive market for foreign investors, certain policies prevent them from fully entering the country. One particular policy in the country is the 60/40 rule, which prohibits foreigner-owned corporations to own land in the Philippines. Only corporations which are 60% owned by Filipinos are allowed to purchase land. However, the country allows foreign corporations to lease their land for a number of years and it should also be noted that the country currently has the lowest rental rates in Southeast Asia.
Strict policies are also applied to foreign individuals looking to purchase and own residential units in the country. Unlike Malaysia, which allows foreigners to own properties above RM 1,000,000 under their “Malaysia My Second Home” program, our country only allows foreigners to own structures (improvements) and lease lands.
Complicated processes and red tape
On top of the strict policy, foreign companies also struggle to set up shop in the country due to troubles with bureaucratic procedures and government transparency. According to World Bank Group, to set up a business in the country, one has to go through 16 steps. As of June 2014, the Philippines is 161th in ease of starting up a business. One can easily imagine the amount of red tape that a foreigner has to go through in order to set up in the Philippines.
With the markets of our fellow Southeast Asian neighbors merging, we can expect that the region will attract plenty of foreign investors looking for a good place to start a venture. The AEC (Asian Economic Community) will no doubt, bring in large demand of spaces and properties both from member countries and nations outside the AEC. Many are optimistic with the changes to come in 2015. However, with policies strict as ours, it will be no wonder if our country continues to lag behind even after the integration. Long lease terms and low rental rates are not enough to welcome foreign capital. Our lawmakers should add to their priorities in 2015, the amendment of our current policies to attract and retain foreign investments in the country.
Want to know what else to expect for the real estate industry in 2015? Check out our article here.
Forex money photo from epSos.de/Flickr
Thumbnail photo from TaxCredits.net/Flickr