A significant driver of growth and an indicator of economic health, construction has long been a key engine of the Philippine economy. Historically led by the private sector, the administration of President Benigno Aquino III has pledged major investment in infrastructure to unleash the potential in tourism, agriculture and industry, address housing needs and increase direct jobs in the sector. The government has stated it will deliver these projects through public-private partnerships (PPPs), but has bided its time, preferring to first clear its books and weed out corruption. Meanwhile the private sector is driving forward, serving rapidly expanding demand for middle-income properties and office space, primarily for business process outsourcing (BPO).

FACTS & FIGURES: The construction industry’s share of total GDP has steadily increased from 2006 to 2010, contributing an average of 5.2%. Over the same period the sector posted an average growth rate of 10.5%, far higher than the 4.5% rise overall. While in 2008 and 2009 expansion slowed due to the global and domestic economic downturns, 2010 was an election year and spending on infrastructure boosted growth by 14.3%.

Despite the Aquino administration’s pledges to invest in infrastructure, the private sector has historically been the largest driver of construction activity and is likely to remain the main contributor. According to the National Economic Development Authority, authors of the Philippine Development Plan 2011-16, public expenditure on infrastructure in the first quarter of 2011 declined by 37.3% on the same quarter for 2010, whereas private expenditure increased by 21.6%. Policy goals laid out in the plan are to accelerate investment in infrastructure development, improve institutional and regulatory frameworks, and encourage PPP ventures.

Upon election the government stated it would invite bids worth up to $16.8bn for PPP projects over a two-year period. However, the Aquino administration has prioritised implementing anti-corruption policies and many existing contracts and projects are being reviewed before new procurement rounds and PPP ventures are launched. Once complete, it is expected that a wave of investment and building will be unleashed. Having experienced several past building and infrastructure booms, the construction industry is well served by Filipino architects, contractors and labourers. However, large foreign firms, mainly from Japan, Korea, China and Malaysia, are increasingly involved in the big-ticket areas, such as the power grid, hydroelectric power and desalination plants. As part of the wider review of ownership laws and to draw foreign investment and expertise, licensing processes may be altered from current rules mandating that businesses in the sector be at least 60% locally owned, towards a more attractive arrangement allowing up to 90% foreign ownership over a set term.

DEMAND DRIVERS: The industry is expected to grow at similar rates to the past five years, driven by investment in BPO, expansion of tourism facilities, continued remittances from overseas Filipino workers (OFWs) supporting residential acquisitions, and the implementation of PPPs and large-scale publicly funded infrastructure projects. The continued strong performance of BPO will boost construction of commercial buildings in key business districts within the capital Manila, but also in other cities such as Cebu City to the south. According to the Export Development Council, BPO growth of 18-20% for 2011-12 is possible. The construction of BPO centres also tends to fuel demand for localised middle-income housing, which in turn necessitates retail and leisure facilities, further supporting demand.

ROBUST: Construction in Manila remains robust, with the new central business district (CBD) of Fort Bonifacio adding 160,000 sq metres of office space in 2011. Office space in Makati CBD has reached a plateau of 2.7m sq metres with limited developments in the pipeline. Residential growth is still high in Makati with more than 2000 units to be added per year until 2013, though the increase in Fort Bonifacio is greater, with 3052 units in 2011 and a projected 2417 in 2012, satisfying rising demand from BPO and service sector workers. While Manila still attracts the most attention, Cebu City is close behind as a prime destination for BPO (particularly call centres), hotel accommodation and apartment buildings. Office space reached 373,000 sq metres by the end of 2011, an increase of 10% on 2010.

HOUSING: There is significant demand for housing at all locations and income levels. While developers have been quick to concentrate on demand at the more attractive end of the market, building high-rise apartments for middle- and upper-income earners in urban centres, low-cost housing is relatively underserved.

Housing and Land Use Regulatory Board figures show the number of licences to sell in the high-rise residential segment grew by 83.4% to 20,698 between the first quarter of 2010 and 2011. Meanwhile, social housing declined by 34.4% to 9823 licences over the same period, and low-cost housing dropped by 27.4% to 14,336 licences. Residential supply is strongest in the new commercial growth areas such as Fort Bonifacio in Metro Manila, home to several major BPO and service industry providers, fuelled by the growth in the service industries and particularly workers in BPO looking for accommodation situated close to their place of work. With 8000 units being delivered by the end of 2013, Fort Bonifacio should catch up with the Makati CBD, offering around 19,000 residential units.

“High-rise developments outside of Metro Manila are increasing in number but are still largely experimental. In many areas apartment and condominium living is simply not yet part of the culture, though this is slowly changing with rapid urbanisation,” Gilbert Yu, the founder and president of G&W Architects, told OBG.

Remittances from OFWs, estimated at $18.8bn in 2010 and expected to increase by 8% in 2011, are helping fuel construction activity. Having traditionally been used to provide additional income for education or food, families are beginning to invest in small apartments. These are mostly self-contained 20-sq-metre units or one-bedroom apartments in central urban areas.

