SUSTAINING GROWTH IN PHILIPPINE REAL ESTATE INVESTMENTS

The Philippines is still experiencing real estate boom this year. Enrique Soriano, Ateneo program director for real estate said that “Five years after the financial crisis triggered by housing bubble, the global economy is convalescing. The Philippine economy is poised to move up. Real estate markets in all segments will grow. Some developers will fail and others will do better because they have a strategy and they have found exactly the right position.”

Jones Lang La Salle said last year that according to Emerging Trends in Real Estate 2013, Metro Manila is becoming a haven for real estate investors and developers. It indicates a growing interest in alternative markets in Asia like the Philippines

philippines-overseas-remittancesIn order to make the real estate sustainable, we need to focus on things that make the Philippine real estate unsinkable.

OFW remittances have been helping not only the Philippine economy but the real estate as well because, according to a study by World Bank, an estimated 60% of OFWs’ remittances are invested in real estate properties. They have to buy homes for their families or built a home for their retirement. Their remittances have sustained the low-end and mid-scale housing projects in Metro Manila and nearby provinces.

Buoyed by a robust Philippine economy and younger populations, BPO companies are fueling the demand for office spaces and it still continues this year with the continued growth of offshore outsourcing and the call center industry. Julius Guevara, CBRE Associate Director, Valuation and Advisory Services and Head of Consultancy and Research reported that over 50% of the total office space leased in the country is taken up by BPO companies and also projects that foreign companies will soon move to the Philippines due to its low skilled cost of labor and excellent pool of workers.

Another 600,000 – 1M BPO employees also have deep pockets and have such gung-ho spending styles that will suck up readily the middle and high end dwelling places. Because of this increasing development, real estate developers are targeting the increasing BPO offices.

Jones Lang La Salle reported that in between 2012 and 2015, approximately 1M sqm of office space is expected to be constructed in Metro Manila or a record 55 percent more than the current office stock of 1.8 M sqm.  In order to attract prospective lessor, JLLS experts advised developers to design a bulding that meets or exceeds the market expectations.  Reviewing a building’s blueprints and assessing them from the point view of operating costs is also vital, according to JLLS Head of Integrated Facilities, Property and Asset Management Berna Santiago.

Younger population is also contributing to the real estate boom as what Jan-lo de los Reyes, Jones Lang LaSalle senior research analyst, once said that “Several studies conducted by economic think tanks and investment banks have recognized the growing population of the Philippines as an economic asset now and in the near future. A growing population means a growing workforce and a larger consumer base that could propel future economic growth for the country.” The impact of population demographics is more visible in the residential sector, especially in the mid-end residential condominium market.

Colliers International also noted that the younger population is sustaining the growing demand to property ownership

philippines-real-estate-loansAmid the rising cost of housing, the country continues to attract both local and foreign property investors and more and more Filipinos are becoming homeowners instead of tenants because of low interest rates and affordable financing conditions. The unsatisfied demand of 500,000 housing backlog for the low-end users has been staring in our faces for a decade now.

JLLS Head for Research, Consulting and Valuation Claro Cordero said that an estimated 11,200 units are expected to be completed this year and that ‘the residential demand will stay strong across all subsegments, there are also various externalities which may challenge the growth of demand over the near- to medium-term.”

Colliers, citing the report of BSP and the Institute for Development and Econometric Analysis, said that OFW remittances will continue its upward trend but a bit slower but it will still continue spur the housing purchases by OFWs.

Tourism has been a sunshine industry. More and more foreigners are coming to the Philippines, with the DOT targeting 10 million visitors by 2016. This drives real estate developers to construct resorts, hotels, and entertainment centers. The infrastructure projects of the government are also a boom with the real estate sector, especially the PPP project. Several roads, airports, sea ports are now being developed and renovated.

A good banking system also works. Banks are liquid enough to place its bet on the real estate boom- bullish enough to allocate a hefty 20% of its loan portfolio to this market. Also, collective buyers and sellers have such immense faith on each other– that the dramatic rise in residential development has been buttressed by pre-selling methods.

At present, the market is fuelled by the constant demand for appraisal and valuation requirements. Demand comes from the SEC, PSE and other institutions that require international accounting standards with practices of good governance. Additionally, more and more government departments and private companies now require independent appraisal reports for taxation, bidding, feasibility studies, research, privatization, audit accounting, leasing, utilities, power rate adjustments and PPP’s as well as legal engagements. Tourism, real estate and industrial industries are also promising sectors to be look upon due to Philippine competitive advantage such as a lower wages compared to China.

