Full speed ahead
We foresee more companies with land bank diversifying from their core business and into real estate.
It gets to that point where it’s almost hard to believe that optimism reigns strongly in the Philippine real estate industry.
The last several years saw only the stellar performance of an industry fueled by rising demand from across different segments and by new emerging growth drivers, and driven primarily by a consistently robust Philippine economy. And it’s the same old news every single year that some naysayers—in the belief that the industry is highly cyclical and susceptible to crashes—fear that the other end of this growth spectrum is already looming.
Four property consultancy firms polled by Inquirer Property, however, beg to differ.
According to these firms, emerging trends in flexible workspaces, dormitories, offshore gaming, e-commerce, logistics and warehousing, as well as the influx of Chinese tourists and workers are expected to heavily influence the demand for spaces—be it for the residential, commercial, office or industrial segment.
Despite some headwinds and concerns of overheating, consultancy firms believe the Philippine property industry will remain resilient as demand continues to be supported by an underserved growing middle class, increasing purchasing power, and an ever growing demand from companies either setting up shop or expanding. Add to that the government’s aggressive infrastructure initiative and decentralization thrust, which are expected to unlock the potential value of land in key areas across the country.
For these consultancy firms, all signs indicate that the Philippine real estate industry is still in a sweet spot and industry players are all expected to continue full speed ahead to cash in on all the prospective growth opportunities that can be tapped.
Perhaps, there’s really no reason to doubt this bullish outlook and strong optimism for the industry. Here are excerpts of the views shared with Inquirer Property by Colliers International Philippines, Pronove Tai International Property Consultants, Jones Lang Lasalle and Pinnacle Real Estate Consulting Services Inc.
Remaining resilient amid headwinds
COLLIERS INTERNATIONAL PHILIPPINES
Several trends are expected to drive growth for the Philippine real estate industry in 2019.
The tight Metro Manila office market, coupled with the emergence of a mobile workforce and the drive among firms to bring down operating costs have given rise to another office sub-segment—the flexible workspace. At present, flexible workspace only accounts for 3.2 percent of Manila’s leasable office stock.
Colliers projects flexible workspace supply to grow by 8 percent to 10 percent annually from 2019 to 2021 as a number of foreign operators expressed interest to open new facilities across the country’s capital.
The growth is supported by multinational corporations using serviced facilities to save cost, outsourcing firms requiring a plug-and-play office, and the growing number of millennials, and micro, small and medium sized enterprises (MSMEs) that occupy co-working spaces.
We also believe that demand for worker dormitories remains underserved. The need is rising due to the worsening traffic situation in Metro Manila.
Colliers believes that the fringes of Fort Bonifacio, Makati and Ortigas are viable locations for these projects. Hence, Colliers sees more developers investing in worker accommodation projects that cater to young urban professionals who can’t afford to own an apartment or rent a condominium unit yet within established business districts.
The property sector remains resilient with major segments such as office, residential, and leisure poised for record-high demand and supply in 2018. However, we see challenges ahead, foremost of which include:
Rising interest rates which could dampen low to mid-income residential demand over the next 12 to 24 months. We believe that a volatile interest rate environment should entice local developers to be more open to partnering with foreign firms to develop horizontal and vertical residential projects;
Surging inflation rate that curtails consumer spending, which accounts for nearly 70 percent of the country’s economy;
Persisting private construction delays due to acute shortage of skilled workers and ramped up implementation of public infrastructure projects;
Uncertainty surrounding the implementation of the second package of Comprehensive Tax Reform Program (TRAIN 2), which proposes to reduce corporate income tax rates and rationalize tax and nontax perks granted to foreign investors, and
Slower approvals by the Philippine Economic Zone Authority, which might impede the expansion of the outsourcing sector in 2019, among others.
There are initial concerns about the country’s property sector overheating. But the central bank has been implementing measures to temper inflation and quell such concerns.
