The Philippines finds REIT timing for property investment

Contagion and calamity thwart the Philippines’ rising real estate industry, but a new form of investment stands to democratise the property market

A breathtaking aerial view of Luneta Park with the famous Manila Bay sunset behind. Aragorn_19/Shutterstock

The new decade started with a bang and a cough for the Philippines. Taal Volcano was roused from slumber, shuttering airports and decimating business in Luzon island. A few weeks later, the deadly novel coronavirus began its international danse macabre, claiming a life in Manila—its first outside China.

But not everything was fire and contagion: 2019 witnessed great gains for the Philippine economy, which polished the year off with a glowing quarterly growth of 6.4 percent. The information technology and business process management (IT-BPM) sector ended 2019 with USD26 billion in revenues, while tourist arrivals raced to 8.26 million, 15.24 percent higher than 2018’s year-end 7.16 million. Home prices across the archipelago posted an annual growth of 10.4 percent, the highest since 2016, as the vacancy rate for Manila residences fell to 2.9 percent.

Now, the old ways of making money-makers out of the islands’ properties will undergo an exciting paradigm shift. In January, the government issued new rules and regulations for the legal framework of real estate investment trusts (REIT), acquainting Filipinos once more with the powerful financial instruments.

Publicly traded like stock corporations, REITs manage various classes of income-generating properties, allowing local and foreign investors to partake in the domestic real estate market without owning the bricks and mortar.

“Investing in REITs allows smaller unit sizes to be purchased versus an entire condo,” explains Michael McCullough, managing director of Manila-based consultancy KMC Savills, Inc. “The stock is more liquid and is a more tax-efficient way to receive the proceeds. Basically, REITs enable individual investors to diversify their real estate portfolio without the burden of high transaction costs.”

REITs have been around since the enactment of Republic Act 9856 in 2009, but the law’s minimum public float or ownership requirement stood at an onerous 67 percent, dissuading developers from participating. The new rules have eased this requirement down to 33 percent, sweetened by a bevy of tax privileges.

“The REIT law will raise the capital markets of the country, which will be used for new developments,” predicts McCullough. “Asset pricing is expected to be more transparent in a market where REITs are present. We expect this to spill over to residential valuations.”

Destinations outside Metro Manila, such as Cebu (pictured) and Davao are also witnessing tremendous growth as the Philippines builds its appeal to investors. Ghing/Shutterstock

The idea of owning lucrative physical homes in the archipelago is drawing the Americans, Chinese, Japanese, and Koreans, who together make up 50 percent of high-end home sales to foreigners. “The Philippines has one of the highest rental yields in Southeast Asia, estimated at six to 10 percent depending on location,” says McCullough. “It’s an attractive market among investors because property prices are lower than most of its Southeast Asian neighbours. There’s also a huge rental market from the growing middle class, BPO (business process outsourcing), and tourists.”

No foreign people is as bullish on the country as the Chinese, whose offshore gaming companies are driving growth across a broad spectrum of Philippine real estate. This, despite an official appeal from Beijing in August for Manila to curb cross-border gambling. “I decide that we need it,” said President Rodrigo Duterte in response to calls for outlawing Philippine offshore gaming operators (POGOs).

POGOs have become an intrinsic part of life in Manila, with office and residential properties growing in areas where they operate. “In certain submarkets, the POGO sector may comprise at least a third of net absorption for a new office building. This has squeezed the BPO sector to locate or consolidate in areas where the POGO sector isn’t welcome, like Taguig. Essentially, the POGO sector is vastly responsible for the healthy office market,” says McCullough.

POGOs’ mostly Chinese employees have propelled residential prices by at least 25 percent year-on-year in the Manila Bay Area over just the past two years, according to KMC Savills. “Online gaming firms have brought loads of cash and make up one of the largest buyer segments for the top three residential developers. As of now, they haven’t brought additional systemic risk since they’re all cash buyers,” says McCullough.

