2012 and Beyond: The Philippine Real Estate Market Outlook
Good morning! The morning feels doubly good in your company—as I believe you are as positive as I am on the climate of rising investments in our country.
And the Asia Pacific Real Estate Investment Summit Philippines 2012 couldn’t have been more timely. Congratulations to the Asia Pacific Real Estate Association, the Philippine Stock Exchange, Inc. and the Investment House Association of the Philippines for spearheading and successfully organizing this Summit. You are aware, I am sure, of the role you play in informing and enabling ourselves to take hold of the opportunities coming our way.
We have plenty of good news to share this morning. Finally, the world has seen our reform initiatives. We have put our place in order and we are now counted among those who have the best prospects for growth.
Positive Economic Performance and Outlook
According to HSBC, the Philippines is currently the 44th largest economy in the world. By 2050, it expects us to be 16th among the top 50 economies. While this looks a long way off, it simply means that if keep at it, our jobs look to be a “Mission Possible.”
And based on the World Economic Outlook Database, our country is one of the next 11 emerging markets along with Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, South Korea, Turkey, and Vietnam.
Two months ago, the Philippines rose ten notches again in the global competitiveness index. The World Economic Forum Global Competitiveness Report rated us as one of the most improved, and out of 144 countries, the Philippines now ranks 65th. We were 87th in 2009 but rose 22 notches from 2010 to 2012. In terms of its macroeconomic environment, the Philippines registered the biggest improvement, moving 18 notches this year to 36th place.
In another survey of 200 companies in eleven countries in Asia, conducted by Thomson Reuters and INSEAD, the September 2012 Asia Business Sentiment Index reports that the Philippines, along with Indonesia, recorded the most positive readings of 100 each. The Philippines had the same rating for the second consecutive quarter this year.
Please note that in the Asia Business Sentiment Index, countries with a rating of 50 or higher are considered to have the best economic outlook. For this reason, investors are quite excited about the good business prospects of the Philippines. It is nice to see that we are now doing much better than our Asian neighbours.
For a change, we are enjoying good ratings and these excellent rankings are not without substance. The economy of the Philippines is looking up. Our GDP or gross domestic product grew by 6.1 percent in the first semester of this year from 4.2 percent a year ago driven by strong public infrastructure-related spending and domestic demand for consumer goods and real estate properties. Forecasts by HSBC show that it is even possible for our GDP to maintain growth rates of 7 to 10% until 2016. Our growth rates have outperformed all economies in the region, with the exception of China.
Our gross international reserves of $82 billion (as of October) now exceed our total foreign debt, and this has allowed us to commit $1 billion to the International Monetary Fund to help some troubled economies. According to the Midyear Business Economic Brief, inflation rates are manageable, averaging 4.25% for the past two years and decelerating to an average of 3.2 percent for the first three quarters of this year. Interest rates are at a historical low. From 1985 until 2012, our interest rate averaged 10.16 percent reaching an all time high of 56.60 percent in December of 1990 and a record low of 3.75 percent in July of 2012.
The Philippines is seeing positive trends: a stable democracy, strong macroeconomic fundamentals, labor peace, an educated, young, and English speaking work force, high rate of savings due to OFW remittances, low rate of dependence on petroleum, and one of the best performing stock markets in the world.
Indeed, it’s an “All Systems Go” for the Philippines towards a brighter tomorrow. And we are committed to stick to the game plan adopted by the government.
Government’s Drive to Improve the Investment Climate
The government’s thrust is not just more fun for tourists but more opportunities for businessmen and investors. To do this, our reform initiatives have been to fight corruption, reduce red tape and bureaucracy, construct efficient infrastructure, lower the rate of poverty, and improve our mitigation of and preparedness for natural calamities.
These are key ingredients if we are to achieve higher levels of Foreign Direct Investments (FDI), generate more job opportunities for Filipinos, and enhance the people’s well-being.
The government has zeroed in on fighting corruption in the country since 2010. I am happy to note the results of the latest SWS survey of enterprises on corruption that showed 71% of the executives from 950 companies saying that they see less corruption in the present administration than in the previous one. The most radical change as far as sincerity level improvements are concerned is in the Office of the President: from a minus 37 in 2009 to plus 81 in 2012. Other government agencies also received good scores. This means that the government is steadily improving and living up to its mandate and vision of weeding out corruption.
Not only that, according to a study made by PriceWaterhouseCoopers and the Urban Land Institute, the Philippines in terms of investment prospects has ranked 18th in 2012, rising 2 spots up from its previous rank of 20th. Good governance and the current macroeconomic environment have made this possible.
The administration is also pushing ahead with infrastructure development. Based on the 2012 Midyear Business Economic briefing, public construction grew by 60 percent during the first quarter of 2012. Roads are being built with the DPWH’s goal to have all national roads paved by 2016 and all national bridges made permanent by the same year. At present, 84 percent of the National Arterial and Secondary Roads have been paved and improved. As for bridges, about 27,000 lineal meters (lm) have been rehabilitated since last year out of the targeted 117,600 lineal meters by 2016.
