Manila Property Report September 2011
Why Manila in the Philippines has emerged as one of the most attractive property investment destinations in the world today.
With the western world in financial difficulty, the USA still trying to recover after the credit crisis back in 2007, and the current problems in the Eurozone partly because of Greece’s debt, and with the recent FTSE100 falling so dramatically in September 2011, many western investors are now looking further afield for investment opportunities.
As you might be aware, over the past few years, the property investment market in Asia has been very strong especially in compasison to the west the Asian property investment markets in Asia are becoming increasingly popular with many international investors.
Looking at real estate investment activity in Asia at a first glance, it is the bigger countries and economies that seem to have more dominance. The Jones Lang LaSalle, On Point, Asia Pacific Capital Markets Bulletin – August 2011 shows China as the largest market with the most real estate transactions (USD 5.1 billion of direct commercial transactions in 2Q11) with Hong Kong, India, Japan, and Singapore all showing high levels of business also, indicating that these countries currently have a lot of activity with many property investment opportunities available.
However we should not overlook some of the other smaller emerging markets in Asia such as The Philippines as many experts have indicated that the Philippines is prime for property investment. Let’s look at some of the driving factors behind this.
The Philippines Strong Economic Performance
The ADB (Asian Development Bank) 2011 Report highlighted the Philippines strong economic performance. The report showed that the economy recovered strongly in 2010 from a slight dip the previous year with a 7.3% lift in GDP. Moneyweek also points out that the Philippines along with China, India, and Indonesia averted negative GDP figures in 2009 when most Asian economies shrank sharply as the global trade went into free-fall. What is more impressive is the fact that the Philippines has enjoyed 52 consecutive quarters of economic growth.
A recent report from the IMF (International Monetary Fund) showed that in 2010 7.3% growth in the Philippine economy was the highest in 34 years, emphasising the country’s strength within the global market. This growth has come from both business and tourism.
Millions of tourists continue to be attracted to the amazing beaches, world class dive spots, and of course the 7,000 plus islands. Tourist numbers are expected to grow to just over 3.8 million by 2012, representing an 8.4% growth rate from this year (Govt of Philippines).
The ADB 2011 report also highlighted that consumer confidence and spending in the Philippines is strong with 60% of the GDP growth due to private consumption, which rose by 5.3%.
This can partly be attributed to the fact that personal earnings exhibited brisk growth in the first quarter with Greater China, Vietnam and the Philippines leading the trend in Asia according to The CBRE, MarketView, Asia Luxury Residential Q1 2011 report.
Add this to the fact that remittances from overseas workers grew by 8.2% to $18.8 billion it would seem Filipinos have increasing spending power for consumables.
It is interesting to note that Investment contributed about 40% of total GDP growth, the highest proportion in 10 years. Construction activity rose by 10.5%, driven by strong demand for office space, particularly from the Business Process Outsourcing (BPO) industry (which is a strong and growing sector in the Philippines), and which overtook India in 2010.
Residential housing was also a contributor and probably as a direct result of international business growth in the Philippines as additional employees and residents will of course require accommodation.
Government Incentives for Multinationals
The Philippine government is actively encouraging foreign investment in a variety of industries including energy, technology and tourism. Special TIEZA’s (Tourism Infrastructure and Enterprise Zone Authority) have been created to provide incentives for investors.
The Philippine government also operate an open economy allowing 100% foreign ownership in most sectors and support a BOT (Build Operate Transfer) investment scheme that other Asian countries imitate. Privatisation of government corporations including telecommunications, shipping, banking and insurance as well as deregulation of power industries are attracting foreign investment.
Coupled with incentive packages including reduced corporate income tax, with companies in the Special Economic Zones (ecozones) subject to only 5% overall tax rates, and Multinational companies entitled to tax exemptions including duty-free importation of specific equipment and materials, it is easy to see why many international companies are moving offices and workforces to the Philippines.
