OPPORTUNITIES ARE ABOUND

The Economy

Buoyed by the stable Aquino Administration and its platform for good governance, the Philippines posted a real Gross Domestic Product (GDP) growth rate of 6.8% in 2012. The recent credit rating upgrade by Moody’s Investor Services to investment grade (Baa3) reinforces the earlier upgrades from Fitch’s and S&P’s ratings. While the projected GDP growth rate for 2013 was initially pegged at 7.8%, this will be adjusted due to the devastations caused by Typhoon Yolanda. Based on initial estimates, the annualized GDP growth rate will still be in the high 6% hovering to 7%. The average GDP growth rate for most of the Association of Southeast Asian Nations (ASEAN) for last year, and the projected GDP growth for this year is 6%. Thus, even with the negative impacts of Typhoon Yolanda, the Philippines is still at par with or even has a slightly higher growth rate than most ASEAN countries.

The average annual bank interest rate is a very good indicator of stability of available capital, as well as business sentiment. In the past five years, the single-digit interest rate regime has been experienced. Starting with high 8% from 2007 to 2009, it has been dipping to 6% since 2011 up to the present. Likewise, inflation rate is another good gauge of business activities. While inflation rate spiked to over 8% in 2008, since 2009, inflation rate has been averaging 4% and is projected to dip to 3% this year.

The Philippine Peso to US Dollar exchange is a popular indicator of economic health given that the Philippines is strongly tied to the US economy, and most imports and exports are done with US Dollars. The exchange has been generally stable with a slight bias to a stronger Peso, presumably due to the lingering weakness of the US economy in recent years. Moreover, dollar has been steadily generated from business process outsourcing and stable overseas Filipino remittances. As of September 2013, total remittances reached US$16.48 billion, which is 5.84% higher for the same period last year.

The total Visitor Arrivals by August of this year breached the three million-mark, at 3,180,903, which is 11.28% higher for the same period last year. The 3.18 million arrivals is also another record as it is the first time that visitor arrivals reached the three million mark in the month of August.

More importantly, the Philippine Economic Zone Authority (PEZA) investments from January to October this year increased by 38.5% (year-on-year), and reached Php 150.91 billion. This is a testament to the increasing attractiveness of the Philippines given that the total foreign direct investments in 2012 grew by 42.68%.

All of these key indicators translate to robust economic fundamentals and sound investment environment. In turn, the macroeconomics fuels the strong demand for the different sectors in the property market.

Office Market

The demand for office spaces in Metro Manila is still very robust, with occupancy rates ranging from 94% to 98% in the different business districts. The BPOs’ continued expansion represents the biggest demand driver. Developers are pushing ahead with their projects to capture this pent-up demand. Rents have been inching up, even with new buildings coming online, due to the tight supply. Thus, the market has been seeing pre-leasing again especially from big occupiers to avoid the space crunch. While Ortigas, Alabang and Quezon City offer alternative sites, Makati CBD and BGC remain as the preferred office locations.

Since Makati remains the location of headquarters of major companies and global businesses, developers and investors have been looking for old buildings that can be renovated or re-developed. Some big companies even acquired existing buildings that can be converted for their own use and occupancy. While rental rates are increasing due to space limitations, these are still within tolerable limits. Rents in Premium Grade A are still slightly higher than Php 1,000 per sqm per month, while rents in Grade A have an average of Php 750 per sqm per month. Small and old buildings in Makati are offering rents at an average of Php 550 per sqm per month.

The very strong demand for Fort Bonifacio Global City (BGC) lots has pushed accommodation values even higher than in Makati land values, since most lots in BGC are below the 16- floor area ratio (FAR). BGC is indeed the preferred location of BPOs. The interest in BGC’s office market has further thickened with the recent acquisition of five buildings of the Net Group by no other than SM Group, at an estimated tag price of Php 18 billion. Meanwhile, asking prices in BGC are way above the Php 30,000 accommodation value. The cross section at BGC, however, does not directly compete with Makati CBD. Makati still caters to the corporates and traditional offices, while BGC buildings (green and all) mainly cater to BPOs. BGC and Makati are actually complementing one another, which is a welcome decongestion of Makati CBD.

Residential Market

While various developers have been more discerning with their project launches, the residential market continues to be very active. The high-end segment remains to be strong and top brands of the Ayala, Century Properties, Filinvest, Robinsons, and Rockwell Groups have been introducing products catering to the rich and famous. It is no wonder that rents in luxury high-end condo units are well above Php 200,000 per month, depending on the floor areas. Rents in the villages, given the very limited supply, remain to be strong ranging from Php 300,000 to Php 500,0000 per month.

For the mid-market and affordable segments, the prevailing low interest rates and high liquidity allow both developers and buyers access to various financing schemes. Various developers continue to tap the availability of financing from the banks and even from international players. These financing institutions assure them access for land banking as well as to complete their ongoing residential projects. This highly liquid regime likewise gives their projects a better likelihood of being sold as this would open their units for sale to a larger market, locally and internationally.

Retail Market

The Filipinos’ affinity to malls and their propensity to spend have been keeping the retail owners with enviable cash liquidity. Retail owners have been raking in from overseas Filipinos and their families, and from the ever-increasing number of BPO employees. Even for self-employed or small businessmen, or the traditional employees, disposable incomes continue to rise over time and these incomes funnel to the malls. With a lot of office and residential developments, various retail platforms have been introduced as well, such as the mini-grocery and convenience store setups. Some developers have either setup their own retail division or forged alliance with well-known retailers.

