Real estate soothsayers see ‘rosy’ picture in 2018

posted December 21, 2017 at 06:52 pm
by  Joel Lacsamana
MANY property and construction players are crystal ball-gazing this time of the year to assess what’s in store for the Philippine real estate industry in 2018, and beyond.

Depending on who you talk to, the soothsayers’ prognosis can be mixed.

There are industry pundits who track the construction cranes that dot the skyline in an unprecedented 14-year construction boom from Alabang to Balintawak, from Pasig to the reclaimed shorelines of Manila Bay—with thousands of new office buildings flooding the market, and ask—is a real estate glut in Metro Manila upon us?

But there are many more who share the optimism held by some of the biggest business groups about the country’s prospects for next year, and pronounce that  an equally robust property market may be expected in 2018 and the next five years, on the back of a strong economic growth, a growing knowledge process outsourcing (KPO) industry, aggressive infrastructure spending by the incumbent Duterte administration, and  sustained private sector confidence.

Quo vadis, BPO industry?

Andy Manalac, former chairman of the National Real Estate Association (NREA) and head of Havitas Developments Corp. agreed. But he cautioned that  the recent tax reform proposal of the Department of Finance (DoF) could threaten the prospects of the BPO industry.

The DoF, through House Bill 5636, proposes to remove the value-added tax (VAT) exemption on gross sales presently enjoyed by BPO firms. It is part of the comprehensive tax reforms package submitted to Congress and certified urgent by Malacañang. Should the DoF plan be implemented as proposed, BPO firms will be made to pay 12% VAT with a corresponding entitlement to claim refunds through VAT inputs. The government promises to process such refunds within 90 days.

The year 2018 may further see the expansion of alternative industrial hubs; more strategic landbanking within the vicinity of crucial infrastructure projects ; and project differentiation, among others.
Technically, the effect on BPO cost structures should be minimal except for the need to beef up working capital to subsidize VAT until the refunds come through. What makes it contentious is that government makes no guarantees that all refund claims will be honored.

“BPO firms in the Philippines already operate at a 6% cost premium versus those operating in India,” Manalac said. “This is due to higher wages, power costs, and office rentals. With the additional tax burden coupled by the need for additional working capital, the cost differential between India and the Philippines could widen to 15%, effectively obliterating Philippine competitiveness.”

 Exacerbating the situation is the relative ease to duplicate BPO operations in other locations. With this, Manalac said, the Philippines could face the specter for closures and outward migration of BPO firms.

Optimism abounds

 Knight Frank Philippines chairman and CEO Rick Santos said the outlook on Metro Manila’s real estate market is more optimistic next year as the government’s infrastructure projects are expected to be rolled out, improving the business environment here.

He added that higher business confidence is seen as post-ASEAN hosting effect, since the government was able to project the opportunities in investing in the country.

Likewise, infrastructure funding deals and other key agreements forged by the government and officials from other countries who attended the ASEAN Summit are also expected to drive economic opportunities in the Philippines.

This will lead to stronger demand in property market, according to Santos.

“With deeper cooperation between the Philippines and East Asian neighbors such as China and Japan, prospects for the Philippines’ property sector are stronger than ever before. Enhanced infrastructure projects and access naturally attract more institutional and private investments that, in turn, lead to accelerated countryside development and growth of secondary cities,” he said.

Strong fundamentals

The Philippines is now Asia’s new economic powerhouse on the back of its strong, stable macroeconomic fundamentals. 

The country continues to have one of the fastest growing economies in the region, coupled with low inflation and interest rates, and strong remittances from overseas Filipino workers. Infrastructure spending is also on the rise, considered by many as a signal for sustained growth.

The Philippines’ investment grade ratings from notable credit rating agencies have long put the country on the radar of foreign investors, many of whom have started to set up shop here over the last several years. And with the strong investor confidence, more Filipinos today have stronger purchasing power given the access to better quality jobs.

Stable industry

The favorable gains achieved over the last five years have benefited a host of other industries, including real estate, which is now being heralded by many quarters to be the more attractive investment option.

The numbers tell the perfect story.

Metro Manila, for one, ranked third in terms of city investment prospects under the Asia Pacific City Investment Prospects 2017, which identified the Philippine region to be one of the “most attractive urban hubs for developers and yield-seeking real estate investors.”

Rental yields of residential condominiums in Manila also remained more attractive compared to the interest rates offered by other instruments, according to Colliers International Philippines. For instance, as of end February this year, Manila rental yields stood at 7 percent, higher than any of the rates offered by treasury bills and bonds, time deposit, and bank lending, Colliers said.

More importantly, data from Global Property Guide 2016 showed that the Philippines offers a higher gross residential rental yield compared to most countries in the region. At the same time, the country’s average residential prices remained competitive, way below those of Hong Kong, Japan, Singapore, India, Taiwan and Thailand.