For the economic growth to be more inclusive and supportive of a thriving property market, the government must guarantee that policy reforms are in place, which include the continued granting of both tax and nontax incentives to ensure that the Philippines retains its stature as an attractive destination for outsourcing and industrial locators.
Similar to other economies, the Philippine property sector is highly cyclical and is susceptible to periods of expansion, overbuilding and a subsequent crash and price correction.
These cycles were prevalent in the 1980s during and after the Marcos era, and the Ramos administration in the 1990s which saw the Asian Miracle followed by the financial crisis of 1997.
But the real estate sector has been growing since the early 2000s due primarily to rising household incomes and an unmet demand for housing. Mainly driven by remittances from overseas Filipino workers (OFWs), the housing sector has been on an upswing, dipping only momentarily during the global financial crisis of 2009.
Unlike previous real estate booms that were fueled by speculative buying, the current demand for housing comes from the end user. Local developers have also recognized that the middle class’ housing requirement is largely untapped, and has shifted condominium development towards more affordable options. The middle class families’ disposable incomes have grown steadily over the years, propelling demand.
The Asian and global financial crises also compelled the central bank to strengthen oversight of banks’ real estate exposure. It also adopted stress testing, one of which is the Real Estate Stress Test (REST). We believe that measures are in place to address “overheating” concerns.
Growth may remain positive, albeit slower, which would be the “new normal” growth trajectory for the industry.
China’s impact on PH real estate
PRONOVE TAI INTERNATIONAL PROPERTY CONSULTANTS
Overall, the real estate market will stay healthy in 2019.
Expected supply in the office property market is at 1 million sqm, with demand to be driven by the IT-business process outsourcing (IT-BPO) sector on the back of improved skilled-labor force, innovative technology application, and upgrade on infrastructure.
Offshore gaming growth will remain dependent on supply availability in Makati City and the Bay Area, while coworking spaces will continue to grow by an average of 5 to 10 percent share as compared to the 2 to 4 percent average share in 2018.
In the residential market, Chinese buyers and renters will continue to push up property prices while foreign retirees will continue to take up residential dwellings in emerging cities such as Clark in Pampanga, Cebu City, and Davao.
In the office market, the Philippine Offshore Gaming Operators (Pogo) are growing by an average leasing transaction of 81,000 sqm per quarter since 2017. To date, the offshore gaming firms have accounted for 23 percent of the 790,000 sqm office take-up in the first three quarters. Chinese nationals working both in the online gaming activities and its support services dominated offshore gaming firms.
With the influx of working Chinese nationals, the demand for residential units also increased most notably in Makati City and the Bay Area (Pasay City and Parañaque City) office districts. The recorded transactions from Chinese tenants contributed to the rising prices and rents in the residential market as they closed deals without price negotiations.
With the enhanced China-Philippines bilateral relations, it is expected that mainland Chinese nationals and companies (e.g. China Telecom, GAC Motors) will continue to come to the Philippine market in the short-term period most specifically during President Duterte’s administration.
The demand from offshore gaming firms has already changed the landscape not only in the office market, but also in the residential market.
Offshore gaming saved the property sector most specifically with the slowed demand from the ITBPM sector last year. Moreover, the government’s target of 1.5 million to 2 million Chinese visitors per year (2018 to 2020) will likely happen.
This will further enhance the tourism sector as well as the retail market catering to Chinese nationals.
However, the influx of Chinese-related businesses are currently changing the buyers’ profile in the residential market in the Philippines due to the rising prices of residential houses in Metro Manila. This pushes local buyers to go outside Metro Manila, where housing is more affordable.
Moreover, the Chinese impact on the Philippines is considered unsustainable in the long term due to policy issues. The change of government approach related to China (if any) in the coming years will definitely impact the sectors that have been driven by the Chinese.
However, there are key issues in the economy that could dampen the momentum growth of real estate industry and these include rising interest rates and inflation rates.
