INVESTING IN THE PHILIPPINE REAL ESTATE MARKET

MACROECONOMY

The World Bank Group President, Dr. Jim Yong Kim, declared in July that Philippines is the “next Asian miracle” due to its very strong macroeconomic fundamentals and government management. Thus, the World Bank is extending to the country over US$4 billion worth of funding for various infrastructure and livelihood projects in the next four years to sustain the economic growth. There is a special emphasis in Mindanao, especially after the comprehensive peace agreement with the Moro Islamic Liberation Front (MILF).

Even the Malaysian firm ALLOYMTD Group, through its local unit MTD Philippines, Inc. casted its lot in the Philippines and expects to complete about Php 10 billion worth of regional government centers (RGCs) before June 2016. MTD partnered with local government units, initially with the Php 2.5-billion Region IV-A Calabarzon regional government center, modeled on Putrajaya, the Malaysian federal government center south of Kuala Lumpur. MTD is also targeting “Bangsamoro”, Eastern Visayas, Bataan, Ilocos Norte and Nueva Ecija to build infrastructure for regional offices.

Why all these buoyant expectations? The Philippine economy is very vibrant. While the first quarter growth rate is a lower-than-expected 5.7%, the gross domestic product grew by 6.4% during the second quarter of the year. Based on Bangko Sentral ng Pilipinas (BSP) statistics, the average bank interest rate slightly ticked up to 3.85% as of September compared to 3.78% as of June of this year, primarily due to the intervention of the BSP of increasing bank rates to avoid overheating of the economy. Inflation rate in August inched up to 4.9% compared to 4.5% in June. The Philippine Peso to US Dollar exchange shows a slightly stronger dollar from Php 43.64 in July to Php 44.596 in September. Dollar remittances from overseas Filipinos continue to increase. Remittances reached US$13.485 billion from January to July compared to US$12.746 billion for the same period last year, or an increase of 5.8% according to BSP.

Foreign direct investment (FDI) from January to June of this year reached US$ 761.75 million, excluding reinvested earnings and debt instruments. FDI for the same period in 2013, excluding reinvested earnings and debt instruments reached US$ 582.95 million.

The total Visitor Arrivals from January to July reached 2.862 million, which is 2.24% higher than the same period last year (Department of Tourism). Visitors from South Korea and United States continue to top the country of origin.

It is no wonder why the unemployment rate has been tamed. The unemployment rate inched up to 7.1% by end of 2013. Based on the second data of PSA, the unemployment rate dipped to 6.7% by July 2014 even with the increasing labor base.

These indicators present the sustained economic growth and sound investment environment for the Philippines. The top real estate developers have also been taking advantage of this great opportunity. Based on the programmed capital expenditures (CAPEX) for 2014 (as reported in the second quarter Market Insight), the top 15 developers have a total CAPEX of approximately Php 300 billion for 2014 to fast track their projects. Apart from the strong demand from the local and overseas market, most if not all of the top developers are already preparing for the ASEAN Economic Community (AEC) integration.

OFFICE MARKET

The Business Process Outsourcing (BPO) industry drives the demand for office spaces in the entire Philippines, accounting for approximately 80% of the demand for the Grade A office spaces. Key industry players projected an additional of 120,000 employees this year, and probably breaching the one-million employee mark. The BPO industry is seen to generate a total of US$ 18 billion revenue for 2014.

Even with the new office buildings this year with a total leasable area of close to 500,000 sqm, rents are expected to be stable and may even increase slightly. Many of these buildings are pre-committed and have signed up lease contracts even prior to completion. Vacancy of Premium Grade A and Grade A buildings is projected to stay below 5% across the major business districts by end of the year. Rents in Premium Grade A shall continue to command rates hovering around Php 1,100 per sqm per month or about US$ 25 per sqm month, which is one-fifth of rents in Hong Kong. The lowest rent in India is about US$ 31 per sqm month according to recent reports. Rents in Makati CBD Grade A buildings have an average of Php 765 per sqm per month.

