What’s the real state of real estate?
By Flor Tarriela, PNB Chairman and FINEX Trustee, former Undersecretary of Finance, and first Filipina Vice-President of Citibank.
What is the current status of the Philippine real estate industry? Real estate demand is buoyed by the Philippine economy which has grown at 6-7% level. There are new captive markets due to improved accessibility and the pipeline of new infrastructure projects connecting Metro Manila and nearby Calabarzon provinces to the south and the Clark/ Subic areas to the north. A significant real estate driver is the continued growth of business process outsourcing (BPO) industry ($17.3 billion in 2015) and remittances of overseas Filipinos ($25.8 billion in 2015) expected to further improve consumer spending.
Claro Cordero of Jones Lang LaSalle (JLL) says that from the sectoral overview, there’s an increasing demand for office space as new and existing BPO companies further expand. Residential demand remained strong, both in the luxury and low-end segments. More mall spaces are in the pipeline with the entry of foreign retailers. Limited supply of high specification modern logistics facilities; while demand for Third Party Logistics (3PL) and e-commerce warehousing has the potential to grow. There are challenges like ownership limitations for foreign companies and individuals are likely to remain plus the lackluster global recovery and growth. But the Association of Southeast Asian Nations’ integration to push growth of consumer markets is a welcome opportunity.
For the office market, with the BPO sector growing double digit at 10.6% in 2015, demand has grown continuously. The Philippines is a great success for the BPO industry because of the high level of English proficiency, affinity with Western culture, workforce’s positive attitude and a large pool of millennials among others. Per Mr. Cordero, as of the second quarter of this year, 51% of the 2016 pipeline of 780,100 square meters (sqm) as already been taken up, with only 5% vacancy for Grade A developments. Rental rates have actually increased (4-10%) across major business districts.
Who are the top developers in the office market? According to the JLL study, the top five which comprise 42% of total stock are:
• Megaworld Corp. 12%
• Ayala Land Inc. 12%
• SM Development Corp. 7%
• Robinsons Land Corp. 6%
• Filinvest Land, Inc. 5%
The next five are The Net Group, Eton Properties, Daiichi Properties, W Group and Shang Properties.
Among Asia-Pacific rental values, Manila ranks 10th with the lowest rental value, the highest being Hong Kong, Beijing, Tokyo, Shanghai and Singapore. Manila also ranks 4th with lowest capital value.
On the residential sector, remittances continue to fuel consumer demand. Mr. Cordero says supply is currently concentrated in central business districts (CBDs) such as Fort Bonifacio, Makati, and Ortigas, and will continue to be concentrated in CBDs for the next five years. Top residential developers which contribute 52% of total stocks are:
• Megaworld Corp. 15%
• SM Development Corp. 14%
• DMCI Homes 9%
• Ayala Land, Inc. 8%
• Cityland Developmentt Corp. 6%
The next five are Robinsons Land Corp., Century Properties, Filinvest Development Corp., Federal Land and Vista Land. Note that most of the top office and residential developers are part of conglomerates with strong balance sheets and well-capitalized and experienced the 1997 Asian financial crisis.
In the tourism and the hotel market, Metro Manila remains the prime location for hotel development and demand is supported by gaming industry. Branded hotels, though, are expanding beyond Metro Manila such as in Iloilo, Davao, Sicogon, Palawan etc. Tourist arrivals increased by 14% year-on-year as of April 2016 from 5.4 million in 2015. South Korea continues to be the top tourism source followed by the US, China, Japan and Australia.
In the industrial sector, increased saturation, reduced availability of land and worsening traffic in Metro Manila led locators to go to adjacent areas north and south of the Metro. As of 2016, industrial parks amount approximately to 3,000 hectares. Calabarzon has the highest concentration of manufacturing activity in the Philippines. Land values in Cavite, Laguna and Batangas range from P3,800 to P6,500 per sqm. However, majority of existing logistics/ warehouse stock is not within international grade. Improved connectivity of Metro Manila to adjacent areas expected due to new infrastructure projects.
The Bangko Sentral ng Pilipinas (BSP) has been closely monitoring the real estate market to ensure that banks are not overly exposed. Banks’ exposure to real estate as an industry is limited to 20% of its total portfolio. The BSP further expanded the description and coverage of real estate exposure of banks, imposed real estate stress tests, required quarterly reporting on residential real estate loans and placed a cap on collateral value from 80% to 60% to increase the coverage of credit protection.
So what’s the real state of real estate? Should we be concerned about a property bubble? A bubble occurs when asset prices rise quickly but because it is not supported by underlying demand, it is not sustainable and price go down quickly too. Discussing among business and real estate specialists, the consensus is no given the country’s strong fundamentals, continuing growth of the BPO and overseas remittances, emerging middle class, access to credit with lower interest rate and longer tenors, and acceptance of condominium living among others. However, if at all, there could be a temporary supply-demand imbalance which can be self-correcting as developers themselves voluntarily delay project launches on their own.