The real estate industry is not yet affected by rising interest rates as of the moment but the residential market remains vulnerable if the concerned monetary agencies and banks do not act accordingly and in a timely manner.
While economies remain strong in most parts of the world, growth is threatened by geopolitical tensions which create an atmosphere of uncertainty. For instance, the West Philippine Sea dispute may have an impact specifically on Chinese driven sectors such as offshore gaming, the hospitality sector, and the residential condominium market.
While the Philippines and China enjoy improved bilateral relations, future changes in international policies governing Chinese relations will surely impact Chinese investments as well as sectors driven by Chinese money. This may dampen the growth of Pogo firms in the office market as well as in the residential market.
Property developers should thus maintain tenancy mix in most of their projects. The state-run gaming corporation Pagcor should spearhead attracting other foreign denomination into the Philippines with offshore gaming activities.
For now, there is no cause for concern over an overheating market. Both private developers and the banking sector are very much attuned to the property market and in fact, are very proactive as we have seen in the past. We have seen the immediate slowdown in completions when there were signs of oversupply in the residential condominium developments and the tightening of property loans by the banks.
Our lessons from the Asian financial crisis, during which we had big developers going bankrupt, have taught us well and have left us with a cautious imprint so that the industry now checks and regulates itself to avoid another crisis.
Shifting preferences, changing behavior create new demand
JONES LANG LASALLE
We see logistics and e-commerce to have a more prominent role in the short and medium term. This is supported by the solid macro and socio-economic fundamentals of the country underpinned by healthy domestic consumption owing to a young and growing population.
Changes in shoppers’ behavior—brought about by rising disposable income and access to goods and services through the internet, and worsening traffic congestion—have led to the growth of the e-commerce sector. We see this in the planned opening of IKEA and Lazada’s largest warehouse in Cabuyao, Laguna; plans to further expand warehouse facilities in Northern Luzon and Central Luzon, and DoubleDragon expanding into industrial operations, among others.
Similarly, we see alternatives such as co-working and dormitels to continue their growth trajectory. Apart from established operators such as Regus and developer-owned Clock-in, we have seen the entry and expansion of global and regional players such as WeWork.
A growing number of boutique and regional players (e.g. developers in Cebu and Davao) are also becoming active in the real estate market. We foresee more companies with land bank diversifying from their core business and into real estate.
At the same time, we’re anticipating more regional players to be more active and expand in other areas with the likes of Cebu-based developer
Cebu Landmasters, reported to develop a township development called The Paragon Davao in Davao City. Meanwhile, 8990 Holdings Inc. is venturing into the hospitality sector forming 8990 Leisure and Resorts to open hotels in key areas such as Iloilo, Cebu, Metro Manila, Legazpi, Cebu, Palawan, and Boracay.
Today, mainland Chinese investors continue to be one of the key demand drivers of the real estate market. Online gaming continues to prop up office demand particularly in the Bay Area, and are also present in other parts of the country such as Cebu. These investors are also a growing market for the residential sale and leasing market, as well as the second top source market for tourist arrivals, driving hotel occupancy.
The changes in the way we live and work have led to the introduction of new product offerings such as flexible workspaces and dormitels that are transforming business models and addressing gaps in the market. These sectors are projected to continue growing in the next years with the supply of flexible workspaces growing at the average rate of 9.5 percent, annually.
However, the weakening peso, rising inflation and interest rates are some of the externalities that may affect the performance of the industry. Nonetheless, we still observe healthy activity both from the local and international players due to the solid macro fundamentals of the country underpinned by a young population, and solid domestic consumption, among others.
Even if these impact the market as a whole, we project that growth may remain positive, albeit slower, which would be the “new normal” growth trajectory for the industry.
Real demand boosting property sector
PINNACLE REAL ESTATE CONSULTING SERVICES INC.
