Essential infrastructure: Private sector fuels office growth

Offering little to no experience or expertise prior to 2003, the meteoric growth of the Philippines’ business process outsourcing (BPO) industry has largely been due to the availability of good infrastructure alongside a large and trainable talent pool with a unique cultural affinity with the US and other Western markets. Recognising the catalyst for national development that the BPO sector still presents, the Philippine government developed a market-enabling environment in little over 10 years, in which investors and companies have been able to make use of the country’s natural advantages.

FURTHER INVESTMENT: Today, the country has succeeded in attracting more than 750 firms, which has spurred development and national consumption across industry sectors. However, if the country is to hit its 2016 BPO sector targets of 1.3m jobs and $25bn in revenues, substantial investments are required. By 2016 global consultancy Everest Group forecasts that the Philippines will require an additional 4m sq metres of real estate, 50 GB per second of broadband capacity and substantial tertiary investments in transport, hotels and other social ecosystem issues. A substantial majority of this (some 80%) will be in Manila’s National Capital Region.

The Department of Trade and Industry’s Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA) took the lead for this scheme in the late 1990s, joined more recently by the Bases Conversion and Development Authority (BCDA), the national agency in charge of turning former military bases into investment and business havens, which has matured in parallel with the BPO sector since its inception in 1992.

INCENTIVE SCHEME: The BOI remains the government’s principal point of contact for investors, dually promoting the more popular and numerous PEZA incentives, which are tailored to export-focused companies (defined as those with an equivalent to 70% of products or services destined for sale abroad), reflecting the outbound nature of the Philippine BPO economy. Both the BOI and PEZA’s incentives are renewable and can be applied to individual office buildings as well as to 252 economic zones nationwide, with the creation of additional zones being considered in 2012.

PEZA incentives, which apply outside prescribed free port and economic zones, were originally designed to support buildings left empty in Metro Manila after the Asian financial crisis of 1998. They were integral to bringing the first BPO investment as they allowed firms to start commercial operations on the back of existing infrastructure, minimising start-up investment costs.

However, posting a compound annual growth rate of 30% nationally from 2006-10, the scale and infrastructure demands of the BPO sector has outgrown Manila’s office capacity, leading to the development of green- and brownfield sites nationwide to accommodate BPO firms, a move more recently led by the BCDA. The private sector is the anchor of this initiative.

The BCDA is the force behind Manila’s 240-ha Bonifacio Global City, Market! Market!, Serendra, McKinley Hill, JUSMAG Property in Fort Bonifacio and the 25-ha Newport City. The BCDA also operates 155 IT parks and centres nationwide, including BCDA-administered zones in Pampanga, Baguio City, La Union and Bataan.

NEW CENTRES: These new satellite central business districts (CBDs) have become focal points for BPO, offering new, attractive locations that also host leading international companies. They have subsequently attracted substantial investments and bids from key Philippine firms, resulting in the property sector’s best fundamentals since the pre-crisis presidency of Fidel Ramos. The BOI reports that 714,000 sq metres of new office space will be available between 2011 and 2013.

Manila remains the third-lowest cost city for BPO operations in Asia, behind New Delhi and Jakarta. Increased demand has translated into higher rents, rising by 7.84% in 2010, according to CB Richard Ellis, a global real estate firm. Vacancy rates in Manila’s CBD were under 10% in the third quarter of 2011 and average rents were forecast to top P750 ($17) per sq metre.

The past two years have seen some of the Philippines’ major property developers break ground on sites that are tailored to BPO demand. In 2009 Bridgebury Realty announced the P7bn ($158.9m) Zuellig Building, which opens in 2012 in the Makati CBD and includes PEZA office space. In 2010 property firm Megaworld pledged P22bn ($499.4m) over 20 years to the 34. 5-ha JUSMAG property, which will generate around 80,000 new jobs. The property is a joint venture with the BCDA and brings the total development portfolio of Megaworld in Fort Bonifacio to over 100 ha. This was followed in 2011 by the immediate launch of Megaworld’s 30-storey NAPOLCOM office building, with the first phase of development costing P7bn ($158.9m).

BEYOND BCDA: Growth has also driven construction beyond BCDA development areas. In Manila’s Quezon City, for example, vacancy rates dropped to 2.79% in the first half of 2011. An additional 105,241 sq metres of office space, due to open in 2012, should relieve some pressure on supply, according to CB Richard Ellis.

Elsewhere, Robinsons Land Corporation (RLC) made strong moves in 2011 to cement its position as the dominant landlord in the Ortigas CBD with the announcement of its Cyberscape Alpha and Beta buildings, both of which target the BPO industry. This followed RLC’s release of 20,000 sq metres of new PEZA-approved office space within its Manila, Tarlac City and Davao City malls to cater to BPO expansions.

BPO VILLAGE: In November 2011 property firm Ayala Land formally opened the first phase of its P3bn ($68.1m) high-end BPO village in Baguio’s Camp John Hay property, a mixed-use and special incentive zone that also includes accommodation facilities for BPO employees. Phase one of the development has already been undertaken by Convergys, a global relationship management firm that promised more investment into the Philippines in September 2011.

GOING FORWARD: If the country can hit its 2016 goal of $25bn in revenues, the National Statistics Office forecasts that the $12.9bn in annual salaries and benefits would mean P73.7bn ($1.7bn) for housing receipts, P45.5bn ($1bn) for transport and communications, P355.2bn ($8.1bn) spread across the retail, food and financial sectors and P110bn ($2.5bn) going to taxes.

The UN Conference on Trade and Development has cautioned the Philippines and other developing economies about the dangers of relying on “footloose” non-equity modes of foreign direct investments such as BPO, which invested $1.71bn in the country in 2010. However, the industry itself remains the principal investor in building Philippine soft and hard capacities.

Further BPO sector growth is dependent on companies’ investments in human resources as well as the strengthening of the country’s skill base. To this end, the Philippine government and the private sector have entered into an informal private-public partnership, which – supported by public sector educational reform and institutional partnerships, as well as an apparent new era of political stability – has helped to ensure investors’ commitment to the country’s BPO industry.

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The Report: The Philippines 2012

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