The five years preceding 2008 saw tremendous growth in the property market, with prices increasing 56% during that time period. However, the upward trend appears to have reached a peak and most industry insiders are now predicting a correction in the industry. Colliers International latest market review anticipates a 3-5% decline in property prices during the second half of 2009, while capital values of office properties are expected to drop 5-6% over the course of 2009 following decreases in office rental prices.
Despite weakening prices, the residential real estate sector should be buoyed by continued growth in Overseas Filipino Workers (OFW) remittances, which, according to the National Economic and Development Authority, played a major role in sustaining real estate demand throughout 2008.
According to the Central Bank, OFW remittances are expected to grow 3-6% year-on-year, from $16.4bn in 2008 to $16.9bn-$17.4bn in 2009. This continued growth in OFW remittances, though down from historical figures of around 10%, is key to maintaining demand for low and middle-income housing in 2009.
Meanwhile, demand for high-end luxury property is likely to decline sharply as foreign investors become more risk-averse.
Adding to the bear case, economic growth, which fell from 7.4% in 2007 to 4.5% in 2008, is expected to deteriorate further this year, with Gross Domestic Product (GDP) growth predictions varying from a conservative 1.9% by Swiss bank UBS to the 3.7-4.7% estimate from the local government.
In a statement to local press Jaime E. Ysmael, the CFO of Ayala Land, the country's largest property company, commented, "We all know times are difficult and the country is starting to feel the effects of the economic crisis and real estate is not excused".
The good news is that as the recession in Western economies spreads to the developing world, many companies will be led to cutting operational costs. For many, this will mean outsourcing customer service and back-office operations to more cost effective locations. The Philippines, which is the 2nd largest outsourcing destination worldwide behind India, could receive a good share of the new business resulting from an operational restructuring.
Meanwhile, Megaworld Corp, the country's third largest property firm, is taking on a bullish stance based on commercial property developments specifically tailored for the Business Process Outsourcing (BPO) sector. The company announced on February 4 that it planned to raise $221m to support a three-year expansion programme. This move shows that while the market as a whole is likely to stagnate, there are niche areas that continue to be safe investments.
Despite the uncertainty surrounding the real estate market in the short-term, fundamentals remain strong for long-term growth. After the 1997 Asian financial crisis, a great deal of consolidation occurred among developers, leaving behind several large, well financed organisations that are now not only experienced in operating during times of instability, but also strong enough financially to sustain long periods of slow or flat growth. Many analysts also believe the current crisis is also likely to further weed out speculators and any ill-financed companies that remain on the market.
A stable economy, a forward thinking government, an English speaking population and tropical climate have all helped to boost foreign investment in real estate over the past five years and these factors have not been affected by recent events. Domestic demand will eventually bounce back to strong figures, though the industry will have to ride out the rest of 2009.