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Phililppines Real Estate Report Q4 2011
Business Monitor International, Oct 2011, Pages: 63
The Philippines has a very healthy economy, despite being in a region of unrest and following the disaster in Japan in early 2011. This is following a stellar 2010 when full-year real GDP growth was 7.6% yearon- year (y-o-y), the highest in over two decades. Growth will moderate in 2011 but even as the pace of moderation continues, it will still reach 4.5% y-o-y expansion in 2012.
The commercial real estate market continues to recover from large drops in rents and values in 2009. Overbuilding and oversupply of commercial real estate caused issues in some areas, particularly in Cebu. Residential housing remains in short supply, with the Manila Times reporting in July 2011 that there is a shortage of 3mn homes. However, the residential market is suffering from increasingly stringent residential property loan rules brought in after a fraud incident concerning ‘ghost borrowers’.
The country opened up the market for real estate investment trusts (REITs) after passing the Act Providing the Legal Framework for Real Estate Investment Trusts and for Other Purposes in February 2010. It allowed investors to benefit directly from a property’s income rather than investing only in the developer. However, in July 2011, the tax agency added 12% value added tax (VAT) on the transfer of REIT assets and the Bureau of Internal Revenue (BIR) added 30% income tax, severely reducing its attractiveness to developers.
Some of the key opportunities in the real estate market are:
- The government is trying to resolve the conflict in the South China Sea and end 40 years of insurgency from the rebel group the Moro Islamic Liberation Front (MILF) by offering the prospect of autonomy. A more settled region will improve the perception of the country in the eyes of foreign investors.
- 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 in cities in the Philippines continue to experience poverty, environmental degradation and living 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 the 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.
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