Can large-scale building projects fuel the Philippines' recovery?


While Covid-19 has thrown the Philippines’ economy into flux, early indications suggest that construction and real estate is one of the most resilient sectors, and could provide a platform for national recovery. However, with construction projects delayed by lockdowns during the second quarter of 2020 and demand for office space and high-end residential developments weakened by mobility restrictions, the sector still faces headwinds. At the same time, however, the disruption of the pandemic is giving rise to new opportunities, and agile developers have the chance to establish a firstmover advantage as tenants and buyers seek projects that meet the demands of the new normal.

Structure & Oversight

The regulatory architecture of the industry has benefitted from the government’s long-running efforts to shift services online, which was especially beneficial during the pandemic. For example, the Construction Industry Authority of the Philippines (CIAP), the state agency that regulates building under the auspices of the Department of Trade and Industry, provides contractors with the option to renew their licences online via digital payments. The CIAP portal also allows users to schedule managing officer exams, apply for contractor licences, register for government infrastructure projects and submit performance evaluations. Such efforts to move permitting processes online, including improvements to the procedure for obtaining the occupancy certificates necessary to secure construction permits, helped lift the Philippines’ ranking in the World Bank’s 2020 “Doing Business” report by 29 places, to 95th out of 190.

The non-profit Philippine Constructors Association (PCA) is the main industry body and leads training and skills development. Under the Philippine Construction Industry Roadmap (PCIR) 2020-30, the PCA is working with the Technical Education and Skills Development Authority to train 2000 globally competitive construction supervisors needed to carry out the government’s ambitious infrastructure agenda, which centres on the Build, Build, Build (BBB) programme. The PCIR aims to boost the construction industry’s economic contribution from P2.3trn ($45.7bn) in 2018 to P130trn ($2.6trn) by 2030, with BBB acting as the catalyst.

The National Economic and Development Authority (NEDA), the state economic planner, reviews and approves BBB projects. As such, NEDA guides the deployment of P8trn ($159.1bn) of spending earmarked for 20,000 public infrastructure initiatives, primarily transport and mobility projects (see Transport & Infrastructure chapter), but also spanning education, health care, ICT, urban development and the environment.

BBB implementation is largely the responsibility of the Department of Public Works and Highways (DPWH), the Department of Transport, and the Bases Conversion and Development Authority (BCDA), the latter of which handles mixed-use developments. As the Philippines emerges from the pandemic, the Board of Investments’ Investment Priorities Plan (IPP), released annually to promote investments eligible for government incentives, will be monitored closely by interested parties. The “We Recover As One” report, published in May 2020 by the Inter-Agency Task Force Technical Working Group, suggests that activities critical for the supply of essential goods for the construction and rehabilitation of health facilities could be incentivised via tax breaks.

Response & Recovery

The government’s Covid-19 response can be broadly broken into two phases. The first hinged on the Bayanihan to Heal as One Act (Bayanihan 1), which empowered the executive to direct and finance the public health and social support response. In August 2020 these emergency measures gave way to the Bayanihan to Recover as One Act (Bayanihan 2), which aimed to stimulate economic recovery. The bill approved P165.5bn ($3.3bn) in assistance to low-income households and health care workers, cash for test-and-trace programmes, and other financial support measures, including a 30-day grace period on residential and commercial rents. The bill also suspended most building permits required for telecoms operators to build new cell towers for three years, reflecting the urgency attached to improving digital infrastructure for remote learning and working.

Other Bayanihan 2 provisions relevant for the construction industry include P1bn ($19.9m) for the DPWH to build tourism infrastructure, P4.5bn ($89.5m) to build and maintain isolation facilities, and another P4.5bn ($89.5m) for the construction of temporary medical isolation and quarantine facilities, field hospitals, dormitories for frontline workers and the expansion of public hospital capacity. Aside from these industry-specific measures, the bill has the potential to underpin a broadbased recovery of the economy into 2021, provided Covid-19 transmission remains relatively under control and additional lockdowns are not required.


The pandemic also gave fresh impetus to long-standing proposals to phase out tax incentives for certain businesses operating in Philippine Economic Zone Authority (PEZA) areas. Under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill, the government is pushing forward a revised tax reform package. CREATE is a modified version of previous reform bills that failed to pass Congress under the administration of President Rodrigo Duterte: Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) and the Corporate Income Tax and Incentives Rationalisation Act (CITIRA). In its previous incarnations, the legislation proposed a reduction in corporate income tax from 30% to 25%, before further reducing the rate by one percentage point a year in 2022-27 to achieve a regionally competitive rate of 20%. This was to be funded by the rationalisation of incentives such as 10-year tax holidays offered to PEZA occupants, notably those in the manufacturing and business process outsourcing (BPO) industries that have generated vibrant demand for light industrial and commercial real estate in recent years. However, the realities of the pandemic, and its impact on exporters in particular, have amplified calls for the incentives to remain in place or be phased out more gradually. Now approved by both the House of Representatives and the Senate, it is set to be enacted before the end of 2020. If an appropriate balance can be struck between fiscal needs and investor expectations, this should help sustain buoyant demand for PEZA land and office space.


