After a steady three-year rise in the Residential Real Estate Price Index (RREPI), the Bangko Sentral ng Pilipinas (BSP) monitored that residential prices grew marginally by 0.4% year-on-year in the second quarter of 2019 as RREPI rose to 117.5 from 117 for the same quarter last year. Residential prices in the National Capital Region (NCR) grew at a faster rate than in areas outside NCR (AONCR) as prices for the former increased by 5.2% year-on-year while slowing by 1.1% for the latter.

This trend is mirrored by the very low inflation rate of 0.9% in September 2019, which is the lowest since May 2016, which was the month of the national elections. It is well known that the delayed approval of the 2019 national budget and the implementation of various “Build, Build, Build” projects as the main culprits in the slow growth and low inflation, coupled with the fact that the results of the mid-term elections is still sinking in.

At any rate, Pinnacle Research opines this sideway track is momentum-building for the next wave. This edition of Market Insight shall present the strong case of gearing up for the next level of expansion.

Everyone knows and is excited about the various infrastructure projects of the national government. Pinnacle has been citing the aggressive expansion of the top real estate developers. For this quarter, Pinnacle Research will highlight some international actors in the real estate market.

Mainland Chinese have been cited in recent quarters as one of the demand drivers of office and residential markets, and translated to demand for hotel, mall, and even industrial spaces. The Philippines is poised to register record-breaking applications for Alien Employment Permit (AEP). Based on the latest data, which is only for the first half of 2019, the Bureau of Local Employment (BLE) of the Department of Labor and Employment (DOLE), already registered 52,450 AEP applications. This is already approaching the 2018 full-year total of 54,251 AEP applications. Most of the applicants are Chinese nationals and they come from the Philippine Offshore Gaming Operators (POGO) sector. Pinnacle Research also monitored Chinese investors and developers who are teaming up with local real estate players for joint development of projects.

Not to be outdone, the Japanese are likewise giving it a push led by the heavyweight Mitsubishi Group, which is touted as Japan’s largest trading company. We are not talking about the successful Mitsubishi Mirage, which received incentive approval under the Comprehensive Automotive Resurgence Strategy (CARS) Program of the Bureau of Investments (BOI) that eventually led to the building of a factory with 35,000-unit annual capacity in Sta. Rosa, Laguna. Yes, that is big, but the Mitsubishi Group is planning for bigger things.

Mitsubishi Corp. signed a partnership deal with the Filinvest Group for a mixed-use project in Alabang. Mitsubishi will acquire a 40% stake in approximately 17,000-sqm land held by its unit Filinvest Alabang Inc., for the development of a Php15 billion mixed-use project. Likewise, Mitsubishi Corp. owns 40% of the newly formed joint venture PHirst Park Homes together with the 60% of Century Properties Group. The venture will roll out 33,000 home units, worth approximately Php57 billion, outside of Metro Manila. PHirst Park Homes will launch 15 communities in the CALABARZON and in Central Luzon regions within the next 5 years.

In addition, Mitsubishi Estate is acquiring from ArthaLand Corporation a 40% stake in the latter’s ownership of Savya Land Development Corporation, which is developing the Savya Financial Center in Arca South, Ayala Land’s new mixed-use estate in the former FTI Terminal in Western Bicutan, Taguig. This new, premium-grade mid-rise office development will have a fully integrated retail component. Both the North and South towers of Savya are designed with modern, smart, and sustainable building features, pre-certified Gold with the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) and registered with the Philippine Green Building Council’s BERDE.

Apart from the Chinese and Japanese, the Singaporeans are expanding their footprint in the Philippines as attested by the continuous development of Keppel Land. Keppel Land’s main project is the joint development of The Podium with the SM-BDO Group. Developed in phases, phase one comprised The Podium Mall that opened in 2002. The second phase of this high-end retail complex commenced operations in 2017. The construction of The Podium West Tower started in 2015 and was completed in May 2019. The total leasable area of the entire development is about 140,000 sqm: 50,000 sqm of retail space and about 90,000 sqm of office space. Recently, the chief executive of Keppel Land said in an interview that the Group shall look for new sites within Metro Manila when the current development is fully completed and operational.

