Real Estate on the Rise

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The real estate industry, which posted growth of 30% in the first quarter of 2007, is the fastest-growing sector in the Philippines, according to the National Statistical Co-ordination Board. The thriving business process outsourcing (BPO) - including contact centres - and information technology (IT) industries as well as continued low interest rates and overseas remittances are the main contributors.

Statistics released by the Business Process Association of the Philippines (BPA/P) show the country now has a 5% share of the $45bn worldwide IT-enabled service market, which includes call centres and back office support. Projections indicate this figure is likely to increase to 10% by 2010. The impact of the growth will result in a 174% increase in required office space, or nearly 2.6m sq metres in total. According to Oscar Sanez, CEO of the BPA/P, when taking into consideration the multiplier effect, nearly $670m of additional funds will be directed to the real estate sector, roughly the equivalent of 90,000 homes.

Understandably, property developers have taken notice.

President and COO Frederick Go of Robinson's Land told OBG, "We believe this is a once in a lifetime opportunity that a country has. It is very rare that a country can focus on one giant sector where everything is going right. We are currently the fastest builder of BPO buildings in the country today."

Jaime Ayala, president and CEO of Ayala Land, echoed Go's comments telling OBG, "In 2003 our office market was very sleepy, but with the global outsourcing trend there has been an enormous kick in demand. There is a need for call centre space and they require a whole building at a time. Structurally, on the demand side, it is big because it is driven by global forces as opposed to domestic business formation."

He added, "If you look at it from an office space standpoint the amount of space needed by the sector in the next three years is roughly equivalent to the amount of office space you have in Makati. Essentially, what equates to a whole new city. Not only is it an indication of the strong demand, but it is also a strong pre-lease market. During the 1997 Asian Crisis you would have to wait until the building was completed before you slowly built up your occupancy. Right now even as the buildings are being built we get offers for the bulk of the building."

According to statistics provided by industry analysts, international premium grade office space in the Makati central business district has escalated by nearly 31% to an average of $19 per sq metre per month. Rental prices are approximating pre-1997 Asian financial crisis levels and the expectation is that rents will increase by 20% in the course of 2007 to an average of $23 per sq metre per month. Office vacancy rates are expected to drop to less than 3% in 2007 from a record low of 17% in 2001. Premium office grade capital values are also up 20% year on year to an average of $2114 per square meter up from $1787 per square meter in 2006. Over the next twelve months that price is expected to increase to $2567.

Aside from the growth in the BPO industry, strong macroeconomic indicators have caused interest rates to drop considerably making it easier for individuals to finance the purchase of homes and condominiums.

"Historically, interest rates have always been in the high teens. Today borrowing rates for retail customers are between 9% and 12%. Related to interest rates there is also now the availability of long-term mortgages. In the past, even if you were willing to pay the high interest rates, you could not borrow fixed money for 25 years. Today you can," Go told OBG.

Industry analysts estimate that residential vacancy rates in the Makati business district will ease to 8.1% by the end of 2007 down from 10% in 2006. Residential prices appreciated by 10% in the course of 2006 to end the year at an average of $1833 per sq metre. Further capital value escalation is forecast for 2007 at 10%. Market insiders have said that developers in the pre-sales market are now quoting prices in excess of $2111 per sq metre.

A final indicator encouraging optimism in the real estate sector is the continued influx of remittances from Filipinos working abroad. Currently, over $1bn a month is sent back to the Philippines. According to industry players, a significant portion of this money is spent on real estate.

"Forty percent of our residential sales are from overseas Filipinos. That's up from the low single digits four or five years ago. Essentially it is a whole new market that has been created. The share of this market, in terms of how much it has being penetrated by the industry, is still very low," said Ayala.

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