Small and old buildings in Makati are offering rents at an average of Php 550 per sqm per month. This is the rent offering in the Mall of Asia Complex, while rents Ortigas Business District are at slightly higher level of Php 575 per square meter. Bonifacio Global City rents have breached the Php 800 per sqm per month, while Quezon City rents are still at Php 625 per square meter-level.

RESIDENTIAL MARKET

Recent estimates peg the housing backlog to five million. While majority of this demand may come from the socialized and economic segments, the open market, especially the mid-market and affordable residential units are typically for “end-use”. The upper mid-market and high-end market segments are typically marketed for “investment opportunity” or rental income.

The high-end and upper-mid market condominium units usually have strong leasing activities. Rents are from Php 50,000 to Php 100,000 per month for upper-mid condominium units, while rents of above Php 100,000 per month for high-end, depending on the sizes. Luxury condominium units have breached the Php 300,000 per month-rent.

More attention is now given to the affordable and socialized segments. Big players have been active in building in this segment, instead of partnering with smaller players to comply with the 20%-socialized housing component as required by the Urban Development and Housing Act. The Subdivision and Housing Developers Association (SHDA) is also targeting to build one million housing units by 2016 to address the housing backlog.

RETAIL MARKET

Continuous market integration is observed in the retail sector. Not to be outdone by the Puregold-Lawson Inc. (Japanese brand) partnership, the SM Group is mulling a partnership with one of the leading Indonesian convenience store operators, Alfamart that runs over 7,000 stores.

Major retailers continue to enjoy high lease rates and occupancy levels. This is the main reason why the players in this segment are introducing various retail platforms.

HOTEL AND GAMING MARKET

Another record-breaking Visitor Arrivals for the first seven months is expected to push the occupancy and room-rates of hotels up. Apart from the investment grade of the Philippines as a whole, the gaming industry has been very active in attracting visitors to fill up their casinos. The hotel and gaming industry, as well as the public in general, has been waiting for the opening of City of Dreams, which would add 920 rooms in the market.

Kazuo Okada’s Tiger Resort Leisure & Entertainment Inc. will be offering the most number of hotel rooms in PAGCOR Entertainment City once it opens the first phase of its US$2-billion Manila Bay Resorts by the end of 2015. The first two phases of the 44-hectare integrated casino and resort project will introduce a total of 2,000 hotel rooms in the market. The company is very bullish about the prospects of their multi-billion dollar project due to its location, which is about two-to-three-hour flight from billions of people.

In terms of room rates, five star hotels enjoy rates above US$ 300 per night rate, especially for the bigger suites. Four star hotels are still enjoying rates above US$ 200 per room on the average even with the appreciation of the green buck. Existing hotels have seen increasing rates due to record-breaking tourist arrivals the past years.

INDUSTRIAL MARKET

The growth of the industrial and manufacturing sector has been filling up even the massive Clark Special Economic Zone (Clark) and Subic Bay Freeport Zone (Subic). Between these two special economic zones, the combined available industrial space is less than 150 hectares.

Clark Development Corporation (CDC) recently signed 193 contracts in the first seven months of 2014, with a total aggregate investment of Php 4.1 billion. At least 178 of the total signed contracts are subleases, with three of these either revived or recovered; while 12 are direct leases. The new investments translate to 81,500 additional jobs within five years.

INVESTING IN THE PHILIPPINES

The Philippines investment rating upgrade has effectively generated new and expanded demand not only for real estate, but also for other goods and services. The forthcoming ASEAN economic integration is also fuelling investments from Malaysia, Singapore and Thailand apart from the usual trading partners of the Philippines like the US and Japan.

As earlier reported, the top real estate players are aggressively positioning their products and platforms to take advantage of the bullish market. Most of the players are exploring various market segments and asset classes to generate growth. They are also partnering with international and ASEAN companies to create synergies and opportunities.

According to reports, major multinational companies, some of which belong to the Fortune 500 list, are actively looking to invest big time in the Philippines. One good indicator is the demand for flexible office spaces such as Regus. Its Philippine country manager reported that their business tripled in two years, and that they are receiving 800 to 1,000 inquiries every month. Regus now has 12 centers in Metro Manila and one in Cebu.

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