Underpinned by healthy economic growth, political stability and a growing population, confidence in the Philippine real estate industry is high. Supply is increasing across all sectors: residential, office, retail and hotel. Prices continue to rise fuelled by the growing outsourcing sector, overseas workers using remittances to fund purchases and strong retail demand. Foreign investment is also increasing, particularly in office space and tourism.

Foreign firms looking to reduce costs are increasingly moving operations to the Philippines, contracting business process outsourcing (BPO) companies to manage vital back office and client services. This is sparking demand for office space, particularly in Manila but also other urban centres such as Cebu. BPO workers are buying apartments close to work to avoid long commutes in heavy traffic, leading to new urban developments with integrated work-live-shop complexes.

Overseas workers’ remittances grew by 6.3% in the first half of 2011, and were forecast to exceed $18bn for the whole year. Many families are using this additional income to finance property purchases. With cash-rich banks offering increasingly competitive rates and developers providing generous and flexible contract terms, it has never been easier for middle-income Filipinos to enter the property market.

RESIDENTIAL: Makati central business district (CBD), Rockwell, Fort Bonifacio, Ortigas Centre and Eastwood are the major real estate development areas of the capital where the majority of higher-value properties are found. While the slowdown in 2008 and 2009 reduced new supply, strong demand resulted in rising land and rental values. Growth in residential stock has accelerated through individual condominium projects and mixed-use developments. The latter has resulted in a multitude of mini-cities forming, typically incorporating a transport hub, shopping mall and office space. According to Colliers International, 8900 residential units were expected to be added across Metro Manila during 2011 and total supply is expected to double from 2010 levels to reach 61,000 units by 2013. The largest developments include the Grand Emerald Tower (1064 units) and One Rockwell West (504 units).

HOT SPOTS: Driven by demand from the BPO and service sectors, combined with more competitive land prices than Makati CBD, the growth of residential units in Fort Bonifacio is expected to rise from 10,709 in 2010 to 18,575 in 2013, catching up with Makati CBD, which is expected to expand to 19,323 units. The surge in supply is forecast to increase vacancies in Makati CBD to as high as 12% by mid-2012, although vacancy rates in luxury residential units will remain lower as strong demand continues. High-end residential units in areas such as Rockwell and Eastwood are expected to maintain current vacancy rates of around 3%, while Fort Bonifacio and Ortigas City will be forced as high as 12% due to the number of new projects coming onto the market, particularly smaller units catering to BPO workers and the increasing number of speculators.

Rents are set to continue rising across the major CBDs, having recovered from the lows of 2010. Despite the new supply entering the market, rents in Fort Bonifacio rose 6% between 2010 and 2011, according to Colliers. Capital values are broadly similar between Makati CBD and Fort Bonifacio, at an average of $2431 per sq metre in the third quarter of 2011, although lower new supply and larger unit sizes are pushing absolute values higher in Makati. Even during the recent downturn, prices in the major areas have remained stable, rising further during periods of strong economic growth.

OFFICE: As growth continues in services and BPO, office space is rising rapidly across the major CBDs of Manila. With typical rents one-sixth of those in Hong Kong, the city holds a competitive advantage for international clients expanding back office service operations. Overall office space is expected to reach 6m sq metres in 2012, rising by 214,000 sq metres on 2011. Makati CBD has virtually run out of development land and stock is set to stay at 2.7m sq metres until completion of Zuellig Tower (57,000 sq metres) in early 2012 and Alphaland Makati Tower (38,000 sq metres) in 2013.

As a relatively new development Fort Bonifacio had just 485,693 sq metres of office space at the end of 2010. However, a further 374,175 sq metres is planned between 2011 and 2013 with major completions in 2011 including the Trade & Financial Tower (23,800 sq metres) and Sun Life Office Building (23,500 sq metres). Land supply in Makati and the Fort is being carefully managed by Ayala Land, so there is limited danger of oversupply, or of areas being pitched into competition.

Ortigas CBD remains desirable due to strong infrastructure, while Alabang and Quezon City have also experienced rising rents. New locations such as Manila proper and Pasay are becoming popular for BPO operations seeking lower rents and locations with alternative transport hubs outside of the central CBDs.

Makati CBD rents remained robust with a rise of 3.7% between 2010 and 2011 to $19 per sq metre for premium office space. Grade-A space increased by 10.3% and grade-B by 10.4%, indicating growing demand towards the mid-range, according to Colliers. Vacancy rates in premium buildings, as well as grade-B, remain low at just over 3%. This comes despite some sizeable relocations, including Mitsubishi Heavy Industries from BPI Buendia to Robinsons Cybergate Plaza, and the downsizing of Pfizer in the Ayala Life FGU Centre.

RETAIL: The general retail environment is being buoyed by robust economic growth, available credit and stable consumer confidence. Many new mixed-use developments with significant office components are being based around shopping malls. Despite warnings that retail is soon to experience oversupply, vacancies in malls remain extremely low. Retail units are also benefitting from new customers as non-retailers, including service centres and medical clinics, seek to integrate business opening times with shopping schedules. The main malls of Manila, including the Mall of Asia, Glorietta and SM City North EDSA continue to see high footfall and low vacancies despite the opening of the Greenbelt, owned by Ayala Land, the country’s biggest developer, a low-rise build with four interconnected malls and external courtyards filled with restaurants.

