Matching real estate supply with demand in the Philippines

Favourable demographics, a solid macroeconomic outlook and a confluence of demand drivers are inspiring bullishness in all property segments in the Philippines. Motivated by some of the region’s most competitive rental rates and an attractive workforce, business process outsourcing (BPO) firms are taking office space in sought-after commercial areas. Traditional office take-up is also rising as the economy grows at one of the fastest rates in Asia, and confidence is being bolstered by investment rating upgrades and plaudits from institutions like the World Economic Forum for the improved business climate and political stability.

These same factors, along with system liquidity leading to historically low interest rates, are fuelling the residential segment. Expatriate and high-income earners are moving into luxury condominiums in and around central business districts, while the BPO sector workforce – which is expected to double in size by 2016 – and the relatives of overseas Filipino workers (OFWs) are stepping onto the housing ladder and taking up middle- and lower-income units.

Increased purchasing power in an environment of growing consumer confidence is motivating domestic and global retailers to expand, boosting demand for retail space. In addition, the hotel property segment is benefitting from increasing numbers of international business visitors to the capital and leisure travellers to resort-oriented islands, while rising manufacturing output, trade flows and demand for logistics are driving occupancy levels in industrial lots.

COOL HEADS: Although the signs point to buoyant times ahead, there are also challenges related to land acquisition and foreign ownership restrictions to temper any over exuberance, as well as risk factors that could be brought about by external shocks.

This raises the need for property developers to rein in their exposure and slow the pace of projects in certain segments and locations that could face saturation, and is prompting the industry’s regulators to impose capital adequacy requirements and other control mechanisms in an effort to pre-empt the property market from potentially overheating.

Despite the unprecedented pace of new office stock hitting the market, demand is expected to outpace supply for some time. “As the Philippines improves the ease of doing business we will see sustained demand for office space,” Lars Wittig, country manager for the Philippines at multinational office provider Regus, told OBG. BPO and offshoring currently account for 80% of office take-up, according to local real estate firm KMC MAG. Having expanded by 15% in 2014 to reach $15.3bn, the segment shows no sign of slowing. By 2016, the IT and Business Process Association of the Philippines (IBPAP) expects sector revenue to reach $25bn, while research group Tholons predicts the country will close in on $50bn worth of BPO earnings by 2020.

The Philippines has a number of attributes that have contributed to its emergence as the top global provider of contact centre work and the second-most-popular destination after India for IT-BPO and global in-house centres (see BPO chapter). Attractive lease rates form a key component of the value proposition. According to real estate management firm Jones Lang LaSalle, rents in Manila are among the cheapest in Asia. At around $20 per sq metre, rates in the capital match those in Bangkok and Bangalore as the lowest of all major Asian cities, and are well below what a locator would expect to pay in markets such as Hong Kong, Beijing and Singapore, where rents exceed $85 per sq metre.

TAKING STOCK: According to IBPAP, by the end of 2013 70% of the Philippines’ BPO segment, as measured by employment, was located in Manila. The city’s most sought-after commercial districts, and in turn the locations where most new high-grade office stock is being delivered, are Makati City, which since the 1970s has been the country’s financial centre, and has the highest concentration of multinational and local corporations; Fort Bonificio (also known as Bonificio Global City), a rapidly growing greenfield redevelopment spread over land formerly occupied by US army bases; and Ortigas Centre, a third financial and central business district that straddles the boundaries of Pasig, Mandaluyong and Quezon City. Other master-planned communities that have launched with similar aspirations to Bonificio Global City of becoming a site for offices, residences, retail and entertainment include Eastwood City Alabang and McKinley Hill.

According to second-quarter 2014 figures from CBRE, the vacancy rate in Makati City stood at 1.4%, while the average lease rate was the highest in the country at P970 ($21.80) per sq metre. Fort Bonificio had average rates of P797 ($17.90) and its vacancy rate rose to 3.8%, up from 2.2% in the previous quarter. As most of the district’s stock comprises new buildings, rental rates are considered to be stable compared to other more fluctuating districts. Rates in Ortigas, at $12.87 per sq metre, were the lowest of the three, and its vacancy rate was the highest at 8.75%. In 2013 Manila’s vacancy rate of 2.7% was measured by the World Property Journal as among the lowest in Asia, with only Bangalore, New Delhi and a couple of areas in Beijing showing tighter occupancy rates.

Colliers anticipates the market to have absorbed 450,000 sq metres of new office space in 2014, with Fort Bonificio and Ortigas the destinations for 55% of new units delivered. By 2016 available office space in Manila will have expanded by nearly a quarter on what had existed in 2012, growing from just over 6m sq metres to 7.5m. While CBRE estimates that 80-90% of the fresh stock will be occupied by BPO operations, this does not preclude other industries from searching for new premises. As the economy expands, so does the arrival of multinationals looking to establish country headquarters, and the desire of local corporates to relocate into upgraded facilities.

Under an initiative titled Next Wave Cities, the government is looking to offset rapid urbanisation by creating more BPO hubs outside of metropolitan Manila. As offshoring, by its very nature, is an exercise in creating cost arbitrage, some clients are moving to areas outside of the capital, attracted by the availability of lower rents, among other factors. By 2016 the government is aiming to reduce Manila’s domestic share of the sector from 70% to 60%.

RESIDENTIAL SEGMENT: In a November 2014 survey of 16 emerging markets, online real estate marketplace Lamudi found that agents and brokers in the Philippines were among the most upbeat of those surveyed, with 92% indicating optimism regarding the market’s future over the next 12 months.

The capital’s infamous heavy traffic is motivating those who can afford to do so to sacrifice hectarage and gardens for premium condominium units in closer proximity to their place of work and other amenities. According to Colliers, an average of 9000 high-end condominium units are set to hit the market over the next three years, 95% of them in the Makati central business district, Fort Bonifacio and Ortigas Centre.

