The construction and real estate sectors make up around 20% of the Philippine economy, slightly ahead of manufacturing, and as of the first quarter of 2014 accounted for 7% of national employment. Over the past few years, construction in the Philippines has been flourishing amid a climate of political stability and upbeat business sentiment, spurred by growth in overseas foreign worker remittances, inbound investments into business process outsourcing, rising numbers of tourist arrivals, and government spending on large- and small-scale infrastructure.
REBORN: The Philippine Constructors Association (PCA) dubbed 2013 a year of new birth for the industry. In Manila, evidence of this pronouncement came in the form of the number of cranes scattered across various master-planned, mixed-use districts where derelict neighbourhoods and abandoned US military bases once stood. Outside the capital, public infrastructure projects, in the form of new highways, toll roads, ports, and water and power facilities, are a common sight. Rebuilding efforts, meanwhile, were taking place across the islands and provinces recovering from the devastating damage wrought by Super Typhoon Haiyan and the Bohol earthquake.
Yet there are signs that these unprecedented growth levels are unlikely to be sustained. A slowdown in reconstruction efforts coupled with budgetary hold-ups is leading to delays in public infrastructure work. In addition, a deceleration in the pace of private building activity is arising from the central bank’s intervention on banks’ lending exposure to real estate projects, issues over land availability and price appreciation, and a generally more cautious approach on the part of developers as office, retail and residential supply catches up with demand.
GOVERNMENT SPENDING: According to BCI Asia-Philippines, the construction sector saw 85% growth in the 12 months leading up to May 2014 compared to the same period a year prior, with much of the lift coming off a resurgence in public spending.
Historically, the construction sector has not relied heavily on the government for work, with industry demand from the private sector bettering that from the government at a ratio of 13:7, according to the PCA. Statistics from the Cement Manufacturers Association of the Philippines (CeMap) reveal the gross value of private sector construction in 2013 to have totalled P435.7bn ($9.8bn), compared to P137.8bn ($3.1bn) worth of public sector work.
Public spending on infrastructure as a proportion of GDP has consistently been less than 3%, ranking among the lowest in the region and below the international benchmark of 5%. In the World Bank’s 2014 Logistics Performance Index, the Philippines, with a score of 2.6 out of 5, placed 75th out of 160 countries surveyed, testament to the fact that its roads, airports and other infrastructure are in need of major upgrades and expansion. The government wants public infrastructure spending to account for 5% of GDP by 2016. To reach this level, an estimated P200bn ($4.5bn) of extra spend is needed each year, and by 2020 the government is aiming for $110bn worth of public projects to be completed.
BUDGET DISBURSEMENT: Public infrastructure spending increased by 32% in 2013 to reach P267bn ($6.01bn), according to PCA figures, with higher tax collection and improved budget execution cited as contributory factors. Budget execution in 2014 was, however, less smooth, following intervention from the Supreme Court over a fiscal stimulus package that resulted in some planned spending items being halted. In turn, the administration has faced criticism for not spending according to programme, during a period when funding especially needs to be mobilised to ensure that reconstruction and rehabilitation efforts go ahead in natural-disaster-affected areas.
Budgeted government expenditures from January to September amounted to P1.73trn ($38.9bn), yet actual outlays came in 16% below target at P1.46trn ($32.9bn), which was also 2.6% below what was spent in the corresponding period in the year prior. Construction projects contracted by 6.2% year-on-year (y-o-y). The spending shortfall partly accounts for GDP growth in the third quarter of 2014 being below expectations at 5.3%, compared to projected growth of 6.5%. Second-quarter growth was 6.2%.
The inflection point came in July, when the Supreme Court ruled that some components of President Benigno Aquino III’s fiscal stimulus package, conceived in 2011, were unconstitutional. The decision resulted in some projects being left unfunded, and parliament is reworking these items into a supplementary budget so that work can recommence. If approved, the P23bn ($518m) extra budget will consist of P16.4bn ($369m) allocated to new urgent projects, of which at least P9.5bn ($214m) will be directed towards reconstruction efforts.
REBUILD: According to risk research firm Maplecroft, the Philippines is the most at-risk country in the world to natural hazards, and 2013 saw it hit extremely hard by acts of nature.
Super Typhoon Haiyan, which was labelled the worst recorded storm to ever hit land, brought about the loss of 7000 lives and caused the destruction of some 10,000 homes. The island of Bohol, meanwhile, was affected by an earthquake measuring 7.2 on the Richter scale that occurred in October. Hazard research firm Kinetic Analysis estimates that Haiyan caused $12bn-15bn worth of damage. One of the most affected areas was Tacloban City, the capital of the Eastern Visayas region, where the city’s main airport, seaports, power lines, hospitals and mobile network stations are all undergoing repair.