Estimating economic losses from the pandemic is difficult as the challenges are ongoing, but the aforementioned “We Recover As One” report indicated that the construction industry lost P37.9bn ($753.8m) during the initial enhanced community quarantine period, which lasted for two months in Metro Manila. On the upside, NEDA said construction could be incentivised to build quarantine and other health facilities, as well as rehabilitate existing ones. One notable development in this regard was the addition of a virology institute in New Clark City to a list of some 100 priority BBB projects under the auspices of the BCDA. NEDA also anticipates an uptick in construction in rural areas as urban dwellers able to work remotely relocate away from congested cities. The authority called for the adoption of digital construction technologies such as modular design, and encouraged local authorities to foster take-up by implementing standardised structural specifications that could be deployed at scale.

The near-term outlook for construction is uncertain given the stubbornly high Covid-19 case count throughout much of 2020 – around 433,000 to date as of early December – with Fitch Solutions forecasting the sector will contract by 9.8% in 2020. While the government is actively pushing an infrastructure-led recovery, obstacles such as incomplete feasibility studies, problems acquiring right-of-way permits and local government bureaucracy could delay recovery until 2021, when the ratings firm expects the industry to grow by 9.5%.

Those forecasts are to some extent guided by fiscal constraints, with the government trimming its 2020 infrastructure programme to P785.5bn ($15.6bn), or 4.2% of GDP, down from the P881.7bn ($17.5bn) spent in 2019. Difficulty arranging deals that usually require face-to-face interactions, notably public-private partnerships (PPPs), is also likely to hamper activity, as will corporate caution over capital investments. On a positive note, Fitch Solutions suggested that potential government measures to lengthen the term of PPP projects, or defer collection of the state’s share of revenue, could help attract investors.

Foreign direct investment (FDI) recovered somewhat after slowing at the start of the pandemic, helped in part by the relatively successful efforts to control the virus in China, Japan and South Korea, which are major sources of FDI. Overall, net FDI inflows fell by 18.3% year-on-year (y-o-y) in the first half of 2020 to $2.99bn, according to Bangko Sentral ng Pilipinas (BSP), the central bank. However, FDI rose for a third consecutive month in July, registering a 35.2% y-o-y increase to $797m, indicating a positive outlook.

Looking to 2021, NEDA recommends that the DPWH ring-fences funding for road and transport programmes under the BBB, while local government units direct funding towards wholesale food terminals and trading centres, warehouses, cold storage, mobile storage, cold chain and refrigeration facilities.

Offering a further note of optimism, engineering and infrastructure conglomerate Megawide Construction said it expects the domestic construction industry to reach a value of P3.3trn ($65.6bn) by 2023, up 50% on its 2018 valuation, for a compound annual growth rate of 8.6% over the period. Megawide highlighted the government’s intention to maintain infrastructure spending of at least 5% of GDP for the foreseeable future under the PCIR 2020-30, as well as the robust growth of the middle class, which is expected to underpin demand for retail mall developments in particular.

Commercial Market

There are indications that the commercial real estate market has remained resilient in the face of the pandemic, at least in major cities. Property consultancy Leechiu said in August 2020 that despite the pandemic, it expects demand for office space nationwide to reach 800,000 sq metres by the end of 2020, up from 482,000 sq metres in August, driven by the tech and BPO sectors. According to Leechiu, global efforts to downsize in-house operations have spurred demand for outsourcing in the Philippines. The firm highlighted the June 2020 announcements by US-based customer service company Alorica and Singapore’s Everise that they would hire 4000 and 2000 more staff, respectively, in the Philippines. In the first three quarters of 2020 demand from the BPO sector helped new leases outpace vacancies, lifting net absorption of office space by some 57,000 sq metres. Much of that growth occurred in the second quarter of the year, when new leases rose by around 50% y-o-y to 77,000 sq metres, with demand for BPO space in Cebu a primary catalyst. However, despite a robust start to the year, demand from Philippine online gaming operations (POGOs) fell in the second quarter as a result of new taxes and international travel restrictions that prevented Chinese operators and workers from taking up occupancies. POGO firms run online gambling operations aimed at clients outside the Philippines, predominantly those in China. However, Colliers International said it expected delays in new construction due to poor labour mobility to limit the impact of falling demand on vacancies and rents. These delays also helped ease demand for construction materials, allowing suppliers to cover expected shortfalls of key inputs (see analysis).

