Philippine residential, commercial real estate in expansive mood

Michael Alan Hamlin

Posted on March 2, 2007

BPO demand benefits tier-two cities, provinces

If trends hold, the residential and commercial real estate markets will continue to expand rapidly, possibly for several years, according to executives of CB Richard Ellis (CBRE) Philippines. “This is the first time I’ve seen this kind of enthusiasm in 10 years,” CBRE chairman Rick M. Santos told reporters and analysts in a briefing last week. Santos is also managing director of CB Richard Ellis Hong Kong.

Among the factors that have contributed to expansion in the residential market is the first long-term, fixed-rate mortgage financing programs in the Philippines. Santos explained, “local banks have launched mortgage financial programs that provide 11 percent fixed interest for 25-year home loans.” Other factors include an innovative build-to-own concept, notably in Fort Bonifacio Global City, that allows buyers to own residential units at direct cost; pre-selling to overseas foreign workers (OFWs), and project-financing initiatives by PAG-IBIG, the government’s housing fund.

Partly in response to these and other developments, the total number of mid-high to high-end residential apartments in major central business districts (CBDs) has increased consistently in recent years, from approximately 6,000 in 2002 to about double that number, 12,000, last year. In 2005, about 2,500 new apartments were completed, and about the same number were turned over to owners. Meanwhile, vacancy rates have steadily declined since 2003, to a little more than one percent last year.

Chay B. Ong, CBRE associate director for residential, said that at the end of 2006, the rents, supply of, and demand for luxury and grade A apartments were all up, while vacancy was down. And there is more growth in store. “Upper mid-market residential is expected to grow as more and more investors enter the market, especially given sustained growth in the BPO industry,” she said. CBRE general manager Trent Frankum noted that much of the demand is from bulk buyers of residential condominiums, who are betting that the market will in fact continue to expand.

Santosexpanded on that theme, noting that there is more liquidity in financial markets than ever before. “There is a lot of liquidity looking for opportunities. As a result, there’s a fight around the world for product.” Frankum said that the Philippines has emerged as an attractive investment destination in that competition in part because it is one of the few countries that can still provide a truly attractive return on investment.

But as Ong earlier noted, much of the interest in the retail residential market is generated by the Philippines’ fast-growing BPO industry. A Financial Times report carried on the Dow Jones wire late last week said BPO revenues “surged 43 percent to $3.4 billion in 2006,” and “Philippine call center and outsourcing companies are combining their efforts in a plan to quadruple industry revenues to $12 billion and raise the country’s share of the global outsourcing market to 10 percent by 2010.” If that goal is reached, the Business Processing Association Philippines (BPA/P) estimates the industry will employ over one million Filipinos.

Industry practitioners agree that the Philippines’ attractiveness as a BPO services hub is closely tied to the service mindset of Filipinos, strong English-language skills, and affinity for western culture. But the low cost of real estate doesn’t hurt. According to Santos, Prime/Grade A Monthly office lease rates are among the lowest in the region, and far lower than in Mumbai and New Delhi.

Although vacancy rates are low in Mumbai, lease rates are approximately $6.25 per square foot. In New Delhi, lease rates average just under $6.00 per square foot. But in Manila, similar space leases for under $2.00 per square foot. That is lower than rates in Ho Chi Minh City ($3.00 per square foot) and Bangkok ($2.00 per square foot). Only Kuala Lumpur, with a far smaller population than the Philippines, and Jakarta offer lower lease rates. However, vacancy is much higher, over 8 percent in Kuala Lumpur and 14 percent in Jakarta, reflecting weak demand. When it comes to retail lease space, the Philippines is even more competitive, offering lease rates below even Jakarta.

Aside from BPO, other drivers of commercial real estate expansion include record low interest rates, which are stimulating investor interest by providing a lower cost of capital and therefore a higher return, as Frankum suggested. Another factor is the strong inflow of investments, supporting peso appreciation against the U.S. dollar. This results in savings on foreign debt, allowing government to invest in infrastructure, which stimulates business activity.

Clearly, there is a convergence of many factors that have contributed to the synergy that is driving the economic revival. In the real estate sector, this means new buildings built on spec are being committed to sometimes before groundbreaking, and in almost all instances before the project is complete. And because an increasing percentage of BPO investment is directed to tier-two cities, opportunity is spreading throughout the nation.

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