What’s in store? 

Industry observers believe the sectors which performed well in 2017 will likely see similarly  growth in 2018.

Manalac said there a number of trends and growth drivers that the industry players should watch out for as these may offer highly lucrative opportunities for further growth and expansion of their respective businesses.

He said these trends included the expansion of mixed-use developments outside Metro Manila as these are expected to offer better value proposition than the stand-alone developments; as well as the development of meetings, incentives, conventions and exhibitions (MICE) and leisure facilities.

The year 2018 may further see the expansion of alternative industrial hubs; more strategic landbanking within the vicinity of crucial infrastructure projects ; and project differentiation, among others, added Santos.

Colliers Philippines predicts  a surge in manufacturing investments and this will further raise demand for industrial space. Firms must start developing industrial parks outside of the Cavite-Laguna-Batangas area.

Public construction will be a major source of growth as the government committed to ramp up infrastructure spending.

Private construction will continuously grow due to sustained appetite for office and retail developments, while outsourcing and tourism-related activities will continue to drive the services sector.

“We anticipate the office, residential retail, and industrial sectors to grow further in terms of supply and activity, thanks to stronger regional trade and infrastructure cooperation,” he added.

For this year alone, office space take-up is expected to reach over 600,000 square meters, led by the demand in the information technology and business process outsourcing (ITBPO) sector.

For the residential sector, around 52,000 residential units are scheduled for turnover in 2018.

More than 182,300 square meters of retail space are slated for turnover by the end of the year.

E-commerce not a drag

Knight Frank’s Santos noted that e-commerce is not seen to drag the demand in retail spaces in the Philippines, unlike in the United States where market for retail space faces challenges in the age of e-commerce.

Likewise, forecast on industrial sector remains rosy as business confidence in the country is still high.

The company noted that there is an increasing demand for warehouse and storage spaces, particularly in Metro Manila, Clabarzon (Cavite, Laguna, Batangas, Rizal and Quezon), and Central Visayas. 

“Build, build, build”

Colliers Philippines believes  the infrastructure plans of the current administration will dictate the direction of real estate developments beyond the term of President Duterte.

The implementation of infrastructure projects nationwide should provide access to properties that could be redeveloped into mixed commercial, residential, hotel or leisure and industrial estates.

Expect developers to be more aggressive in pursuing projects outside of Metro Manila as access will be significantly enhanced.

Millennials dictate retail spending in the country

Filipino millennials have high disposable incomes and have overtaken the baby boomers in terms of demographic size.

They are very selective in terms of products and services that they patronize. They are heavy users of “shared economy” services such as Grab, Uber, and AirBnB, and drive demand for e-commerce sites like Lazada, Zalora, SSI Online.

Developers are buildings new malls with the millennials in mind. They are starting to offer a unique tenant mix and house retailers that specifically cater to millennials.

We see developers constructing more lifestyle-oriented malls rather than retail-centric ones to differentiate themselves especially with the emergence of online shopping.

Thriving condo living to drive demand for home furnishings, accessories

Demand for home furnishings and accessories is primarily driven by an expanding middle class with incomes buoyed by BPO sector and remittances from overseas Filipino workers.

Growing local demand lures foreign brands such as Crate & Barrel, H&M Home, Pottery Barn, West Elm to set up shops. IKEA is set to enter the Philippine market.

Construction delays 

At the beginning of 2017, the projected supply of new office space was close to 900,000 sqm. This has been adjusted downwards by more than 30 percent due to project delays related to the tight labor supply in the construction sector.

Top general contractors are declining to provide their company profiles to prospective clients due to a shortage of adequately skilled workers.

Construction industry pundits  believe that private construction in 2017 could’ve been more robust if not for construction delays brought about by the lack of adequately-skilled workers. The intensified development of public infrastructure projects around the country will exacerbate this problem.

Hotels and leisure segment on upswing

The emerging segment of affordable hotels is likely to drive the market given the rising number of local entrepreneurs and domestic tourists. Colliers sees local developers expanding their hotel portfolio to cater to this market.

Colliers projects hotel occupancy rates in Metro Manila stabilizing between 65 percent and 70 percent over the next 12 months.

Foreign arrivals are estimated to reach 6.5 million, and both affordable and luxury hotels stand to benefit. Unfortunately, the growth of tourism sector is still hampered by the capacity limitations of existing airports.

The entry of more foreign hotel brands such as Grand Hyatt, Okada, and Dusit’s D2 will continue in 2018. Tourism players anticipate the development of more resort hotels in tourism hubs in Visayas and Mindanao.

Topics: Philippine real estate industry
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