Demand Shifts

Bayanihan 2 introduced new measures to double tax revenue from POGOs, which had an immediate impact on demand for office space. Offshore gaming licensees, including gaming operators, agents, service providers and support providers, are now subject to a 5% tax on turnover, replacing an existing 2% gross revenue tax. The new law was brought in amid a lockdown-enforced hiatus in POGO operations. As of mid-October 2020, 33 of the 55 licensed POGO operators had been allowed to resume operations. According to Leechiu, the new rules had prompted POGOs to vacate 103,000 sq metres of office space by September 2020, almost half the floor area vacated nationwide for the year. While this accounted for 6% of the overall space leased to POGOs – which hold 11% of office leases – Leechiu warned that BPO and manufacturing companies could follow suit if tax incentives are not protected to some extent in the CREATE bill.

“The pandemic has made the office rental market uncertain but we are optimistic that the market will bounce back in two to three years. Measures to mitigate the challenges include reducing rental rates by up to 25%, strengthening relationships with existing industry partners and forging new connections that can boost the prospects for stability or even growth,” Reynaldo A Cruz, executive director of AtlasOffice, told OBG.

In the medium term the government hopes that financial technology (fintech) firms can replace BPO companies and POGOs as sources of demand for PEZA commercial space. In September 2020 the government proposed the Financial Technology Industry Development Act 2020, which seeks to establish a Financial Technology Office (FTO) responsible for a fintech industry roadmap. The FTO would issue special investor resident visas for executives of foreign fintech firms.

The use of digital payment services has increased substantially as a result of the pandemic-related movement restrictions, with transactions on InstaPay – the national electronic transfer service – reaching P175.5bn ($3.5bn) in the March-May period, up 54.4% from December-February. BSP has also issued draft guidance on the establishment of digital banks, opening up potential for a new segment to drive office demand.

In the meantime, there has been a significant rise in demand for flexible office space, which includes co-working centres and serviced offices. This runs contrary to the trend in developed markets, where remote workers are tending to operate from home rather than risk contact with strangers in a shared space. In the Philippines, however, cramped homes and weak ICT infrastructure have prompted some companies to direct staff towards co-working arrangements (see analysis). Average fixed-broadband download speeds are one-tenth of those in Singapore and substantially lag behind most other countries in the region, according to Ookla’s Speedtest Global Index. In the longer term, the ongoing adaptation to new forms of remote work could potentially lead to de-urbanisation in city centres, or growth in regionalised work centres. Real estate services firm CBRE suggests landlords should adopt a more proactive approach to flexible space and take on a more service-oriented role. Colliers, meanwhile, advises hoteliers to explore the viability of converting unused areas into flexible work space.

REIT Direction

Real estate investment trusts (REITs) – publicly traded companies that own, operate or finance income-producing properties – have the potential to galvanise construction and real estate in the Philippines. Singapore is the largest REIT market in Asia outside of Japan and hosts more than 40 REITs with a market value of about S$100bn ($72.3bn), while Malaysia has about half that number, for total capitalisation of RM43.4bn ($10.3bn). The Philippines has long aspired to emulate this success, which in theory allows individual investors to pool finances and earn dividend income from property investment, while providing developers with income they can reinvest in real estate and infrastructure. REITs have notionally been possible in the Philippines for over a decade, but aggressive minimum public ownership requirements imposed by the Securities and Exchange Commission (SEC) prevented the concept from taking off. Those rules specified that at the time of listing on the exchange, a REIT must have at least 1000 public shareholders, each owning at least 50 shares, who in the aggregate own at least 40% of the outstanding capital stock of the REIT in the initial year, increasing to 67% within three years of listing. A value-added tax (VAT) on the transfer of properties to the REIT also curbed investor enthusiasm.

In January 2020 the SEC dropped the VAT requirement on the transfer of property to a REIT in exchange for shares, adding to existing benefits enjoyed by transferors of property such as exemptions from capital gains tax and creditable withholding tax. The SEC also imposed a reinvestment requirement on REIT sponsors: they must detail plans to reinvest within one year the proceeds from sales or income from REIT shares or securities in real estate or infrastructure. The Philippines Bureau of Internal Revenue adjusted the minimum public ownership from 40% to 33%, removed the twothirds ownership requirement and will monitor REIT dealings to ensure the reinvestment requirement is met. Notably, REITs are not limited to the initial property transferred to them and can incorporate debt, including mortgage debts, into their balance sheets.

The shift in rules has sparked significant investor interest in REIT structuring and initial public offerings (IPOs), not least because they increase cash flow by generating revenue as dividends that are income tax exempt. They also have a lower capital cost because the REIT security acts as a bond that offers a predictable rate of return, provided the property holding does not encounter valuation problems. REITs are required to declare dividends of at least 90% of distributable income. REIT fund managers can be domestic corporations and trusts, as well as foreign corporations licensed to do business in the Philippines.