We’re seeing a lot of movement in provincial areas, especially Cebu, Davao, Iloilo and Bacolod, and to a lesser degree, popular tourist spots like Siargao, Palawan, La Union, and Bohol. A lot of our clients are looking for large developable land, especially those suitable for resort or leisure developments.
The warehousing sector is also on an uptick which we believe is a direct impact of the e-commerce industry. The availability of skilled laborers and the cost of doing business in the country are still relatively lower compared to our Asian neighbors. Interest is mostly concentrated in the south (Laguna, Batangas and Cavite) and Central Luzon (Pampanga and Bulacan).
Similarly, Metro Manila’s residential leasing sector is buoyant, thanks to the expat market. However, the landscape is now vastly different from a few years ago. While before, the demand is coming from expats employed by the BPO sector, most are now coming from employees of the POGO industry, most of whom are Chinese nationals. Mid-range condos and houses for lease are more popular in this market, most notably those to be used as staff housing.
The POGO market also continues to drive the office and retail spaces in the Bay Area. Most of the POGO operators are Chinese entities. It is a lessor’s or seller’s market when it comes to them as they are willing to pay any amount to get spaces for their operations and employees.
Co-working spaces are likewise picking up pace. Initially, these spaces are in Metro Manila but they have since expanded in key cities in Visayas and Mindanao. These spaces primarily cater to individuals and SMEs who want flexibility in working periods in an open office environment at reasonable rent. Some of these co-working spaces have opened their doors to students preparing for board exams or doing their research or thesis.
The retail sector is buoyant too—but not in a way similar to what we’ve seen years ago, due to increasing competition from the e-commerce sector. Today’s malls are now vastly different, with many focusing on offering experience and convenience. Innovative shopping centers now incorporate value-added elements including live performances, trade shows, arts centers, sports centers, and even farmers’ markets—elements one would not find on e-commerce websites.
Meanwhile, property developers are going north of Metro Manila, making Central Luzon a prospective investment hotspot. There’s the 177-ha Clark Global City, which is being developed by Udenna Corp. as the latest business hub of the country, as well as the 9,450-ha New Clark City with Phase1A comprising the National Government Administrative Center to be delivered by 2022.
The current exuberance seen in the real estate sector is further driven by the government’s massive spending on infrastructure—evident in the growing interest in areas close to where such projects are currently underway. One example is Commonwealth Avenue, where the MRT7 is under construction. Firms that have land bank in the said area are reportedly now looking to develop residential projects.
The influx of foreign tourists and investors, specifically the Chinese, would also play a big role in boosting the real estate industry. However, proper safeguards should be in place to make sure that prices would not significantly shoot up, affecting the local end users and industry in general.
The Philippines has been historically resilient to external shocks, thanks largely to fiscal conservatism, and we expect this to continue. The residential market is driven primarily by end-users and not speculators, which should cushion the market from shocks or capital flight.
The weak peso also boosted the OFWs’ spending power, and many of them are now starting to buy real estate for the first time. In fact, an article published in the South China Morning Post reported that Hong Kong-based buyers now account for 8 percent of SM Development Corp.’s international sales. It should be noted that there are approximately 150,000 OFWs in Hong Kong, based on available data from the Philippine Statistical Authority.
We’re thus confident that the market is not overheating. There might be some corrections along the way but these scenarios are mostly temporary. As mentioned, the Philippines has historically been fiscally conservative. The prevailing interest rate is at 4.75 percent, the highest since 2009. The housing market is also largely driven by end-users, which in turn is real demand and not speculative. Developers are also conservative and would rather test the market first before launching a project.
However, inflation remains a challenge. The BSP increased its inflation forecast for the year to 5.3 percent from 5.2 percent, but had cut its forecast for 2019 to 3.5 percent from 4.3 percent. Inflation is seen to ease to 3.3 percent by 2020. Housing affordability also remains a concern for many Filipinos, although we hope that the government will come up with robust housing programs with the creation of the Department of Human Settlements and Urban Development.
