Integration Will Not Get in the Way of Real Estate Sector Growth

Business Mirror by Roderick L. Abad10-09-2014

The Philippine real-estate industry still has more space for expansion even with the integration of the 10 member-states of the Asean at the end of next year.

"By 2015, when the Asean integration takes place, the real-estate market should have matured further and the Philippines should be in a good position to complete fairly with the other Asean partners," Jones Lang Lasalle CEO Lindsay Orr told the BusinessMirror.

"So we think, it will be very exciting for the country," CBRE Philippines Founder, Chairman and CEO Rick Santos said.

Most property-consultancy firms in the country agree that growth will continue across all segments, particularly in the office and industrial sectors.

Santos said a lot of companies in the region are seen moving more of their operations or headquarters here for "cost reasons, as well as for high-quality real-estate perspective, labor pool and good quality of life."

The office sector continues to look very promising during and after the integration, particularly with the continuing growth of the information technology-business process outsourcing (IT-BPO) sector and considering the relatively low base rate for rents at present.

"There is no letdown seen in the growth of IT-BPOs in the country. IT-BPO companies come here for the cost and grow quickly because of the people," Santos said.

What's fuelling the continued strength of the outsourcing business are office rental rates in the Philippines, which remain to be the lowest and best value in Asia-at $29 per square feet per annum-thus, increasing further demand for office space.

In fact, for three quarters of 2014, a total of 124.55 square meters (sq m), or 1,340.65 square feet, of office space has been occupied-the highest transaction ever in the last six years. This bullish take-up, according to CBRE, is projected to track supply as more spaces are now being developed.

Aggregate vacancy declines to 2.45 percent from 3.3 percent in the first quarter of this year. Up-coming office supply will offset the drop with more than 400,000 sq m of new space within the year.

Location-wise, the traditional Makati Central Business District remains most attractive to global firms, followed by the emerging business hub of Bonifacio Global City. Not to be ignored also are the outsourcing growth areas in the country identified by global outsourcing advisory firm Tholons, such as Santa Rosa City, Bacolod City, Davao City, Iloilo City, and Cebu City. Philippine Economic Zone Authority-registered industrial sites are, likewise, going to contribute to the supply.

The ample pool of highly skilled work force also draws the interest of foreign locators to do business here.

Based on the 2014 A.T. Kearney Global Services Location Index, the Philippines is ranked 7th among 51 countries as prime BPO location.

The study highlighted the country's labor sector as one of the "deepest" or that of large, untapped value and skill. Beyond voice as its major strength, the industry is expanding into higher-value-added services, as well as into IT and business processes in the medical or health care, legal, financial, insurance, and other specialized fields.

"BPO full-time equivalent employees are expected to reach 1.3 million by 2016. This, as well as the upcoming Asean integration, will be favourable to the strengthening of the country's position as tip BPO destination." Santos said.

The direct boost by the single economic community is also expected for manufacturing and, thus, industrial sector as free trade expands the size of "domestic" market, according to Antton Nordberg, manager for research and consultancy of KMC MAG Group Inc.

"Real-estate industry is ready for this. There are enough industrial parks and offices to serve these companies," he said.

For Orr, this property segment also looks promising given the interest now being shown by manufacturers looking to scale down in China. Warehousing and distribution, among other areas have considerable growth prospects, particularly with the development of more industrial business parks in Central Luzon and the South, he said.

Apart from Japanese companies, Santos cited that Southeast Asian locators who are "very aggressive" to set up their production facilities here are from Indonesia, Malaysia, Singapore, and Thailand. He added that those from Brunei Darussalam, Cambodia Lao PDR, Myanmar, and Vietnam are also keen to expand in the Philippines.

But what concerns most of them in putting up a business in this archipelago is in infrastructure that could hinder the growth, stressed Orr. He said that "the poor level of infrastructure is limiting the manufacturing sector and is also the reason why services sector is bigger than industrial in the country."

As to the other real-estate sectors, bright prospects for the retail, hospitality, and residential segments will continue in the next couple of years.

Much like the office space, retail will still be one of the prime movers of the property market, according to CBRE Philippines Senior Director for Global Research and Consultancy Jan Paul Custodio.

In terms of lease rates, he said that Manila charges the lowest rent of $38 per square foot as compared to its counterpart cities in the Asia-Pacific region. "This actually gets attraction from most international retailers. Normally, the rates paid by retailers in terms of their renting expenses is probably two or three times higher than what they pay here," he said.

Apart from the big malls, he said that a lot of new convenience stores are coming in. Smaller store formats, he added, are being spread out especially in the ground floors of new office buildings, as community malls rise up in areas where there's a high density of residential developments.

The increasing purchasing power, especially among the middle-income earners and families of overseas Filipino workers, help drive the continued growth in the retail space, Custodio said. This, in turn, has encouraged more developers and global retailers to set up stores in the country.