INDUSTRIAL: Industrial land use is undergoing transition as large-scale industry has seen plant closures, while the growing light manufacturing sector is basing itself across the 64 newly formed economic zones. Recent figures produced by the National Economic Development Authority showed export receipts grew by 19% in April 2011, fuelled by a rise in manufactured goods. Colliers estimates industrial occupancy in Regions IVA and IV-B, containing the major cities of Batangas and Cavite, at 88%, with land values rising by 7% year-on-year (y-o-y). Sites such as the Intel facility in Cavite, to the south of Manila, which closed in 2009, are typically razed to avoid property taxes, but sites are rarely sold or rebuilt on. Land acquisitions have reduced in recent years, as manufacturing firms now look to lease.

Filipinos say when Manila grows, so does Cebu. As the country’s oldest city, it is a centre of commerce and trade, and with the second-busiest seaport it is also home to most of the country’s domestic shipping companies. With an international airport, Mactan-Cebu International Airport, favourable climate and great beaches within easy reach of the main business areas, it is becoming an increasingly attractive destination for real estate developers. Cebu has attracted high-profile IT companies, BPO providers, retail banks and corporate offices through a skilled workforce and lower rental costs than in Manila. These include HP, Fluor Daniel, Dell and JP Morgan Chase. Between 2007 and 2010 office space grew by nearly 30%. Research by Colliers shows Cebu City office stock stood at 373,295 sq metres in 2010, with an estimated 60,000 sq metres to be added in 2011. Residential accommodation is growing similar to Metro Manila, with preference for small to medium-sized condominium units servicing middle- to upper-income earners. Supply is estimated at 3500 units, but expected to rise to 10,000 units by 2013 fuelled by several large-scale integrated projects from developers such as Ayala, SM and Filinvest.

TOURISM: Government plans to boost foreign visitor arrivals to 10m by 2016 will necessitate considerable growth in the supply of hotel and leisure facilities. Increased disposable income among young workers combined with package deals reducing internal travel costs should also help stimulate demand for rooms from domestic tourists. Expansion is already under way to build capacity, with Manila expected to add 969 rooms in 2011 to reach a total of 16,113 rooms, with a further 2893 rooms in 2012. Occupancy is estimated to have grown from 70% in 2009 to 80% in 2010.

Top spots for the tourism include Cebu, Boracay, Baguio, Davao and Camarines Sur. Cebu is expected to see an increase in tourists seeking gaming holidays, as the Philippines aims to become the Macau of Southeast Asia, catering to demand from Singapore, Japan, China and the US. Typical of new developments under way is the Megaworld Corporation’s site on the island of Boracay. The site will see five-star hotels, golf courses and shopping centres, and include design-your-own holiday chalets. The resort will benefit from the airport upgrade to Caticlan, a short boat journey away, currently being carried out by the San Miguel Corporation.

GETTING IT REIT: Real estate investment trusts (REITs) are intended to attract liquidity into the real estate market through tax incentives. The legal and regulatory framework was ratified by Congress in 2009, but the law has not been well received by developers or tax experts. To receive the tax incentives developers must list their firms on the Philippine Stock Exchange, offering 67% of shares to the public and retaining only 33%. Developers complain that such public exposure is too risky and major companies have dropped planned REITs. SM Prime Holdings, the country’s biggest mall developer, pulled a planned REIT, which would have raised $500m, due to the minimum public ownership rule. Other property giants, including Ayala Land and Megaworld, earlier expressed interest in setting up REITs, but have stipulated they want the public ownership requirement to be brought down to no higher than 33%.

Tax experts are also not convinced by the law, arguing developers can benefit from tax incentives and still effectively own the business by selling public stock to friends or cronies. They also argue the vehicle will reduce government tax revenue from real estate by at least P10bn ($227m) annually. Despite a long gestation period, it appears REITs will require consultation and further amendments before actually stimulating public investment in the real estate sector.

FINANCING: Banks in the Philippines tend to gravitate towards low-risk sectors and the historical stability within real estate means it makes up an increasing proportion of institutional investment portfolios. Overall credit available to the real estate sector is also growing, fuelled by rising land and property prices and careful control of new supply into the market.

Overall credit rose by 19.8% between June 2010 and June 2011, from P291bn ($6.6bn) to 347bn ($7.8bn), according to the Bangko Sentral ng Pilipinas, the country’s central bank. Credit has risen y-o-y at roughly the same rate of 18.8% since June 2008. While the residential segment has maintained a consistent 30% of total real estate credit, and expanded from P75bn ($1.7bn) to P104bn ($2.4bn), over the same period the proportion allocated for social and low-cost housing dropped from 11.9% of the total credit allocated in 2008 to 8.3% in 2011. Investment has been greater in higher-value properties and banks are extending credit to middle-income earners. Loans for property other than low-cost units rose by 53% from $1.1bn to $1.7bn in the two years to mid-2011, reflecting rising wages and more advanced credit rating systems easing access to the market.

Loans to developers rose by 43% and for residential units they increased from P50bn ($1.1bn) in 2008 to P71.5bn ($1.6bn) in 2011. Over the same period loans for office buildings and condominiums dropped from P18bn ($408.6m) to P15bn ($340.5m), showing both a slowdown in demand but also that developers are increasingly able to self-finance such projects.

OUTLOOK: With rising values and strong demand drivers real estate looks set to remain the primary investment target for Filipinos for the foreseeable future. Prices should level off as supply increases for both residential properties and office space. Retail looks to be well provided for and any additional space may result in oversupply, especially if consumption falls, but real estate remains an exciting destination for investors.