Stability and growth


    The political cycle is said to greatly impact the economic cycle. The relatively peaceful and decisive national elections last May bodes well for sustaining the country’s robust economic growth. The electoral process proved once again that Philippine democracy is stable and the politicians are mature enough to accept the verdict of the voters.

    While President-elect Rodrigo Duterte wrested the support of the voters from the current ruling party, a smooth transition of power is expected; just like the political transition of President Benigno Aquino 3rd in 2010 even when his party was the staunchest critic of then-President Gloria Macapagal-Arroyo. 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.

    Also, the state of the economy impacts on the real estate market. One major economic phenomenon in the Philippines is the sustained growth of the Business Process Outsourcing (BPO) industry. As earlier reported, total employment in the industry breached the one-million mark by mid-2015 and key industry players are targeting 1.2-1.3 million by year-end. In terms of revenue, industry leaders are projecting to overtake the remittances 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 as compared to the now defunct Department of Transportation and Communications. This kind of legislative initiative will surely keep the BPO industry and the information and communications technology sector growing.

    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. The law intends to incentivize income-generating properties like office, retail, hotel, and even residential and hospital developments provided that the company that owns them are listed in the stock market and these companies will distribute 90 percent of their net income as dividends to stockholders. Subsequent rules on public float and value-added tax on the transfer dampened the appetite of would-be Reit company applicants. Thus, there is a need to revisit these additional requirements in the implementing rules.

    Since the current political climate positively impacts on the economy, it is also instructive to assess the macroeconomic indicators to understand and project the growth of the real estate market in the months and years to come.

    The country’s gross domestic product (GDP) grew by 6.9 percent in the first three months of the year, a big boost from the annualized GDP growth of 5.8 percent in 2015. This jump was expected due to election-related spending, and ever-increasing consumer spending.

    More importantly, the growth is higher than the annualized projection of 6.0 percent to 6.4 percent by major credit rating firms and international banks and institutions. It is safe to say that the incoming economic team of the Duterte administration will come up with projections that would reflect this range of GDP growth.

    The latest figures from the Bangko Sentral ng Pilipinas (BSP) show the net foreign direct investment (FDI) has been steadily growing in the past five years. The net FDI reached close to $6 billion in 2014 and 2015.

    Overseas Filipino remittances have been stable. Total remittances in 2015 reached $25.77 billion compared with $24.63 billion in 2014, up 4.6 percent. Remittances in the first three months of the year reached $6.56 billion. Inflation rate in January to May is slightly lower at 1.3 percent compared with 1.4 percent in 2015, according to the BSP.

    While low inflation is generally correlated to weak economic activity, the labor market is generally stable. The latest unemployment rate is pegged at 6.1 percent in April compared with 6.6 percent by the end of 2015. Again, these indicators are positive to consumers as well as real estate developers.

    According to the Department of Tourism, the total visitor arrivals in 2015 reached 5.36 million, registering an increase of 11.67 percent over the arrivals in 2014. Tourist arrivals already reached 1,602,253 as of end-March this year. For three consecutive months, tourist arrivals grew in double-digit terms at 13.17 percent in January, 20.42 percent in February, and 11.86 percent in March. The arrivals generated about P67.74 billion of revenue. It is no wonder there are a lot of hotel and leisure development across the country.

    All indicators point to a strong economic footing for the Philippines. Since the economy is generally stable and growing, it is important to know the impact of the economy on the different sectors of the real estate market.

    Office market
    The growth of the BPO industry has been phenomenal in the last decade, making it the main driver of demand for office space during the period, and probably for years to come. With the target of 1.3 million employees and an annual revenue generation of more than $25 billion in the next couple of years, real estate developers are building to deliver over one million square meters of office space in the next two years in major business districts of Metro Manila, on top of the existing six million square meters.

    While the planned office stock of Grade A and Prime Grade A seems high, it is important to note the overall vacancy across the business districts is still low at 4 percent as of June 2016.

    The office market is still a landlord’s market; and given the low vacancy, rents have been increasing and recently plateauing in recent months. Rents in the Makati Central Business District (CBD) generally held up, where Premium Grade A buildings have a weighted average of P1,295 per sqm per month. Grade A buildings have a weighted average of P905 per sqm per month; and for Grades B&C Buildings, the weighted average is P695 per sqm per month.

    Pinnacle Research observed that Makati Grade A Buildings gained the upper hand in asking rates compared with Bonifacio Global City (BGC) Grade A Buildings due to the sheer numbers—approximately 100,000 sqm—of office stock that came online in the BGC in the past months.

    The weighted average rent in BGC is P895 per sqm per month. The average rent of Grade A office buildings in Ortigas is still at P650 per sqm per month since older buildings are weighing down the rent of newer stock. The Alabang and Bay Area business districts have a slightly higher weighted average rent of P660 per sqm per month due to newer stock. Quezon City office rents have increased to a weighted average of P680 per sqm per month, also due to newer buildings.

    The Reit Law may further enhance the attractiveness of owning office buildings that generate stable rental income. A Reit company would likely put office buildings in the REIT portfolio since the investing public is well aware of a steady demand for office space and the attendant recurring income.