The upbeat tourism of the country, with 5 million projected tourist arrivals by end of the year, has pulled the demand for more hotels and retail establishments in tourist spots and CBDs nationwide. Such momentum is seen to continue for the hospitality segment, with the developments of new accommodation and gaming facilities, particularly in The Entertainment City of the Philippine Gaming and Amusement Corp. in Pasay City, with an inventory of 1,624 rooms.

These include the Belle Grand-City of Dreams, which is expected to be opened any time soon with 920 rooms, as well as Radisson Hotel with an inventory of 500 rooms. In November 2014, Malaysian hospitality brand Tune Hotel will be opening its 200-room branch in Aseana City. All these are included in the estimated 4,000 additional rooms set for completion this year, as 2,000- plus rooms are expected in 2015.

A vibrant residential sector will keep on the rise, especially in the development of vertical housing projects. From 2014 up to 2019, it is estimated that additional 169,000 units will be constructed, of which 96 percent will be mid-range and only 4 percent in the luxury sector.

The mid-end condo projects are those with a price range between P1.5 million and P10 million, and unit size below 15 sq m; while the high-ends are offered at P10 million and above with over 160 sq m unit size. The majority of residential condominiums both existing and future are priced under P3 million.

While the Philippines is fairly competitive across most sectors of real estate, Orr cited that residential land and condominium prices are now higher than several of its neighbours, as well as five-star hotel room rates. These sectors, he said, should "sharpen their competitiveness to reap the rewards of integration and maintain the flow of goods, services, and business or tourist arrivals."

Beyond sustaining its core competencies, capital values, rental rates, costs of labor, and the sufficiency/cost of power are key areas that the entire property industry should consider to ensure that the Philippines stays on track or much ahead of the competition.

"Technically, the integration will make your expertise in certain industries become stronger when you gain competitive advantage. Therefore, you need to benchmark the economic structures of Asean countries to see which these industries could be," Nordberg said.

NO PROPERTY BUBBLE BURST IN THE OFFING

Davao City-Bangko Sentral ng Pilipinas (BSP) Deputy Governor for the Monestary Stability Sector Diwa C. Guinigundo brushed aside a warning of a European financial-service firm that allowing the banks to exceed their ceiling or borrowing may lead to another episode of a property bubble burst similar to what caused the financial meltdown on the region in 1996.

"We have already instituted macro-prudential measures and these are all in place since then," he said.

He said the banks remained obligates to the ceiling of their lending to the property sector "and what have been loaned so far remained within these ceilings."

"In fact, the total loans on real estate and property sector is still way below the level in those years leading to the Asian financial crisis," he said. Joey Cuyegkeng, chief economist and director at the Manila unit of the Dutch financial services giant ING, told reporters last week that "because the banks continue to lend more in support of even more real-estate projects and investments, the BSP may need to put up additional measures to safeguard banks from risks down the line."

"Part of the increase in bank loans to the sector is due to the expanding out-sourcing industry, which also requires residential and commercial spaces," Cuyegkeng said.

Guinigindo said the banks have at least three items that would determine if they have stretched their loan capacity so far.

Aside from the required ceiling of 20 percent of total loan portfolio, there is also the 70 percent loan-to-value limitation and lending cap of 25 percent net worth of the bank to single but big borrowers.

What the ING saw as a concern when some banks have loaned as much as 22 percent of their loan portfolio was the sum of the aggregate items of the banks' required ceiling. "There's nothing to worry about that," he said.

Besides, he said, property loans were not given to property developers alone.

"We include holding companies, their debt securities, bond flotations, and all their instruments."

Overall, he said, "the total loan value amounts to only 22 percent of the total loan portfolio of banks."

"It's even smaller compared to other Asian countries. They gave reached 30 percent even," he said.

"We have not seen any over-stretched valuation of real-estate," he said.

Also, he said, there will only be a bubble burst "If you overbuild and no one buys."

In the case of the Philippines, he said the construction of residences and other real properties remained far from the backlog. He said demand from the overseas Filipino workers(OFWs) alone remains unmet.

He said the entry of BPO companies have added to the increasing demand for real-estate and property development.

His statement came at the heels of a World Bank projection this week that countries like the Philippines, Malaysia, and other countries in the East Asia and the Pacific region have "experienced sharp increases in real estate prices."

While it said this may have been fuelled "by high demand, not all these were fuelled by stable sources, such as income, population, growth, and employment."

The Philippines's weak spot in real estate, it added, "is that about 40 percent of new housing units in the country are financed by OFWs."

"Where housing price growth is mainly driven by rapid credit expansion, for instance linked to loose monetary policy or easily reversed portfolio capital inflows, the economy may be more exposed to the risk of an abrupt downturn," the bank said.