PUBLIC-PRIVATE PARTNERSHIPS: Goldman Sachs has forecast that the Philippines will see its GDP per capita increase by 50% by 2020, leading to rising demand for water, energy, roads, airports and other transport developments. The government has been lowering its fiscal deficit y-o-y, and to alleviate the infrastructure financing burden – and to free up funds for other essential spending priorities, such as reconstruction efforts and subsidised social housing – it has been fostering greater private participation in the ownership and maintenance of strategic infrastructure projects.
Launched in 2010, the public-private partnership (PPP) scheme took a few years to gather momentum, but by the end of 2014 eight projects had been awarded. The latest occurred in October 2014, when the much-delayed P65bn ($1.46bn) contract for a railway linking Manila to Cavite was awarded to a consortium composed of Metro Pacific Investments’ Metro Pacific Light Rail, Ayala’s AC Infrastructure Holdings and Macquarie Infrastructure Holdings.
Other PPPs awarded so far under the Aquino administration include the P17.5bn ($394m) Mactan-Cebu International Airport Expansion won by a consortium of GMR and Megawide, the P15.52bn ($349m) Ninoy Aquino International Airport Expressway awarded to the San Miguel Corporation, and the P34.5bn ($776m) Cavite Laguna Expressway won by an AC Infrastructure Holdings and Aboitiz Land joint venture. In addition to transport projects, utilities are starting to be packaged for private concession. By mid-2015 a P24.4bn ($549m), 32-year contract to supply bulk water to 24 municipalities in the province of Bulacan should be awarded, as should a P183.7m ($4.13m) contract for the construction of a dam north-east of Manila.
MEGA-PROJECT: In all, the PPP programme comprises 54 projects, of which 15 are expected to be bid on by the time President Aquino’s current term ends in May 2016. The project that is receiving the most attention due to its sheer size, level of participant interest and anticipated socio-economic impact is the P122.8bn ($2.76bn) Laguna Lakeshore Expressway Dyke (LLED). Expected to go out for tender in 2015, 24 companies have so far expressed interest, according to the PPP Centre of the Philippines. Structured as a build-operate-transfer (BOT) deal lasting 37 years, financing will come solely from private capital, with support from the government limited to covering the right-of-way (ROW) costs.
LLED consists of two sections. The first covers land reclamation and a 47-km flood-control dyke, atop which a six-lane expressway will be built. The second, located to the west of the dyke, entails 700 ha of forest and offshore area reclamation that will become mixed-use land. On completion, in addition to reducing the volume of traffic in southern Manila, the project is expected to shield 1m residents and 5000 factories situated in low-lying areas around the Laguna Lake from annual flooding.
FOREIGN PARTICIPATION: Despite upgraded investment ratings from Fitch and Standard & Poor’s, as well as improvements in business competitiveness rankings from the likes of the World Economic Forum, foreign participation in the construction sector has been limited. This is partly due to regulatory restrictions on non-Filipino land ownership and stakes in housing, retail and commercial developments, and partly to do with foreign investors’ risk aversion over transparency concerns and the sanctity of contracts. A number of high-profile contract disputes in the power and mining sectors have made international headlines in recent years, while several transport projects have faced bottlenecks arising from disagreements over ROW with local authorities.
The PPP Centre was established by the Aquino administration to promote transparency and alleviate the legal and administrative uncertainty. In July 2012 President Aquino signed an executive order stipulating that all government contracts involving PPPs, BOT schemes and joint ventures with the private sector must contain alternative dispute resolution provisions. Corruption has for a long time been a stigma associated with doing business in the Philippines, but in recent years the climate has improved dramatically, with the country climbing from 129th to 85th out of 175 in Transparency International’s most recent Corruption Perceptions Index.
The local construction sector, with high levels of liquidity and sufficient access to credit, is for the most part equipped financially to take on large projects. Yet beyond capital, the added value of foreign participation is expertise and knowledge.
The winning Mactan-Cebu International Airport consortium includes India’s GMR Infrastructure, which, as the operator of Delhi and Hyderabad’s main airports, brings airport management experience. Meanwhile, Malaysian infrastructure conglomerate MTD Group, which already has a track record in the country, having sold its stake in the South Luzon Expressway in 2012, has expressed interest in bidding on some of the flagship PPP projects.
ASEAN: The establishment of the ASEAN Economic Community (AEC) in 2015 and the move towards a single market presents Philippine construction firms with both opportunities and challenges.
Licensed contractors domiciled in any ASEAN member country will be permitted to operate more freely throughout the bloc, and considering the rapid growth in Philippine construction and the attractive outlook, it is likely that foreign contractors will actively pursue work on local projects.
There are 6000 registered contractors in the Philippines. While some are large conglomerates with the resources, technology and track record of working overseas to enable them to compete on a regional and even global scale, many are small and medium-sized enterprises that could struggle to match their more developed counterparts in places such as Malaysia and Thailand. Professionals will also be able to move more freely within the region, likely contributing further to the brain drain of top Filipino talent in fields like engineering and project management.