Demonstrating the rapid facelift the city is undergoing, the city’s three main commercial districts will witness 25,000 residential condominium units being built between 2013 and 2016, which amounts to nearly half of the 58,000 units constructed over the entire 40-year period prior. Delays in construction reduced the number of units expected for delivery in 2014 from 7746 to 5546, helping to keep occupancy rates high.

With an influx of projects anticipated to become available for occupancy in 2015, some analysts are anticipating vacancy rates to reach double digits, and to remain at that level for the next few years. In turn, the pace of new project launches should be tempered as developers become more conservative under an expectation of supply catching up with demand. Diminishing availability of land in the more popular areas should also contribute to a slowdown in the pace of premium residential construction activity.

MASS MARKET: The Philippines is experiencing a rush of first-time buyers as mortgage rates have hovered around record lows, and a growing middle class – underpinned by the new wave of BPO employees – is driving demand for mid-market housing. Although many fresh graduates entering the profession opt to initially live at home, after a few years of saving they are able to move into smaller condominium units classified by Colliers as studio or one-bedroom, ranging from 21 sq metres to 60 sq metres. Those with younger families transitioning up the property ladder tend to opt for subdivisions or townhouses in areas outside Manila’s three main CBDs. It is estimated that around 10% of all Filipinos are employed abroad as OFWs. The central bank estimates that 2014 remittances expanded by a further 5% to reach a record $23bn for the year. A substantial proportion of this money – up to 60%, according to figures from the World Bank – goes towards supporting family members to purchase property.

AFFORDABLE HOUSING: Despite the frenetic pace of construction and transactions, the country still suffers from a chronic shortage of affordable housing. The government estimates that the housing shortfall will reach 5.8m in 2016. In metropolitan Manila alone, the current backlog is estimated at just below 500,000 units. “There is new building technology that facilitates socialised housing, but it needs to prove it can last for up to 30 years, which is the tenure of the housing loan, especially in an environment that is susceptible to climatological events,” Darlene Marie Berberabe, the president and CEO of the Pag-IBIG Fund, told OBG.

Private developers have been reluctant to enter into affordable housing projects, as commercial returns on lower margins are harder to come by without achieving significant scale. The government has therefore introduced some value-added tax exemptions that developers participating in socialised housing schemes can take advantage of. Private developers are also mandated to ensure that 20% of their total project cost or their total land area for urban schemes is allocated to socialised housing. There are several ways to comply, depending on the location of the project, or whether the developer prefers to acquire existent socialised housing assets instead of building additional units.

“The industry is producing less than 200,000 units of affordable housing per year, at a level that is covering only incremental demand but not addressing the backlog. To be successful in this space you need to come up with a model that works for delivering low-cost housing,” Guillermo Choa, the chairman of property developer Pro-Friends, told OBG.

RETAIL ON THE RISE: Adjusted for inflation, National Statistical Coordination Board figures show gross value added in retail trade to have expanded by 6.8% in 2013. With a young, rapidly growing and consumption-driven market of nearly 100m, an expanding middle class and positive consumer sentiment, the Philippines has emerged as one of the region’s more promising retail destinations. Across the country, malls of various shapes and sizes are under construction to accommodate the waiting list for new storefront (see Retail chapter).

As of the end of 2013 Jones Lang LaSalle measured total shopping mall space at 13m sq metres, of which 7m was located in metropolitan Manila, with the bulk of the remaining space found in the secondary cities of Cebu, Davao, Cavite and Pampanga.

Colliers expects a total of 340,000 sq metres of new space to open up in metropolitan Manila by 2016, and a total of 645,000 sq metres of space to come on-line nationwide between 2015 and 2017.

“For the first time, wealth is being distributed outside the capital. In the past the regions were stagnant. Now there is an aspiration shift, and this is being seen in the pace at which malls are opening in the provinces,” George Royeca, a business development associate at IT firm IPGV Corporation, told OBG.

Although 2014 witnessed the largest delivery of fresh retail stock since 2006, vacancy rates of around 5% did not drastically increase from the year prior due to some project delays and pre-commitments from local and foreign brands. Looking ahead, vacancy rates are expected to deteriorate slightly in metropolitan Manila, as a supply glut looks set to result in saturation in some of the retail districts.

HOSPITALITY: Late 2014 figures from the Department of Tourism (DoT) show the Philippines as having 80,162 hotel rooms available, while demand currently stands at 121,875. The DoT anticipates a shortfall of some 32,023 rooms by 2016, and has been calling on developers to increase the number of beds in the market. In metropolitan Manila alone, Colliers anticipates that hotel stock will increase by 23% y-o-y to reach 21,532 rooms, with an average of 3700 new rooms hitting the capital each year until 2017. Much of the new stock will be situated in and around newly established entertainment and gaming districts.

The rapid growth in construction and real estate has brought benefits for other industries too. “Ongoing construction activity increases the inventory of buildings, which increases the demand for paint, as these structures need to be repainted,” Willy Ong, the president of Pacific Paint (Boysen) Philippines, told OBG.

OUTLOOK: Demand for housing, office, retail and hotel space is expected to keep pace with economic growth, and as long as supply is playing catch-up vacancy rates should remain low. Possible exceptions – where project success rates might be more moderate as more supply comes on-stream – include premium residential units in prime business districts, while some areas of metropolitan Manila risk becoming over-retailed.

Slower-than-hoped-for delivery of government infrastructure and difficulties in acquiring land and permits could ease the pace of large-scale developments, while developers are likely to exhibit greater deliberation when pursuing projects as the demand gap narrows.