In August 2020 Ayala Land-backed AREIT was the first REIT to successfully complete an IPO, attracting a total P13.6bn ($270.5m) across primary and secondary offerings that were twice oversubscribed. AREIT intends to use the proceeds from the primary offering to purchase another property, with capital from the secondary offering being reinvested into local real estate developments. Developer DoubleDragon Properties is also reported to be preparing to bring its most valuable property portfolio, DD Meridian Park in Pasay City, into a REIT that would aim to raise P17bn ($338.1m). In line with the reinvestment requirement, DoubleDragon would use the proceeds to construct about 450,000 sq metres of floor area to augment its leasable portfolio.

Retail & Industrial

The pandemic has impacted the retail and hospitality sectors globally, and the Philippines is no exception. In the first quarter of 2020 vacancies at Metro Manila malls rose to about 10%, up from 9.8% in the third quarter of 2019, according to Colliers. The firm forecast this will rise to 12% by end-2020, based on expectations that only about half the 108,900 sq metres of new leasable retail space will be occupied. As a result of the uncertainty over the take-up of new retail developments, Colliers recommended mall operators consider converting vacant mall space into micro-warehousing, especially near Metro Manila.

One bright spot is the Senate approval in late September 2020 of amendments to the Retail Trade Liberalisation Act, which aims to attract more foreign investment in the retail sector. The amendments lower the minimum capital requirement from $2.5m to $300,000, and decrease the capital requirements attached to individual store openings. The sector was further boosted in October 2020 when it was announced that malls could again operate at 100% capacity in areas of the country under general community quarantine.

Despite the damage caused to exporters, demand for industrial space has yet to exhibit signs of distress. Rommel Leuterio, director and adviser to the chairman of Science Park of the Philippines Inc (SPPI), told OBG that the company was still closing deals that opened before the pandemic using digital tools. “We booked record sales in 2019, pre-Covid-19, and that is continuing this year, primarily from discussions commenced pre-pandemic,” he said, adding that in 2021 and beyond it is more difficult to judge because of foreign investors’ inability to make site visits and uncertainties surrounding the efforts of the Department of Finance to alter incentives for those who locate in PEZA zones.

Leuterio also noted an evolution in demand at the SPPI’s light industrial and science parks, moving from an initial emphasis on electronics exporters to more domestic-focused food and consumption companies. Demand for logistics facilities is also robust given the rising importance of e-commerce. Turnover from digital retail transactions reached $3bn in 2019, up from $500m in 2015, and is on track to exceed $12bn by 2025.


The picture in the residential property market is mixed, with prices holding up well in the first half of 2020 but expected to decline significantly in some areas by the end of the year. In the second quarter BSP’s residential real estate price index was up 27% y-o-y – a 34.9% increase in the National Capital Region and 18.1% outside it. By category, condo prices rose the fastest, up 30.1%. Single detached homes increased by 24.1% – the fastest pace since records began in 2015 – while townhouse prices rose by 10.8%, and duplexes were up 0.8%. Demand for property outside of locked-down cities, including seaside residences, coupled with excess liquidity in the financial system, helped drive the market. In the first half of 2020 take-up of mid-income or higher properties accounted for 80% of the pre-sale market, up from 71% one year earlier, indicative of strong demand for luxury developments.

Most real estate firms expect the worst impacts will be felt in late 2020, before a projected recovery helps reinvigorate the residential market in 2021. Colliers predicted that condo prices could fall by 15% in 2020, prompting speculation that overseas investors – particularly those from China – could be preparing to capitalise on attractively priced assets. The fall can be partly linked to the exodus of POGO workers, with broker KMC Savills estimating that condo rents in areas with high POGO exposure could fall by as much as 25%.

Commercial banks’ 10-year mortgages worth up to 80% of the housing value tend to carry interest rates in excess of 5%, suggesting repayments may come under pressure if the recession endures. In response to Covid-19, public home loan provider Pag-IBIG Fund offered up to six months of payment relief, more affordable amortisation and waived penalties under a special restructuring programme. It also granted a 60-day grace period on all loan repayments.


As ever, the future of construction and real estate will be closely linked to that of the national economy. Despite the slowdown in 2020, the Philippines is well positioned to bounce back from the pandemic. Debt to GDP and inflation remain moderate, giving the government scope to catalyse recovery through infrastructure spending. Covid-19 has interrupted many BBB projects, but the programme has not been derailed and will continue to present opportunities for engineering, design and construction firms. Indeed, the Duterte administration has earmarked P1.1trn ($21.9bn) for the BBB under its proposed 2021 budget. As for real estate, foreign investors seeking attractive returns are likely to be enticed by the introduction of REITs and fewer restrictions in retail, which should provide strong residential and commercial momentum in 2021.

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The Report: The Philippines 2021

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