Retail malls are still controlled by a few big players. Recently, ownership or strategic alliances have been shifting, mainly brought about by the strategic plays of the key players. Early this year, the SM and Walterwart Groups structured a joint venture to counter the aggressive moves of Puregold Price Club Inc., which includes S&R Membership Shopping. Puregold, apart from its recent fray in the Philippine Stock Market, also acquired four operating Eunilaine foodmarts and its 11 operating “Grocer E supermarts”. Other strategic retailers are the Araneta, Ayala, Federal, Filinvest, Greenfield, Kuok, Metro-Gaisano, Ortigas, Robinsons, Rockwell, Sta. Lucia, and Star Groups.

Successful retailers have been dictating lease rates, terms and conditions of occupancy, delivery, and even control the supply chain, thereby, putting pressure on the suppliers to lower cost. As in the previous years, retail malls have been generating one of the highest, if not the highest yields, in the property sector. It is projected that further consolidation shall happen in major retail platforms, and niche players would continue to look for untapped platforms in specialized markets.

Hotel and Gaming Market

The hotel market has been benefitting from the steady rise of the Philippine tourism industry. It is interesting to note the recent race to put flags in major CBDs, such as the Holiday Inn and Fairmont in Makati, Grand Hyatt and Shangri-la in BGC; and some chains like the Ascot Group and the affordable Tunes Hotels have been busy criss-crossing the CBDs. The biggest driver, however, is the booming Gaming industry. The success of the Resorts World Manila (Megaworld Group) and Solaire Manila (Bloombery Resorts) had reverberated to the big players. Large-scale projects are now underway mainly in the “Bay Area” and airport area. Given the requirement of the Philippine Amusement and Gaming Corporation (PAGCOR) to put up hotel rooms in exchange of gaming licenses, a lot of quality supply of hotel rooms would be sprouting.

On the demand side, record-breaking tourist arrivals have been happening almost every year. For 2013, it is the first time that the 3 million-barrier, a pipe-dream a decade ago, was breached as early as the month of August. More importantly, the Department of Tourism has been lining up major international and interregional events for the Philippines, such as hosting the Asia-Pacific Economic Cooperation Summit in 2015. Bilateral (e.g. Philippine-Brazil no-VISA travel) and multilateral (e.g. ASEAN integration) arrangements would further boost the influx of tourist in the Philippines.

Industrial Market

The Philippine Economic Zone Authority has been harping that vacancies in PEZA parks have been declining and there have been steady inquiries on the Philippine industrial market. While one has to take this with a grain of salt, the bell-weather of industrial market is the combined market of the Clark Special Economic Zone (CSEZ) and the Subic Bay Freeport Zone (SBFZ). Officially, CSEZ has a total area of approximately 29,000 hectares while SBFZ has a total area of about 67,000 hectares. In terms of real space for lease, the Clark Development Corporation (CDC) is leasing a total area of approximately 116 hectares while the Subic Bay Metropolitan Authority (SBMA) is only leasing a total area of 51 hectares.

In terms of demand, CSEZ has approximately 1,100 locators, and SBFZ has a total of 600 locators. The success of both Clark and Subic has been through identifying major tenants that would sublease to smaller tenants. In the case of CSEZ, CDC leased big spaces to Berthaphil Inc., Global Gateway Development Corp., and PhilExcel Business Park Inc. The SMBA leased big areas to the Japanese-developed Subic Technopark and the Taiwanese-driven Subic Gateway.

Strategic Opportunities

The Office Sector shall remain a favourite given the very tight office supply. Developers and landlords should take advantage of the “pre-leasing” phenomenon to fill up their spaces, and/or fast track their constructions. Yields shall remain strong and could easily out-pace interest rates. The major decision points are what market to target (BPOs or traditional companies); what technology to use (green or traditional building); and what percentage to sell (pre-leasing or pre-selling). The Ayala and Century Groups have been benefitting from pre-selling of office spaces.

Commercial spaces offered by the retailers shall continue to enjoy the highest yields. Retail malls have been expanding their tenant-mixes that include major government offices and collection agencies to attract more and more foot traffic. The general concept is to attract shoppers in the mall and keep them in for as long as possible by offering various services and products. For niche players, they should consider location-specific opportunities, especially for smart shoppers that avoid long queues and tight parking in malls, and prefer relaxed shopping and dining.

The Residential Sector is highly opportunistic. Luxury residential development is always resilient but more expensive to build. Mid-market is very competitive and location-specific. Demand for affordable and socialized housing has been north of three million, but the marketing is based on volume and highly supported by a number of government agencies, and the margin per unit is relatively lower. The common trend is mixing residential with office and retail developments. More importantly, it is instructive to conduct accurate market scanning on the sizes, amenities and pricing of the residential products to be offered; and how much retail and office spaces to be blended in the mix.

The Hotel Sector has always been a boom-time play. With the investment grade status of the Philippines and record tourist arrivals, this is the best time to put up hotels. The key questions are what “star” to put up (which is location-specific); would it be owner-operated or managed by well-known brands; and would the hotel development co-locate with the casinos or traditional tourism areas.

The Industrial Sector has been the laggard of the Property Market for more than a decade. In recent years, foreign companies have been steadily coming back to the Philippines. The years 2012 and 2013 showed faster growth of foreign direct investments. There are now a number of applications to get PEZA accreditation for a number of economic zones all over the Philippines.

The Philippines is in a very good position to sustain the upbeat Property Market. Even with the destruction caused by Yolanda, most players seeing the opportunities after the crisis. The Philippine government, together with various local and international groups, has generated billions of Pesos for rehabilitation and reconstruction. All sectors are now indeed growth areas, with some caveats in the residential and retail segments. Great opportunities are abound, and are supported by real demand, strong economy, and positive business climate.