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At the start of the year, property consultancy firm CBRE Philippines said in its annual market outlook that the Philippine real estate industry will have bright prospects throughout 2013.


Sustained growth was projected for the residential, gaming, leisure and business process outsourcing (BPO) or office sectors due to strong investor confidence arising from good macroeconomic factors and low interest rates.

True enough, the local property sector has continued to grow this year. Claro Cordero, Jones Lang LaSalle Philippines' research, consulting, and valuation head, gave an overview of the property industry's performance.

"The local property sector sustained its positive performance in 2013, supported by the continued growth of the major property demand drivers---that is, the offshoring & outsourcing (O&O) and BPO industry for the office or commercial sub-sector; the remittances from overseas Filipinos for residential and retail sub-sectors; and continued interest and potential on tourism for the hotel sub-sector," he said in an email to BusinessWorld.

A healthy economy, growing domestic consumption, and a sustained inflow of remittances---which, according to Mr. Cordero, encouraged more international retailers to set up shop in the Philippines---buoyed the retail property sector.

"The sustained demand has supported the moderate growth of rents in retail mall developments," he said. "In 2014, new malls and retail expansions are expected to complete, considerably adding to the current retail stock."

The hotel industry, anticipating increased tourist arrivals because of the Philippines' renewed tourism campaign, continued to start and develop more projects. Mr. Cordero expects the Metro Manila hotel supply, in particular, to "increase even further" in the next several years.

"The majority of the upcoming hotel accommodations will be located in the Entertainment City within Bay City," he said. "There are also a number of hotels coming on stream in the established business districts of Makati, Ortigas and Bonifacio Global City (BGC)."

Aside from a steady flow of remittances, a relatively low-interest rate environment and flexible financing schemes helped the residential condominium market's performance, according to Mr. Cordero. "In the next few years, residential condominium supply is expected to further rise, potentially doubling the current stock in Metro Manila by 2016."

FOREIGN FORCE

More investors and expatriates were also encouraged to establish offices in the Philippines, which then increased the demand for high-end apartments in premium residential areas near and within the central business districts.

In an email to BusinessWorld earlier this year, CBRE Philippines explained how foreign expatriates contributed to the increased demand for high-end residential condominiums.

Initially, expatriates in the country were limited to renting, but with the rapid appreciation of values for luxury developments---particularly residential condominiums---it has become more cost-effective for longer-staying expats to buy these units to live in, and eventually, for investment. The Philippines allows foreign expats to own up to a maximum of 40% of the property's entire sellable floor area.

They also explained that more restrictive realty laws in neighboring Asian countries have made the Philippines a more attractive destination for foreign expats.

In Hong Kong, the government's imposition of higher rates on stamped duty taxes---an effort to control the properties' rapidly increasing prices---have stymied investments in residential units. Meanwhile, in Singapore, banks have imposed a lower loan-to-value ratio top of higher rates on stamped duty taxes, forcing potential buyers to cough up a larger outlay for acquisition of properties through financing.

This has led investors to look for properties elsewhere, and the Philippines, which gained investment-grade ratings from Fitch Ratings, Standard & Poor's, and Moody's this year, has become one of the more feasible options.

Julius Guevara, associate director for valuation and advisory services at commercial real estate consultancy firm Colliers International, believes the demand for high-end real estate coming from expats in the Philippines is "only being addressed."

This market has traditionally driven the high-end market, he explained, especially in central business districts. Because of an expanding economy, the growing BPO sector, and bleaker prospects abroad, foreigners have been flocking to the Philippines, increasing the demand for high-quality dwelling space.

According to him, rental growth in posh villages such as Forbes Park has been escalating steadily since lack of land prevents new exclusive subdivisions from being built near the central business districts. While there has been a strong demand for condominiums in the past few years, these projects were mostly focused on studio-type to one-bedroom units. The demand coming from foreign expatriates is for larger units.

"Luxury condo development has been growing the past couple of years, but we will see their completion in another four to give years," he said in an email earlier this year. "As of now, there will still be some unmet demand for this segment; this is reflected in the low vacancy rates in premium properties in Makati, Rockwell and Bonifacio Global City."

OUTLOOK ON OFFICES

The growing O&O industry, said Mr. Cordero, contributed to the resiliency of rental rates in the commercial office property sector.

"The healthy demand for office space has buoyed the moderate growth of rents and capital values of Grade A office space," he said. "Consequently, property developers were encouraged to launch new office projects in different districts in Metro Manila, further increasing the level of upcoming office supply in the next few years."

At a press briefing held last month, Joe Curran, general manager of commercial real estate services firm Cushman & Wakefield's (C&W) local arm, also noted that office spaces have fared well in driving growth in the local property sector.

According to C&W research, Manila has posted a highly competitive vacancy rate of 4.3% as of the third quarter this year, and it remains one of the locations with the lowest vacancy rates in Asia-Pacific's emerging markets. It has also outperformed the rest of the countries in the Asia-Pacific region in terms of net absorption, which totaled to an estimated 482,126 square meters, with new supply of 332,786 square meters coming in during the same period.

Manila also ranked above markets such as Mumbai and Bangalore in India, mostly due to the healthy demand driven by the IT-BPO sector.

"This means companies are continuously increasing their head counts, and they are expanding not only in Metro Manila but in other cities in the Philippines as well," said Mr. Curran at the event.

In real estate, vacancy rate is the percentage of all available units in a rental property that are unoccupied at a particular time. This means low vacancy rates denote strong rental sales, while high vacancy rates indicate weak rental sales. Absorption rate, on the other hand, is the rate at which available units are sold in a specific real estate market during a certain period of time. A high absorption rate, therefore, suggests a rapidly shrinking supply of available units.

Taguig and Makati have witnessed 59% and 29% of the absorption, respectively, with Makati posting the lowest vacancy rates and highest year-on-year change of 11% in terms of weighted average rental values. C&W said that incoming office supply over the next two years is estimated at 1.2 million square meters in key areas around Metro Manila, with BGC accounting for 42% of new supply.

"The Fort is continuously being a top player in the office space sector, attracting both outsourcing and non-outsourcing firms," said Mr. Curran.

The performance of Metro Manila's office sector, compared with that of other cities in the region, is a testament to how strong the market is today, added Mr. Curran.

C&W expects that in the next three to five years, "green" buildings will become more ingrained in the industry. The Philippines will also enter a "tenant's market" phase since investors will be inclined to buy strata-titled office spaces, which allow for several unit owners across a single property.

Completions are expected to be thin in the first half of 2014, said Mr. Curran, as developers are set to complete projects only by the end of the year, perhaps well into 2015 and 2016. While C&W expects this to put pressure on prices and vacancy, the stable growth of the BPO industry will continue to fuel office space expansion in key locations in the country.

SOARING, BUT SOBER

Last November, Bangko Sentral ng Pilipinas governor Amando Tetangco, Jr., to quell worries about a possible real estate bubble in the country, explained that current real estate activity translates to presence of demand.

"Property developers don’t build if they don’t think there’s demand," he said in a previous BusinessWorld interview. "They have changed their business model. Pre-Asian crisis, if they are building a four-tower development, they build at the same time. Now, it’s one tower at a time."

Despite, or perhaps even because of, the optimism about the property industry, Mr. Cordero still cautions against overzealous building.

"Developers should be able to read market signals by undertaking thorough studies and analyses, to know when excessive building may actually not work in their interest to protect market values," he said. "Well-paced building and development plans can contribute to sustainable and lasting market growth."

source:  Businessworld