    Residential market
    Servicing the estimated demand for housing at 5.5 million units this year, just a small portion of it is a key driver of growth. In terms of supply, the highest number of approved license to sell is just a little over 200,000 units per year. Left unchecked, the housing backlog is steadily increasing every year. This is the reason why real estate developers have been targeting to deliver one million housing units to reverse this trend of widening gap between undersupply and increasing demand.

    The perception of too much supply is due to the brisk development of mid-market residential condominium buildings in Metro Manila. Some may be baffled why the top players like Ayala, DMCI, Filinvest, Lopez/Rockwell, Megaworld, Metrobank, Robinsons, SM, and Vista Land Groups are continuously building. It’s because they are successful in selling their products. Competing against these players for the same market segment, though, is not advisable since they have the marketing and financial clout to build, sell, and deliver their projects.

    It is important to note the projections of the Housing and Urban Development Coordinating Council (HUDCC) of the annual increase in demand. While this projection is up for revision in light of the recent Census of Population and Housing and the Family Income and Expenditure Survey, its national and regional presentation is helpful in assessing the demand for housing.

    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 regions, especially the highly urbanizing regions, since competition in Metro Manila has been tighter in recent quarters, and land prices have been soaring.

    The mass-housing 8990 Group is targeting the affordable segment and building outside of Metro Manila as well. It is launching some 14 new projects all over the country this year with a total of 12,453 housing units, of which 46 percent would come from Luzon, 30 percent from the Visayas, and 24 percent from Mindanao.

    Another underserved demand in the residential market is the high-end segment. Unlike the price conscious mid-market segment, the high-end and luxury residential market is price resilient. Expatriates working in the Philippines, high caliber local executives, and discerning overseas Filipinos who experienced luxury amenities abroad are all looking for facilities and services that suit their tastes and whims, and are willing to pay higher costs.

    Low density and exclusivity is paramount to these buyers/occupiers. Security is also very important so that buyers/occupiers can avoid noisy neighbors and unwanted visitors. Often times, the luxury high-end condominium projects are secluded, quiet and away from the bustling noise of the central business district, even when they are in the middle of the CBD. Another trend is offering quality service like concierge/butler/valet services similar to a hotel. One project, The Residences at Alphaland Makati Place, has even raised the bar of amenities and services and incorporated The City Club in this development. It is not only offering quality service, but the full complement of clubbing is available.

    Given the level of real estate development, the Bangko Sentral ng Pilipinas recently launched its residential real-estate property index (RREPI) to evaluate housing developments and prices. Based on its three-quarter monitoring, housing prices have increased by 9.2 percent. The increase supposedly represents a vibrant housing industry in the Philippines as confirmed by the trends in consumer prices and the recent result of the consumer expectation survey. An asset price bubble is quite remote at this point because the inflation is driven by robust demand, not oversupply according to BSP as reported by the ABS-CBN News website on June 5, 2016.

    Besides brisk buying, one way of assessing the residential market is through the rental market. Rents of residential condominiums have been generally stable, given the wide range of options in the market. Luxury condominium units command the highest rents that plateaued at P1,000 per sqm per month, or P300,000 per month-level for big units of 300 sqm. The typical rental range for luxury two-bedroom and three-bedroom units is between P120,000 and P250,000 depending on the size, location, and furnishing. For the luxury and high-end segment, there are limited choices in terms of rent.

    Leasing of studio and one-bedroom units is stable and still ranges between P15,000 and P30,000, and may reach the P50,000 per month-level, depending on the location, furnishing, and amenities offered by the condominium building. It would be worthwhile to monitor the rents of one-bedroom and studio units to evaluate the yields of these “investment units.”

    Retail market
    The retail market will likewise be boosted if the Reit Act will eventually be implemented and developers list their income-generating retail properties as Reit companies on the stock exchange. The investing public would enjoy dividends from the 90 percent net operating income of these retails spaces. As earlier reported, the SM Group has 58 malls, Robinsons Group 40 malls, and Cosco/Puregold Group 36 stores. The Ayala Group intends to reach the three-million sqm mark in shopping mall footprint by 2020 while the Megaword Group will launch an average of 60,000 to 70,000 sqm of retail space each year until 2019. The Vista Land Group intends to open six to seven “AllHome” stores annually over the next five years that would be integrated with their residential developments.

    Apart from the malls, these retailers have been expanding the various retail platforms such as groceries and convenience stores among others. Continuous growth in the retail market would make shopping even more convenient to the consumers.

    Hotel and gaming market
    Philippine tourism has been benefiting from the steady growth of tourist arrivals in recent years. While the six-million per year mark is still 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 the tourism industry.

    A focused development of tourism infrastructure would positively impact on the development of hotel, gaming, and leisure industry. This would be good to both the local and foreign tourists since there will be more choices of tourist spots, events and accommodations; and in turn, generate more revenues, dollars or other currencies.

    Industrial market
    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.

    The Filinvest Group is pushing its advantage in integrating mixed-used developments around 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.

    The Ayala Group is developing the Alviera Industrial Park (AIP) 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 brisk sales.

    While the top players are jockeying for positions to capture the demand for industrial spaces, President-elect Duterte is planning to establish economic zones outside of Metro Manila as reported by The Philippine Star on May 28, 2016. This pronouncement would give a boost to the growth of the industrial sector.



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