Lack of opportunities in PH real estate hamper foreign capital entry

The Philippines remained an attractive site for foreign real estate developers, but challenges continue to hamper their entry, particularly since the country was being perceived as a “tightly held market.”

This was based on the 11th edition of the Emerging Trends in Real Estate-Asia Pacific, reportedly one of the most highly regarded forecast reports in the real estate industry.

The survey, which was undertaken jointly by PwC and the Urban Land Institute, provides an outlook on real estate investment and trends, finance and capital markets, and other real estate issues throughout the Asia Pacific region.

According to the report, there is a strong shift away from last year’s favorites, which featured core markets in Japan and Australia, in favor of emerging-market destinations, including in particular India, Vietnam, and the Philippines.

This reflected “investors’ growing disenchantment over the prospects of sourcing available core assets in gateway cities, together with a pressing need to identify assets that will meet return expectations.”

While these markets offer opportunities, the same old problems persist, including the lack of sufficient tenant demand for new products, and the critical mass of investable assets to accommodate the volume of capital that investment funds have available to deploy.

Sustained appeal

According to the report, the Philippines “continues to appeal to foreign investors, with good growth in just about every sector, especially the office-oriented business process outsourcing (BPO) market.”

The report however pointed out that the biggest challenge currently is “accessing land, together with increased competition for deals.”

“The real problem in the Philippines for international funds, however, is that the market has always been hard to access because it does not have much need for what foreign capital has to offer,” it said.

The report quoted one locally based developer in saying: “The reality is that while foreign investors like the Philippines, there aren’t many specific deals they can do or players to work with. Real estate assets are not being actively traded or sold here, and the exit strategy is also unclear—buildings mostly are built and held by developers for income generation.”

It also cited the views of a foreign fund manager, who said: “We like it as a market, but we’re very partner driven and we just haven’t found the right confluence over the last five years of partner opportunity and pricing. So we’ve stayed away.”

Strong fundamentals

The report noted that the Philippines has attracted positive comment in the last several editions, on the back of its vibrant economy led by a booming BPO market and strong remittances from overseas Filipino workers.

“Today, the fundamentals appear as strong as ever. Demand is resilient, with many buildings pre-committed before completion. Vacancies remain low, and office capital values and rents continue to show good growth,” it stated.

“Some clouds are on the horizon, however. Overseas remittances are not expected to maintain current levels of growth due to economic problems, both globally and in particular in the Middle East, where most expatriate Philippine workers are based,” it further explained.

The report quoted one Manila-based developer: “The market is reaching a very heated point in the property cycle after several years of strong growth. The challenge developers will face next year is sourcing for land, so it will become harder to find new development opportunities.”

It pointed out that the Philippines’ transition to the new administration, together with its announced policy shifts, has likewise “raised concerns among investors, although probably more so within the Philippines itself than among foreign real estate fund managers, for whom the bigger issue is actually placing capital into the local market.”

It quoted one fund manager who said: “I would still love to go in and do some office in Makati, but it’s a very tightly held market and it’s difficult to find institutional-quality partners as well.”

New REIT markets

The PWC and ULI also cited the progress of the Philippines when it came to REIT or real estate investment trusts.

REITs are a type of security that would allow investors exposure in the property sector, typically for assets like shopping malls and office buildings.

“The Philippines has made some headway in its longstanding efforts to push a REIT framework through the local legislative process. However, while the new administration appears to have the political will to see a deal completed, the stumbling block over tax exemptions remains. If or when the government is willing to address it remains to be seen,” the report stated.