BUILDING BOOM: In the first half of 2014 the Philippine Statistics Authority reported the number of approved building permits to be up 11.2% y-o-y. This continued a trend that has seen residential, commercial, retail and hotel stock being delivered at record rates. Between 2012 and 2016, real estate services firm Colliers predicts available office space for Manila to expand from 6m to 7.5m sq metres. A further 25,000 residential condominium units will be added to the market by 2016, amounting to nearly half of the 58,000 units constructed in the previous 40 years. The city’s hotel stock, meanwhile, is anticipated to grow by 23% y-o-y, with an average of 3700 new rooms hitting the capital annually until 2017.
New mall construction, in contrast, is expected to be concentrated outside the capital. Total nationwide shopping mall space at the end of 2013 was measured by Jones Lang LaSalle at 13m sq metres. By 2015 the property firm expects new supply of 1.4m sq metres to hit the provinces, while Colliers projects new space opening in metropolitan Manila – which already accounts for half of the country’s total stock – to be 340,000 sq metres.
Despite inflationary pressures and an expected run of rate hikes, long-term borrowing costs are likely to remain attractive, allowing firms to take on new projects and carry out capital-intensive construction work. According to a first-quarter 2015 report from the PCA, y-o-y growth in borrowing from the construction sector was 44.2%, the highest of any industry. The Philippines’ banks are liquid and well capitalised, and those with proven track records are able to borrow with relative ease.
MATERIALS: Although the heightened pace of construction activity is leading to a marked increase in the importation of materials, so far materials prices have been kept in check by a slowdown in regional demand, especially from China. According to the PCA, with the exceptions of cement, galvanised iron sheet, tile works and plumbing works, price inflation in the first quarter of 2014 for key inputs – such as concrete, galvanised steel and glass material – were below the overall headline inflation rate of 4%.
With the country a net importer of most categories of construction materials, capacity constraints at the main ports make planning for and stockpiling inventories essential. Cement, in particular, is running only a small surplus, prompting fears that unless domestic output expands, a repeat of 2010 – when prices surged from P205 ($4.61) per bag to P270 ($6.08) – could occur. CeMap reports 2013 cement sales of 19.45m tonnes, an increase of 6% on the 18.36m sold in 2012. Imports for 2013 were measured at 159,000 tonnes, a significant rise from the 39,000 tonnes arriving from abroad in 2012.
In view of the growing demand gap, local manufacturers are investing in new capacity. Lafarge Philippines has allocated P1.2bn ($27m) towards a new mill in Rizal that should commence production in 2015, and has also announced that it will be reopening its plant in Cebu. Holcim Philippines, meanwhile, has indicated that it is considering constructing a $450m-550m brownfield plant in Bulacan, although head office approval has been delayed due to a restructuring of its regional operations.
Under the AEC, tariffs on construction-related materials are expected to be dramatically reduced, prompting producers to re-evaluate their regional footprint and investment in new capacity.
GOING GREEN: As more international firms establish a presence, they are demanding environmentally friendly spaces to be housed in. The Philippine Green Building Council (PHILGBC) was established as a not-for-profit in 2007, and has introduced a voluntary rating system, aligned to the US’s LEED, for independently grading and certifying new buildings and refurbishments. In some more developed markets a desire to move into green certified buildings is predicated mainly on soft factors, such as promoting corporate social responsibility, and garnering employee appreciation and productivity. In the Philippines, however, there are commercial motivations to consider related to utility savings generated from implementing smart building features.
ELECTRICITY COSTS: Electricity rates in the Philippines are among the highest in the world, and the most expensive in Asia. Electricity for general use in Manila, for example, costs $0.23 per KWh, compared to $0.07 in Hanoi and Ho Chi Minh City, $0.08 in Bangkok and $0.11 in Kuala Lumpur. This is providing a strong impetus for developers to implement energy-efficient solutions in a broad range of construction projects beyond just property. So far, the government has not opted to recognise the PHILGBC’s grading system, or provide any incentives to those garnering certification. If a government-endorsed system comes to fruition, it will bolster the pursuit of green accreditation even further.
OUTLOOK: Although growth rates for the sector are unlikely to maintain the exceptional levels of the past 24 months, the long-term prospects remain solid and balanced. Positive trading conditions for the residential, office, retail and hospitality segments point to robust demand for private-sector-led building. Although falling below expectations, government spending still exceeds the levels seen under previous administrations. Public spending on infrastructure is targeted to reach record levels as a percentage of GDP by 2016. Big-ticket and strategic PPP projects, having been stalled for a few years, are starting to be awarded, and on the ground work on some has now commenced. Considering the positive economic story and growth projections for the country, infrastructure projects are highly bankable and financial institutions willing to provide funding.
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