Rising outsourcing demand from banks to help boost office property market

Banks, financial institutions and insurance companies in the region continue to face a difficult landscape.

The shift in consumer behavior, continued macro volatility, the emergence of financial technology (fintech) companies, rising costs, and new regulations are just among the reasons that are now prompting many banks to rethink their strategies to enable their operations to become more cost efficient.

These changes, however, have spurred a creative surge—one that is now benefiting not only the outsourcing and offshoring firms, but the office property market as well.

According to Cushman & Wakefield’s latest 2017 outlook report entitled “Winds of change,” global financial giants are increasingly opting for more cost-efficient locations to house their backend operations in line with efforts to contain costs. In short, the banking, financial service, and insurance sector (BFSI) is turning increasingly to offshoring and outsourcing to to help minimize costs.

And this growing demand, in real estate terms, is seen to translate to an additional 130 million square feet of office space requirements in major cities in Asia Pacific up to 2020.

“The banking and financial services industry is under intense pressure following the global financial crisis. Amid all the regulations and increased oversight, banks are increasingly shutting down non core activities with lower margins,” the global real estate advisor said.

“Accordingly, many global banks are rightsizing their operations or shifting back office operations to non-core locations or lower-cost emerging markets, such as India and the Philippines,” it added.

Key destination

And the Philippines, along with India, is reportedly well poised to ride these waves of technological breakthroughs in the BFSI sector, which has seen an increasing shift to back-office operations to non-core locations or lower-cost emerging markets, the report stated.

It was estimated that the business process outsourcing (BPO) sector is seen to generate another 100-million sq.ft. of office space requirements in India and the Philippines up to 2020. Of this office space, around 30 to 40 percent will be attributed to offshoring activities in the banking, financial services and insurance sector.

“Notably, both countries have the requisite soft skills, aside from traditional BPO skills, that should drive BPO sector growth in the future,” Cushman & Wakefield said.

According to the report, the Philippines has made significant strides in terms of infrastructure, business environment, and tax and regulatory measures, and is gradually moving up the value chain to broaden the gamut of functions it offers in business process management (BPM) and information technology (IT).

“We have observed the increasing share of knowledge process outsourcing (KPO) services in the country which encompasses accounting, animation, insurance, legal services, engineering, architecture, game development, and software development, among others,” the report stated.

“It is interesting to note that banking and financial services constituted nearly 41 percent of the IT-BPM services portfolio followed by retail, telecom, and healthcare in 2015,” it added.

Expansions

Cushman & Wakefield pointed out that global banks such as JP Morgan Chase, DKS, HSBC, and Citibank have established offshoring operations in the Philippines.

These firms collectively have a consolidated footprint of approximately 1.8 million sq.ft. spread between the Makati central business district and Bonifacio Global City, and are expected to continue growing their presence here.

“Citibank will be in BGC to take on more outsourced work from the bank’s other regional and global locations. ING Bank, the Dutch-based lender, has also stated that it seeks to increase its headcount in the country from 250 to 500 employees by the end of 2016,” the report disclosed.

“The BFSI sector’s outlook on the Philippines continues to be bright, especially with the liberalization of the country’s banking sector in 2014, allowing foreign banks to fully own domestic ones,” it further stated.

Citing data from the Bangko Sentral ng Pilipinas (BSP), five foreign banks are reportedly interested in establishing their presence in the country .

Seven banks meanwhile have already secured permissions to open a branch or acquire a local bank. These were identified as South Korea’s Shinhan Bank, Woori Bank, and Industrial Bank of Korea; Taiwan’s Yuanta Commercial Bank and Cathay United Bank; Japan’s Sumitomo Mitsui Banking Corp.; and Singapore-based United Overseas Bank.

Sustained demand

This growing number of banks and financial institutions in the Philippines following the easing of foreign restrictions is expected to help further drive the demand in the IT-BPM sector, which in turn will boost the office property market.

In both India and the Philippines, the IT-BPM sector has been instrumental growth driver of the real estate sector.

“Overall, the BPO expansion has brought about a structural change in commercial property that will continue to drive future growth. We estimate that the BPO industry will account for 70 to 80 percent of the annual average office space demand over the next five years, of which banking-related offshoring activities will comprise 30 percent,” the report stated.

It was projected that full-time BPO employee count is expected to hit 2.6 million by 2020, more than double current levels. If this target is reached, the BPO industry alone would likely need at least another 50 million sq.ft. in leasable space from 2017 to 2020, according to the report.

Cushman & Wakefield meanwhile pointed out that the industry’s expansion is not confined to just one location.

“Most BPO firms do not necessarily require central business district locations, although accessibility to transport, retail outlets, and other support businesses like banks, hotels, and entertainment are important,” the report stated.

As such, there has been a resurgence in existing major business districts and the emergence of alternative office locations or business districts in Metro Manila that feature mixed-use developments.

Other cities, like Cebu, Davao and Iloilo, where most major developers are currently expanding, are also benefiting from alternative location movement, the report added.

The report also cited the IT and Business Process Association of the Philippines (IBPAP) in saying that while Manila and Cebu were considered as mature BPO locations, continued expansion should pave the way for next-wave cities in other provincial areas.

Emerging destinations

According to the report, Metro Cebu is considered a strong alternative or secondary expansion site for BPM operations outside Metro Manila.

“While Cebu is anchored by IT-BPM firms, it has also shown potential as a hub for banking operations. Global banks such as JP Morgan Chase and Co. and Standard Chartered already have a presence in the area while Manulife Business Processing Services is opening a site in Lapu-Lapu City that will handle higher-value functions such as actuarial and underwriting operations,” it said.

“The presence of comparable facilities and good quality of labor (the province of Cebu is considered to be the educational hub of Central and Visayas) that can compete with Metro Manila provides a solid incentive for firms to relocate to the region,” it added.

Outlook

According to Cushman & Wakefield, offshore units may gain greater prominence at a time of slowing global growth in the banking and financial services sector.

“While the Philippines has emerged as a strong competitor to India over the last few years in the voice business, India will likely reap benefits from offering specialized services, as well as from strong domestic demand,” it stated.

“Overall, India’s cost differentials and ability to boost the ease of doing business and reduce infrastructure bottlenecks will dictate the growth of its offshore centers. On the other hand, the growth of the Philippines and its ability to move up the value chain to offer specialized services of higher value and critical to the core operations of clients, will boost the country’s IT-BPM market,” the report explained.

Cushman & Wakefield added: “Going forward, it will be imperative for companies offshoring in both countries to also place more emphasis on the customer experience and make analytics an integral part of their model.”