These initiatives work hand in hand in improving the outlook for other sectors in our society: with better and safer road networks, business will flourish, and especially for our sector, real estate growth will be supported and the quality of people’s lives will be improved.
And more so are they crucial because by 2030, the urban population of the Philippines is estimated to hit 96 million, with three of every four Filipinos living in urban areas. At present, the informal settlements in our cities remind us of the supply-demand imbalance in basic urban services, infrastructure, and housing. This is why it is a priority to start investing in infrastructure and housing, and to simultaneously address the housing need.
As Chair of the Housing and Urban Development Coordinating Council (HUDCC), I aim to create an investment-friendly environment in the housing industry. In this regard, the HUDCC supported the continued inclusion of mass housing in the Investment Priorities Plan. Funds were mobilized as real estate corporations were given the opportunity to liquefy their housing loan receivables through the Housing Loan Receivables Purchase Program.
The collaboration of private developer and real estate groups with HUDCC resulted in the increase by the Bureau of Internal Revenue of the ceiling of house and lot acquisitions exempted from the value added tax from P2.5 million to P3.19 million. With the increase in the cap, we expect to generate more housing acquisition as houses become more affordable without the payment of the VAT.
Tax incentives are already provided by law and we will support these with non-tax incentives such as reducing red tape in the processing of housing loans, registration and issuance of land titles, and housing permits. We continue to work with local government units to review and simplify processes in the issuance of development permits so that fewer barriers exist to private sector investment.
Idle and underutilized government lands are available to private entities for development as part of our asset reform program. A portion of the land may be developed for commercial purposes and part of the proceeds shall be used as enabling components for the development of socialized and low-cost housing, all at no cost to government.
The Current Philippine Real Estate Situation
Given these government thrusts, the good news regarding the country’s improving economy also extends to the property market or the real estate industry. As the organizers of this Summit reported in the Summit website, “the year proved to be a landmark year for the industry across all its sectors, and the future looks even brighter. The Philippines has shown remarkable year-on-year growth in terms of the number of development projects, and these developments indicate that a sustained growth trajectory is expected.”
The Asia Business Sentiment Survey supports this statement and let me quote the report, “The survey showed that sentiment in Asia’s property sector improved significantly, with five of 10 companies surveyed responding with a positive view on their outlook, while the others were neutral. Developers in Singapore and the Philippines were the most upbeat.”
This positive outlook is a result of property drivers such as OFW remittances, the influx in the business process outsourcing or BPO industry and tourism.
Property Drivers: OFW Remittances and Real Estate Expenditures
It is undeniable that overseas Filipinos workers or OFWs, our kababayans, are working towards fulfilling their dream of owning their own house and achieving tenure. As stated by the National Statistical Coordination Board, OFW households spend their remittances for education, medical care, and housing aside from other basic needs.
OFWs spend 2.1% or $364 million of remittances in the housing sector, according to the Asian Development Bank. In 2011, the OFW dollar remittances amounted to $20.1 billion, which is 7.2 percent higher than in 2010, and is also 6.8% of the Gross National Income. For 2012, the estimated OFW remittances will amount to $21.1 billion, which is a significant increase despite global economic difficulties. At the moment, remittances for the first 8 months of 2012 have exceeded the BSP target of 5% growth (BSP). This tells us that we can expect growth in the market as OFWs continue to spend and contribute to the housing sector.
Property Driver: BPO Industry
Another property driver is the BPO industry. According to the World Bank, the Philippines is the third largest BPO player in the world— accounting for 15 percent of the global BPO market after India with 37 percent and Canada with 27 percent. The BPO industry grew by 22% to $10.9 billion and employed around 640,000 Filipinos in 2012.
Experts predict that the growth trend will continue with a forecast of 1.3 million direct workers generating some $25 billion in revenues or 9 percent of the GDP by 2016.
Another reason the country is one of the prime spots for the BPO industry is its competitiveness compared to other Central Business Districts (CBDs) across Asia. The Philippines has the third cheapest lease rates at $19 per square foot per year according to a CBRE study. This is just next to Jakarta’s $16.3 and New Delhi’s $12.7. On top of this, Filipinos are service-oriented, hospitable and have the English language advantage, enough reason for investment analysts like Thomas Forbes to dub the Philippines as the best outsourcing destination in Asia.
With the forecast speedy growth of the BPO industry in the country, it is expected that the demand for commercial and office space will rise proportionally. In addition, because of the increase in job opportunities, BPO workers will want to live near their place of employment—resulting in a rise in demand for residential places near the BPO centers. BPAP states that by 2016, the IT-BPO industry will contribute $12.9 billion in annual salaries and benefits wherein housing will get 13 percent of this consumption.
Property Driver: Tourism
Tourism is another rising sector. The country ranked as the 8th friendliest country out of 10 spots worldwide according to the 2012 Expat Explorer Survey by HSBC. The tourism sector has grown significantly this year. Visitor arrivals from January to September 2012 reached a total of nearly 3.15 million or a 9 percent increase from the previous year’s arrivals of 2.89 million for the same period. Arrivals from Taiwan, Malaysia, China, Germany, and Australia all showed two-digit growth, as the Philippines targets to be top Asian destination with a goal of 10 million foreign tourists and 35.5 million domestic tourists by 2016.