Pent-up demand for low-cost housing is thought to be around 3m units. While developers are beginning to penetrate this growth area and establish sub-brands such as Suntrust Properties, an affordable housing subsidiary of Megaworld Corporation under the umbrella of Alliance Global, profit margins are more challenging and demand is constrained by conservative lending practices from traditional banks. Developers are stepping in to provide credit with affordable monthly payments during the construction period and the balance payable on turnkey. Interest rates are zero on middle- to high-value properties but up to 14% on affordable housing. Some 80% of buyers pay equity on turnkey, with only 20% seeking credit to finance purchases.

Government strategy to tackle the large number of informal settlers, particularly in the major city centres, is also shifting. The National Housing Authority (NHA) plans to relocate some 104,000 families to medium-rise developments by 2016. This represents a change from earlier initiatives that provided housing in low-rise projects on city outskirts. The new strategy intends to avoid costly and painful displacement effects, which saw families lose their social networks and access to urban jobs and thousands of children disrupted at school. With over 500,000 informal settlers in Metro Manila alone, the NHA is under no illusions about the scale of the undertaking. The five-year plan is worth $127m, but the NHA’s budget is too small to fully bankroll the project. It therefore plans to reach its goals by partnering with local government to provide land, and property developers to provide financing for construction.

TOURISM: The Department of Tourism is targeting an increase in foreign tourist arrivals from 3.5m in 2010 to some 10m by 2016. In preparation, the private sector is gearing itself up to construct additional resorts, hotels and apartments. For its part, the government recognises major investment is required in tourism infrastructure and is prioritising refurbishment of airports and seaports. Road building on routes leading to tourist sites has been devolved to the Department of Public Works and Highways to speed up construction. Levy Espiritu, the president of construction firm Datem, told OBG, “As the tourism industry continues to develop with both public and private sector support, the construction industry benefits from an uptick in activity not only in the development of hotels and resorts but also for tourism-related transport infrastructure.”

PARTNERSHIPS: In his first State of the Nation address President Benigno referred to PPPs as the main engine for infrastructure development in the country and outlined plans to invite bids for up to $16.8bn worth of PPP projects. A range of projects has been identified, including roads, airports, rail and ports, as well as smaller ones building schools, hospitals and irrigation systems. With the competency of local contractors tried and tested and a highly liquid domestic capital market the private sector is well placed to engage.

The industry is organising itself for the challenge. The Philippine Constructors’ Association (PCA), a member-based industry platform, has formed a PPP coalition with stakeholders from the local financial sector to help promote an appropriate and workable framework for PPP and build-operate-transfer projects.

Specific goals are to promote good governance through open, transparent and competitive tendering processes, kick-start the tendering of three priority PPP projects and push for further policy reforms. According to Espiritu, the key to successful PPP projects will be to tender contracts on an open, solicited basis to promote competition and transparency.

PRICES & INCOME: Following the easing of construction materials costs in 2009, costs have started to rise again on the back of renewed growth and higher commodity prices. The National Statistics Office’s price index of construction materials recorded overall price inflation of 2.6% for 2010, compared to just 0.5% in 2009. Tinsmithry and electrical materials, rich in high-demand materials such as steel and copper, rose by 4.5% and 4.3%, respectively. Costs continued to rise for most of 2011, although cement prices – a reliable demand indicator – eased back slightly over the year.

The sector has tapped into the Philippines’ mineral resources and production of building materials is on the rise. Limestone supplies are enough to feed the country’s 15 operating cement manufacturing plants. Total capacity in 2011 was 22.2m tonnes, though production is often underutilised. Domestic production reached 15.5m tonnes in 2010, growth of 7% on 2009. Around the world cement demand is a leading indicator of economic activity and often strongly correlates to GDP growth rates. According to the Cement Manufacturers’ Association of the Philippines, demand began declining in the final quarter of 2010 when volumes dipped to 3.3m tonnes, down 6.1% on the same quarter in 2009. The trend worsened to -6.7% in the first quarter and -11% in the second quarter of 2011. This is largely accounted for by the 37% reduction in public infrastructure spending in early 2011 as the government delayed implementation of PPP projects. Cement imports increased from 576 tonnes in 2010 to 30,000 tonnes in 2011, but exports fell to 39,000 tonnes in 2010.

MANPOWER: Regulation has been significantly improved in recent years, raising standards of materials, enforcement of building codes and skills of construction workers. Leading the drive is the PCA, which has set out a roadmap for strengthening the industry’s competitiveness. One key focus is the improvement of education and upgrading of skills standards for construction workers. Proposed measures include working with the Technical Education and Skills Development Authority, the public sector agency for skills and workforce development, to study supply and demand of workers in the industry and to identify skills needs.

Current areas include scaffolding, concrete forming and rebar technicians. The PCA also wants to see workers with vocational qualifications encouraged into higher education programmes, for example in engineering and architecture, to secure a stronger supply of competitive professionals. The PCA is also driving regional harmonisation of trade skills, pushing for standardised accreditation levels within ASEAN OUTLOOK: Construction looks set to remain a key contributor to the development the economy. Even before the PPP schemes begin in earnest, the private sector is forging ahead with large-scale housing, office and tourism projects. Forthcoming infrastructure projects should provide a boost, bringing rewards to investors and contractors willing to engage with government.