The Philippines real estate sector is generally considered to have outperformed in 2011. Almost 300,000 square metres (m2) of Grade A office space came to market across Metro Manila. The booming offshoring and outsourcing industry boosted office rents, while positive investor sentiment buoyed capital values. Remittances continued to provide local Filipinos with the spending power to drive the retail market, which saw the entry of new local and international retailers, such as Emporio Armani, LeSportSac, Paris Hilton Bags, HTC and Jamba Juice, enhancing the demand for retail space. Despite the weak global economy constraining demand for Philippine exports, the local economy is fundamentally stable, though underperforming. While little can be done to prevent the exogenous factors affecting the Philippines, it may be said that the government could have done better in 2011. Weak government and private spending was little offset by resilient private consumption. Public spending targets were missed throughout the year, with Philippine President Benigno Aquino III’s US$1.7bn stimulus package in Q411 having a relatively mute effect on the quarter’s GDP growth. Private sector participation has also been hampered by Manila’s inability to enact coherent investment policies, emblematic of which has been the government’s highly touted Private-Public Partnership programme, under which not one project made it into fruition in 2011. Private consumption, which comprises 70% of total GDP, slowed from Q2 to Q3 but still posted year-on-year (y-o-y) growth of 7.1% for the quarter. Overseas remittances play a large role in household expenditure and managed to keep private consumption buoyant amid the weakening wider economy. However, this is not expected to continue as BMI forecasts that private consumption will be limited to 4.3% in 2012 following a 5.8% performance in 2011.
A recent pledge by the Philippine government to boost infrastructure spending in 2012, as well as improve monetary conditions, suggests that a recovery in construction activity is on the cards. As a result, we are revising up our forecasts for the Philippine construction sector, with real growth expected to reach 6.5% in 2012 (from 5.7%). Beyond 2012, we believe that construction activity in the Philippines could improve further, with real growth for the sector forecast to average 7.5% per annum between 2013 and 2016.
Some of the key opportunities in the real estate market are:
The Philippines is one of the fastest-urbanising countries in East Asia. With an English-speaking and relatively low-cost workforce, it is ideally placed to participate in high-demand services such as business process outsourcing.
Many residents of cities in the Philippines continue to experience poverty, environmental degradation and live in slums or other inadequate housing arrangements. Economic development has created rural-to-urban migration. Some key risks to the real estate market are:
Political unrest in the Middle East and North Africa causing a decline in overseas remittances.
Economic difficulties in the US and eurozone, and commodity price fluctuations, pose risks to private consumption growth.
Despite President Benigno Aquino III’s pro-foreign direct investment (FDI) policies, the changes in the law affecting REITs mean developers that had planned to set trusts up have stopped. In August 2011, mall developer SM Prime Holdings dropped its plans to raise US$500mn via a REIT and Ayala Land dropped its plans to raise US$400mn following the tax rises by the BIR and the tax agency.