CBRE added that with the influx of visitors to the country, the construction of hotels and other tourism infrastructure must keep up. A target of about 113,000 hotel and resort rooms by 2016 for all tourists in Clark, Angeles City, Subic, Olongapo City, Tagaytay, Boracay, Metro Cebu, Cagayan de Oro, Puerto Princesa, Palawan, and Davao City is already underway. Another foreseen boon to the tourism sector is the rise of more entertainment centers, such as the PAGCOR Entertainment City in Parañaque.
Airports are being improved in anticipation of the influx of tourists as the first phase of the Airport Development Program has taken off. According to the DOTC, the redevelopment of airports in high-tourist areas such as Puerto Princesa, Palawan, and Mactan, Cebu are already underway.
A related development arising from the growth of the BPO and tourism industries is the booming market for residential units. The current trend is condominiums or medium-rise buildings (MRBs) situated in urban centers. As of July 2012, more than 143,000 upcoming residential condo units are being built and two-thirds of the supply will be located in Quezon City, Makati City, Mandaluyong City, and the City of Manila. Iloilo City, Metro Cebu and Davao City are also seen as rising markets. The demographic makeup of the local population also contributes to the rise of demand for residential units in urban centers as our population is weighted heavily on the younger age set and with most job opportunities located in urban areas. This generation will continue to fuel the demand in the real estate industry as they rent or purchase their residences.
The growing market for the real estate and property industry will not only make the country a better and more attractive place to invest in, especially in the real estate sector, but also make available more housing opportunities to Filipinos and foreigners alike. This will deepen the foundations of the industry and contribute more significantly to the progress and development of the country.
Opportunities and Incentives in Philippine Real Estate
Let me now take this opportunity to invite you to look a bit closer at the real estate or property market in the Philippines. Based on the main property drivers and the current situation of the sector, there is certainly room for more growth and development.
In the residential sector, the government is campaigning for Medium Rise Buildings (MRBs) and affordable mid-to-low income housing. With an assured market, investors can partner with us and develop projects. There creation of new urban centers across the country offers an even better opportunity, as economic activities shift toward the regions. It is then timely to start investing and building residential units in areas such as Iloilo, Davao, and Cebu, among other regions and urban centers.
Sustained growth in OFW remittances continues to enable us to expect more of our Filipinos abroad to want their own homes. It has never been more timely, therefore, to invest in and create residential units that fit the preferences of the OFWs. These include mid-range homes, house-and-lot packages, townhouses, or condominium units ranging from P3 to P7 million. Other options for investors include public rental housing and mixed-used developments which maximize returns in large plots of land.
Through the Tourism Act of 2009, the government aims to make tourism an engine of investment, employment, and growth. The Philippines is now gearing towards a status of premiere travel destination and investment haven for domestic and foreign investors. A salient feature of the law is the establishment of the “Tourism Enterprise Zones” (TEZs). These are geographical areas identified as viable tourism destinations in view of their historical and cultural significance, environmental beauty, existing or potential integrated leisure facilities, reasonable distances, accessibility to transportation infrastructure. Consequently, their strategic locations catalyze the socioeconomic development of their neighboring communities.
The government has in fact identified the top 10 priority tourism destinations to be developed. This includes Ilocos Norte, Central Luzon, CALABARZON, Western Visayas, Palawan, Zamboanga Peninsula, Davao, Bicol Region, Central Visayas, and Northern Mindanao. The Department of Tourism has also pointed out opportunities such as the creation of retirement villages and rehabilitation centers because of the Philippines’ irresistible offerings such as world-class medical facilities, inexpensive treatment, and compassionate health care professionals.
TEZ operators and registered enterprises are granted fiscal and non-fiscal incentives. These include income tax holiday for Greenfield Tourism Zones or areas with new and pioneering development, and Brownfield Tourism Zones, or areas with existing infrastructure. Brownfield Tourism Zones also get exemption from all taxes and customs duties on importations of capital investment and equipment, and tax deductions for environmental protection or cultural heritage preservation, sustainable livelihood programs for local communities, and other similar activities.
Aside from the Tourism Act of 2009, the Philippine Economic Zone Authority (PEZA) also provides incentives for operators and developers in both the business and tourism sector. This corporation was set up to oversee the promotion of world-class locations in the Philippines for foreign investments. Eco-zone locators, IT-BPO and GIC investors, developers, and operators can look forward to income tax holiday, and various other incentives under the Build-Operate-Transfer Law.
Conclusion
As we share ideas, best practices, and strategies in real estate investment during this Summit, let us remember that the good news about the Philippines’ economy is only the opening act. With the current boom in real estate and the steady improvements in creating an investment-friendly environment, the Philippines indeed has become a top choice for local and foreign investors.
As the business executive Louis Glickman said, “The best investment on Earth is earth.” Well, you just stepped on lucky ground and I hope I’ve shown you how investing in the Philippine setting is one of the best decisions anyone can make.
Thank you and may we have a fruitful and blessed summit.