These international players are just some of the major drivers that continue to expand the real estate market, not only in Metro Manila but also outside of the metropolis. This new trend will be confirmed below as Pinnacle Research presents the local actors in the real estate market, as well as the impact of the resilient Philippine economy.

MACROECONOMY

While economic growth is in question across the globe due to unstable oil prices and lingering wars and trade wars, the Philippine gross domestic product (GDP) grew by 5.5% as of the first half of 2019, albeit slightly below the government's projected annual growth of 6.0%. This GDP growth is still high compared to selected Asian countries, second only to China’s 6.2% growth. Philippine GDP growth rate is higher than India and Indonesia (5.0%); Malaysia (4.9%), Thailand (2.3%), and Singapore (0.1%). No data yet were cited by BSP for South Korea, Taiwan, and Vietnam as of the writing of this Market Insight.

The average lending rates by early October dipped to 6.0216% as compared to 6.1184% in December 2018. The aggressive management of bank rates reduced the inflation rate to 0.9% as of 2019, compared to the average inflation of 5.1% in 2018. Based on recent BSP pronouncements, there is a downward bias on banks’ interest rates, which would in turn bolster further economic growth.

Overseas Filipino remittances continued its steady growth. Total remittances from January to August 2019 reached the $19.808 billion compared to $19.057 billion for the same period in 2018, or an increase of 3.9%. Dollar remittances last year reached $28.943 billion, and is on track to eclipse this and even breach the $30-billion-mark by year end.

This growth may be felt in the resiliency of the peso. The average Philippine peso to U.S. dollar exchange appreciated to Php51.768 as of September 2019, compared to Php52.631 in 2018. While the Peso slightly strengthened, it is still relatively low compared to the U.S. dollar in the past five years, making real estate products attractive.

Tourism data exudes optimism, especially with the much-awaited Southeast Asian (SEA) Games. Based on latest Department of Tourism (DOT) statistics, total international arrivals from January to July 2019 reached 4.807 million, from 4.272 million for the same period in 2018. There is an increase of 12.53% between the two periods, and the 8-million target appears to be achievable this year.

The latest unemployment rate released by PSA is at 5.4% as of July 2019, which is slightly higher than the 2018 year-end figure of 5.1%. The ten-year unemployment rate average is 6.5%, and the slight increase in unemployment rate is perhaps due to the full impact of the hundreds of thousands of graduates in recent months.

The Philippines’ economic fundamentals have been resilient and continued growth is seen. The low inflation rate is a signal that the BSP would likely reduce interest rates to spur faster economic growth. Sustained growth and lower interest rates would bode well for the real estate market.

CONTINUOUS DEVELOPMENT, SUSTAINED PROFITABILITY

Pinnacle’s Q2 2019 Market Insight cited the sustained capital expenditures (CAPEX) of the top developers for this year. The top seven real estate players have a combined CAPEX of Php423 billion for this year. In this Market Insight, we will report these players’ disclosed profit so far in 2019.

Ayala Land grew its net profit for the first half of 2019 by 12% year-on-year to Php15.2 billion, while its total revenue increased by 4% to Php83.2 billion for the same period. On the other hand, SM Prime also increased its operating income by 17% for the same period to Php27.42 billion from Php 23.36 billion. SM’s consolidated revenues increased by 15% to Php57.05 billion for the same period.

Megaworld’s net income for the first semester increased by 16% year-on-year to Php8.3 billion. Its consolidated revenues also went up by 18% to Php31.7 billion from the Php 27 billion during the same period in 2018.

Vista Land’s net profit posted an 11% year-on-year growth to Php5.8 billion for the first half of 2019. The Manny Villar-led group’s consolidated revenue rose by 11% year-on-year to Php23.4 billion for the same period.