The Philippines Strategic Location
The Philippines is in an ideal location for companies looking to access the massive trade opportunities of the ASEAN markets. Located the center of Asia and within a four hour flight of all the major capital cities the Philippines is the gate way of international airlines and shipping, it is said to be the critical entry point to in excess of 500,000,000 people in the Association of Southeast Asian Nations (ASEAN) market.
The Philippines is the third largest English speaking country in the world with a large expatriate community and its growing support infrastructure accommodates American and European businesses.
These incentives and motivating factors are leading to a growing number of international companies expanding operations into the Philippines with many choosing to set up regional headquarters in business hubs like Makati, in the capital city Manila.
Business Expansion into the Philippines
The American Chamber of Commerce in Singapore (AmCham Singapore), in cooperation with other AmChams in the ASEAN region, conducted a study among U.S. companies operating in the Philippines. Feedback from the companies indicated that most of the businesses plan to expand in ASEAN within the next two years due to what they see as great potential for business growth as well as ASEAN’s increasing market share.
Most of the companies expect expansions in the Philippines as well as a workforce increase in the coming year, due to the potential they see for business growth in the area, increasing market share, and reasonable production costs. The rate of respondents in the study expecting a workforce increase in ASEAN over the coming year rose from 39% in 2009 to 51% in 2010 to 71% in 2011. A third of this expansion will take place in the Philippines.
Commercial property – Office Space Subsector
The office property subsector in the Philippines is one of the strongest in Asia. In a recent article ‘Asia Offers The Best Real Estate Investing’ published on Livetradingnews.com on the 20th September 2011, there was a section ‘An explosive Philippine property market’.
In the article David Leechiu, country manager of Jones Lang LaSalle stated;
‘Details that emerged about the Philippine property market were vast and captivating’ ‘Office space take-up in the Philippines is now highest in the region at about 300,000 square meters for Metro Manila versus 150,000 sq.m for all of Singapore’. “We’ve built about 20 business districts in the last 10 years,” states Leechiu, adding that it is an unprecedented level of development, “one we’ve never had in our hundred-year history.” said Leechiu.
As noted in the ADB 2011 report, one of the reasons behind the demand for office space in the Philippines is the growth of BPO (Business Processing Outsourcing). This was further reinforced by research findings in The ASEAN Business Outlook Survey 2011 – The Philippines Report and a recent Colliers International report shown below.
Commercial office space driven by Business Process Outsourcing Demand
The outsourcing & off-shoring industry is still the major driver in occupying office space across all submarkets tracked by Colliers, and Makati is still the preferred address of traditional offices. Source Colliers International: Philippine Real Estate Market report Q1 2011
Another Colliers report also highlighted the financial growth of the market especially in Makati stating that office rents increased 6.3% year on year in 1Q 2011, while capital values increased by 5.6% during the same period. Asia Pacific Office Market Overview: Colliers International
O1 2011
Manila, Makati hotspot for office space demand
The Colliers International report goes on to highlight other areas in Manila that are undergoing office space development due to lack of available space in Makati; ‘emerging markets have sprouted in different areas in Metro Manila such as Eastwood City, Mandaluyong City and Bonifacio Global City to accommodate the expansion needs of BPO companies’. This demand and growth is having a positive effect on the market driving up property values in Makati.
Capital values for office space are increasing and are capped to appreciate by 7% by next year. Source Colliers International: Philippine Real Estate Market report Q1 2011
The workforce in the Philippines is mainly well educated as higher education is a priority for most Filipinos with a 94.6% literacy rate being among the highest in Asia, and English is taught in all the schools. Multinational businesses setting up shop in the Philippines have an abundance of candidates to choose from as each year around 350,000 Filipinos graduate enriching the professional pool. Source: http://www.philippine-embassy.at
With such a vast well-educated workforce and the fact that salaries in the Philippines are normally around a fifth of that in the United States it is easy to see the attraction for Multinationals.
The office space market growth in Manila is a direct result of business growth in the area from both domestic businesses and Multinationals moving operations to the region for a number of reasons some of which we mentioned above.
