Real estate in the Philippines attracts inflows

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A year of strong economic growth and high foreign direct investment (FDI) in the Philippines has set the scene for a wave of new real estate activity during 2014.

Growing demand from the business process outsourcing (BPO) industry, rising rents, a construction boom and a substantial increase in foreign remittances will all play a part in driving the sector’s expansion. A move by the banks to rein in lending, meanwhile, should help allay concerns that a real estate bubble could be forming.

The Philippines’ property market has been buoyed by the country’s strong economic performance. Annual GDP growth hit 7.2% last year, exceeding both the government’s targets and many analysts’ expectations, while FDI for the first eight months of 2013 reached $2.8bn, up 25.4% on the previous year. Foreign remittances, meanwhile, peaked at an all-time monthly high of $2.06bn in November 2013, according to the Bangko Sentral ng Pilipinas (BSP).

Construction leads the way

Building work, in particular, is booming, sparked by rising demand for residential and office space, especially in Metro Manila. Real estate and construction activity combined now account for one fifth of the Philippines’ economy, edging closer to the manufacturing sector.

The Philippines Constructors’ Association listed 24,400 private projects in the first quarter of 2013, with data showing that residential buildings made up over 70% of the ventures.

A shortage of housing is a major problem for the Philippines. According to a report compiled by the Subdivision and Housing Developers Association, the national housing backlog stood at 3.9m units in 2013, with data suggesting it could rise to 7m during the next 16 years. Reconstruction efforts in the wake of Typhoon Haiyan will also boost construction work and push up foreign remittances.

BPO driving demand for office space

Meanwhile, the expansion of the BPO industry has created high demand for new office space. Manila placed second on investment advisory firm Tholon’s 2014 ranking of top BPO destinations, while Cebu City ranked eighth. Several other municipalities, including Davao, Santa Rosa, Laguna, Iloilo and Baguio, made the top 100.

The BPO industry generated $13.3bn in export earnings last year, according to BSP figures, notching up15% growth, with the central bank forecasting a further expansion of 15% in 2014.

The commercial real estate services firm, CBRE Philippines, recently said it expected the industry to continue expanding on the back of growing foreign investment and demand for BPO office space. The firm added that competitive leasing activity had pushed up rents in key office districts, including Makati. Office rental rates in Makati’s premium central business district reached an all-time high of PHP1200 ($26.65) per sq metre early this year, but still remain lower than those of other prime districts across Asia.

In a joint survey released early this year, PricewaterhouseCoopers and the Urban Land Institute ranked the Philippines fourth on a list of Asia’s best property investment markets, on the back of positive forecasts and growth, ahead of Tokyo, Shanghai and Jakarta.

Prudent planning

Accessible financing has played its part in driving real estate development, with stable overnight borrowing and lending rates, held at 3.5% and 5.5%, respectively since October 2012, instilling market confidence.

BSP data shows that local banks’ exposure to the property sector stood at PHP900.1bn ($19.99bn) in June 2013, an increase of 7% over the prior quarter.

With some analysts voicing concern that runaway growth could be putting the sector and wider economy at risk, authorities have moved to introduce policies aimed at controlling growth.

In February 2014, the BSP announced that it was considering implementing stricter guidelines on real estate exposure, while continuing with its policy of closely monitoring market activity. “Based on our assessments, the lending practices have not been sacrificed even as lending to the real estate sector has increased. Overall, bank balance sheets have remained sound. The BSP will continue to proactively adjust its policies to ensure that price and financial stability are conducive to growth,” the BSP governor, Amando M Tetangco Jr, told OBG late last year.

Banks have also moved to restrict real estate lending in recent months. According to a BSP survey, lenders across the country implemented stricter credit standards on commercial real estate loans during the fourth quarter of last year, with banks reporting wider loan margins, reduced credit line sizes and lower loan-to-value ratios for real estate credit.

The BSP expects banks to maintain tighter lending standards for commercial real estate loans in 2014, which will help keep a speculation-driven boom-bust cycle at bay, while encouraging sustainable growth in a buoyant market.

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