Filinvest Land likewise reported a 16% increase of its net income for the first half of 2019 to Php3.21 billion, from Php 2.78 billion for the same period in 2018. Filinvest Land also increased its gross revenues by 19% to Php12.62 billion from Php10.6 billion in the same period last year.

Robinsons Land’s first semester earnings increased by 20% year-on-year to Php4 billion. The group’s consolidated revenue also increased by 13% year-on-year to Php14.79 billion.

These top developers have been consistent with their developments all over the country. Based on their latest reports, their net income and consolidated revenues have been increasing as well. Pinnacle Research sees no reason for these players to stop developing and offering competitive real estate products in the market. This continued growth and profitability definitely trickles down to the various sectors of the real estate market.

OFFICE MARKET

Pinnacle Research maintains its estimated supply expansion of approximately 1 million sqm of office in the next two years. Metro Manila’s total stock of Grade A or better office building would reach 12 million sqm by the end of 2019. Overall vacancy across the various business districts in Metro Manila would further improved to 5% by the end 2019, from 7% by end of 2018. Rents range from Php700 to Php2,500 per sqm, with an overall average of Php875 per sqm per month.

RESIDENTIAL MARKET

The top players are still building due to the huge housing backlog and continued profitability even in the competitive Metro Manila market. Pinnacle Research is forecasting that total condominium stock for the entire NCR shall reach approximately 400,000 units by year end. Due to the strong demand from foreigners, especially mainland Chinese, absorption is seen to inch up to 94% this year. Prices have been steadily increasing as well, especially in high-end areas like Makati, Bonifacio Global City, and the Bay Area. While the overall average is maintained at Php190,000 per sqm, the upper range has already breached the Php500,000-per-square-meter level.

OTHER SECTORS

Retail giant SM Prime recently opened its 73rd mall in Olongapo, Zambales, and 74th mall in Dagupan, Pangasinan. For the rest of 2019, the group is scheduled to open its mall in Butuan and Zamboanga City. For 2020, SM is targeting to open new malls in Roxas, Capiz; Calamba, Laguna (Brgy. Tubina); Tanza, Cavite; San Fernando, La Union; and Malolos, Bulacan.

Robinsons Land, on the other hand, opened its 52nd mall in San Pedro, Laguna. Meanwhile, Edgar “Injap” Sia’s DoubleDragon Properties is targeting to reach its 51st mall this year. Although its CityMalls brand of community retail centers is smaller compared to SM’s and Robinsons’, the group is on track to reach its target of 100 malls by 2021, which is no easy feat given that its first property was opened only in 2015.

Meanwhile, the Department of Tourism (DOT) reported that the tourism industry earned some Php245 billion during the first semester of 2019. This is 17.57% higher than the figure for the same period in 2018. It is no wonder why Singapore-based RedDoorz Group intends to double its presence in the Philippines. Currently, it has more than 200 hotels, inns, and residences that it partnered with in an 80:20 sharing arrangement in favor of the hotel owners.

PROFITABLE GROWTH

Pinnacle Research continues to see not only the expansion of real estate development but sustained profitability as well. For sure, the real estate market is competitive and one cannot afford not to do its due diligence prior to building. The double-digit net income growth of the top developers, however, is a compelling reason that there are still opportunities in the market, especially, outside of the hyper-competitive and expensive Metro Manila market.

As earlier reported, real demand abounds: BPOs and POGOs for office; strong demand from overseas Filipinos and expatriates, coupled with huge housing backlog for residential; record-breaking tourist arrivals for hotels; increasing local and tourist population combined with increasing spending on retail; and pent-up demand for industrial spaces from foreign and local manufacturers. The continuous expansion of the top developers, combined with these demand drivers, coupled with the government’s “Build, Build, Build” initiative, Pinnacle Research is projecting sustained growth and profitability in the real estate market.