This business growth is creating an increasing number of well-off residents in Manila, both foreign employees brought in from abroad by the Multinationals, and Filipino workers, who as we have highlighted have many core competencies and desirable skills.
This growing affluent workforce will of course require good accommodation especially in the regions and areas with high business growth like Manila so in turn this is driving demand for quality residential property in Manila and especially in Makati CBD.
The demand for residential property in Manila as a direct result of BPO is highlighted in the Colliers International: Philippine Real Estate Market report Q1 2011
‘Strong market signals seem to hint growth across premium grade condominiums, however the market is continually fed by low- to mid-cost projects reducing supply of bigger unit sizes. In Metro Manila, condominium projects offer 70% of studio and one-bedroom units, with average sizes of 25 sq m to 35 sq m. The trend is most likely to continue in the medium term in accord with the emergence of the BPO (Business Process Outsourcing) sector, one of the drivers of growth for this segment.’
On the other hand the report also mentions that the continuous inflow of smaller-size units, which are easily absorbed by the investors market, may escalate vacancy rates further as more of these spaces will still be left for lease. Source Colliers International: Philippine Real Estate Market report Q1 2011.
However because of the continuous business growth in the region this is still to be seen.
The report also highlights that demand for luxury residential apartments in Manila is high with an occupancy rate of 90% in Makati CBD. This further highlights the demand for quality accommodation in Makati specifically.
Residential capital values are consistently increasing especially in Makati, not as much as 2004 to 2008 where values increased from around 65,000 to 110,000 Peso per sq.m, but from Q1 2010 until now (Q3 2011) we are seeing an upward curve from just under 100,000 Peso to around 110,000 Peso per sq.m with many experts and residential development companies predicting further growth for the foreseeable future. Some agents predict capital growth of as much as 10% – 14% per year, Source: Experience International.
Makati and Rockwell are considered prime locations for residential property investment as average rents are continuing to increase due to high demand and the fact that supply will be limited with no new supply coming in the medium term; long-term prices are still expected to rise. Source Colliers International: Philippine Real Estate Market report Q1 2011
Summary
The research shows that the Philippines has many economic growth indicators that are also helped along by government incentives to encourage Multinational companies to set up operations and in a lot of cases headquarters in the Philippines and especially in Manila as a base to expand into the attractive ASEAN markets. This is driving demand for office space in the main business districts like Metro Manila and Makati.
The Business Process Outsourcing industry is responsible for much of the office space demand in Manila where the Multinationals are capitalising on the lower cost of wages and highly skilled workforce. These employment opportunities are creating an increasingly affluent population especially in Metro Manila, Makati & Rockwell.
These affluent residents of course require good accommodation near the workplaces and as a lot of people may be on contract work for shorter periods of time or have family homes elsewhere a large number will prefer to rent accommodation at first and then purchase an apartment once they are settled.
The strong rental demand and limited supply is driving up both rental yields and capital growth for apartments and condos in Makati.
This is attracting many investors from around the world to consider Manila property investments. Filipino property developers like Century Properties Ltd who are the largest private real estate developer in the Philippines have identified this trend and are capitalising on it by forming strategic relationships and partnerships with a growing number of overseas property companies.
For example they have successfully launched the Milano Residences a development with interiors designed by Versace Home.
They have recently announced the collaboration with American celebrity and heir to the Hilton Hotel fortune Paris Hilton who will help design the concept for the Azure Beach Clubhouse, part of Century Properties planned urban resort Azure in Parañaque City, Manila.
And just this month (September 2011) Century Properties also announced the launch of Trump Tower Manila, a collaboration with the world famous property developer Donald Trump in which the Trump brand has been licensed to Century.
These residential property developments all help to expose the Manila property investment market to the international investor audience, and evoke interest.
With all this activity we can assume that today Manila property investment is a hot topic; both for commercial office space and residential property which as in high demand and with no signs of slowing down.
The growing economy, influx of Multinationals, high demand for both commercial and residential property with demonstration of good capital growth and rental yields in Manila, combined with the international media exposure all indicate that now is a prime time to invest in the Philippines property market and especially property in Manila.