Alternatively, POGO employees flock to hotels for housing, driving up occupancy, while more entrepreneurial ones are known to lease 100-square-metre retail spaces or even multi-floor F&B spaces, according to the consultancy JLL Philippines.

A combination of affordable property prices and one of the highest rental yields in Southeast Asia are tempting foreign investors to property hotspots such as Makati in Metro Manila. RichieChan/Shutterstock

Japanese conglomerates and investors are steadily gaining exposure to Philippine property markets. In August, Mitsubishi Estate Company, Ltd. signed a USD76-million partnership with local developer ArthaLand Corporation for a series of affordable housing projects. The Japanese real estate titan was apparently drawn to the Philippines’ zippy economic growth, which the company attributed to policies like the Build, Build, Build infrastructure programme.

Japan also recognises a kindred spirit in their Ring of Fire neighbour. Nomura Real Estate Development Co., Ltd has partnered with Filipino developer Federal Land, Inc. for an ambitious four-tower project, built with visco-elastic coupling dampers because the Philippines “also faces the threat of earthquakes,” explains the Japanese company’s chairman Eiji Kutsukake. Several strong earthquakes had rocked the island of Mindanao in 2019, causing construction delays and a slippage of residential supply in Davao City.

Property growth beyond Manila has never been more apparent than in Davao and Cebu. Selling prices of existing homes in Davao City, the most populous in Mindanao, touched a record PHP211,040 (USD4,120) per sqm in its central district, home to the PropertyGuru Asia Property Award-winning Dusit Thani Residence. Future supply in the area, forecasts JLL, will soar to PHP228,610 (USD4,488) per sqm by 2022.

While relatives of overseas Filipinos rank among Davao’s biggest residential demand drivers—acquiring mostly mid-segment homes to rent out, convert to short-term rentals, or hold for resale—Davao has also cultivated a sizable populace of overseas student tenants like Indians, Koreans and Japanese, pushing monthly rents up to PHP810 per sqm.

In Cebu, the country’s second-biggest city, young professionals and students are propelling the residential lease market. Corporate housing requirements of IT-BPM companies and multinationals, as well as clamour for halfway homes by various employees, have buoyed long-term rentals, with monthly rents rising to PHP1,310 per sqm, according to JLL data.

Luxury is rising with the growing number of high net worth individuals (HNWIs) in Manila and Cebu. Selling prices in their respective markets are at stratospheric highs: Manila’s most expensive residences—and in turn, the country’s—hit more than PHP550,000 per sqm last year. The Philippine capital’s prime residential market grew 6.5 percent, one of the highest globally in 2019, according to Paolo Abellanosa, corporate communications manager at Santos Knight Frank, owing to a tight supply of luxe properties and an “increasing number of Filipino ultra-high net worth individuals (UHNWI).”

More: Ayala Corporation to be the first REIT in the Philippines

Luxe Cebu homes breached PHP240,700 per sqm in 2019, with wealthy locals putting their units on the leasing market or flipping them for massive profits. “End users form minority of the buyer profile and are mostly from affluent families living in Cebu,” says Janlo de los Reyes, head of research at JLL Philippines.

And yet optimism for the immediate future of Philippine property is subdued, with JLL predicting annual capital gains for homes to decelerate to 3.1 percent on average between this year and 2022. The COVID-19 pandemic will no doubt hamper residential sales to foreign investors in the next 12 months, with developers facing construction delays due to disruption in Chinese supply chains, predicts McCulllough. “However, these conditions may rebound once the virus is successfully contained sometime in the middle of the year.”

Anticipated government stimulus to counter the impact of the outbreak, potential rate cuts from the central bank, and a reduction in the reserve requirement may yet shield the property market from global headwinds. “This increase in liquidity should bode well for the residential market. Any of these measures should be beneficial for 2021, and we are more optimistic of the prospects in the second half of 2020,” says McCullough.

Stifled by factors out of buyers and sellers’ control, but showing distinct signs of life, Philippine real estate may only be just getting ready to rumble.

This article originally appeared in Issue No. 159 of PropertyGuru Property Report Magazine