Another factor to expect is the REITs which would be complimentary to the appraisal and valuation industry. PSE requires REIT’s valuations to be done once a year by external appraisal firms. Growth and potential to the appraisal pie may lead to three to five-fold growth increases as fees for these jobs will be based upon a percentage of the REIT entity being appraised. Each REIT can be capitalized with at least a value of 300 million worth of income generating assets; the appraisal fee would be 3%-1% (or 3 to 9 million per REIT  valued). However, most Philippine appraisal/valuation firms currently have their hands full with small accounts and big ticket accounts are normally handled only by appraisal firms that have means to cater to them. Sadly, less than 10% of these firms only know about this opportunity and are getting ready to participate (most of these firms are the large, international property consultants previously mentioned).

Marisa Benitez of Colliers  International and PRC-PRBRES Board Member, Ramon C. F. Cuervo III both members of Royal  Institute of Charter Surveyors( RICS) whose advocacy is to adopt the Professional Standards of RICS for Global Competitiveness.

Marisa Benitez of Colliers International and PRC-PRBRES Board Member, Ramon C. F. Cuervo III both members of Royal Institute of Charter Surveyors( RICS) whose advocacy is to adopt the Professional Standards of RICS for Global Competitiveness.

The Senate Bill No. 63 known as “The Real Estate Investment Trust Act of 2007”  defined REIT as a stock corporation formed for the sole purpose of investing in income-producing real estate assets.  Income producing properties include apartment buildings, office buildings, warehouses, medical facilities, hospitals, mixed industrial/office buildings and other commercial and residential properties.

As explained in the bill, institutionalization of the REITs would allow the Philippines to participate in the globalization of the real estate investment markets thus contributing to the growth and development not only of the capital market but also the national economy through increased investment activities.

The Real Estate Investment Trust Act of 2009 (RA 98501) was also passed into law on December 17, 2009. Its Implementing Rules and Regulations were approved by the Securities and Exchange Commission in May 2010. The proposed bill is timely as we are experiencing real estate boom and the playing field is now open to all kinds of investors.

REIT is very important to the Philippine economy. It would give a bigger boost to the real estate sector as more investors would bring more capital into the country. 

Several analysts pointed out that the Philippines should take a closer look of REIT as it has been proven to be a successful model for growth in countries in the region such as Japan, Singapore, and Malaysia, and its absence is seen as a major barrier to the growth of the property that also affects the capital market of the country.

In order for the REIT to attract capital, the Philippine government must have a tax appropriate rate environmentAnd also, if the REIT is implemented, the Philippine real estate sector can experience inflows as much as $500M in fresh foreign capital within 1 year.

In the APREA Summit last year, Philippine Stock Exchange President and CEO, Hans Sicat, said that the issuance of REIT may have to wait until our country gains the sought after investment grade credit grade rating, which will be a 12-month period. He also said that PSE expects the property developers to continue ignore REIT because of the current tax issues. He doesn’t think that BIR will back down because of fear that they may lose revenues due to current tax rules.

Mr. Cuervo discusses the importance of REIT during the APREA Summit held in Manila last year.

Mr. Cuervo discusses the importance of REIT during the APREA Summit held in Manila last year.

REIT is a good vehicle for capital formation but Finance Secretary, Purisima and BIR Commissioner, Kim Henares, killed and spoiled the Philippine REIT with stiff tax requirements and regulations on ownership. The result, as what Mr. Sicat said, is zero.

As usual, some of our government policies, regulations, and laws are contradictory and in conflict to the administration program to attract direct foreign investments to the Philippines. But this will not happen if we do not remove this myopic outlook of putting restrictions to incentives for capital investments.

Mr. Sicat remained optimistic despite the lack of progress on PSE and DOF discussion. “We have been trying to work with them but I don’t think you will see the REIT product anytime soon,” he said.

He also advised the real estate players to continue the advocacy by pursuing amendments of law, convincing the government of the multiplier effect, softening the constraints, and keeping the channels open. Mr. Sicat also said that with a robust banking sector and a lot of liquidity, funding is still possible.

The PSE said that there’s still overwhelming interest in REITs and they are once again in talks with industry and investment stakeholders to address issues on REIT as it seeks to find a framework acceptable to all.

WITH SOURCES FROM: Philippine Daily Inquirer, Philippine Star, Manila Bulletin, Business World, ABS-CBN

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