The Philippines' tourism sector poised for gains

With more than 7000 islands, nine UNESCO World Heritage sites, tropical biodiversity and a great range of cultural traditions, the Philippines is one of the most attractive destinations in South-east Asia. Since 2010 the country and its policy makers have made a concerted effort to attract more visitors, with intensive investments in marketing and infrastructure to support the tourism industry. While the country still attracts barely one-sixth the number of foreign visitors per year that regional powerhouse Thailand does, foreigners are increasingly staying longer and spending more during their visits. Foreign and domestic tourists alike will have more reasons to linger in the next few years, when transport infrastructure to far-flung beach resorts improves and the development of a $6bn complex of casino resorts reaches completion.

Emerging On The International Stage

The country has begun to show off its natural and historic assets to the world. It kicked off 2015 with a four-day visit by Pope Francis, and then hosted 80 meetings of government officials throughout the year as chair of the 21-member Asia Pacific Economic Cooperation (APEC) forum. Up until the meeting of the heads of government in November in Manila, all APEC meetings among senior-level officials took place at provincial venues with some tourism appeal. These included Bataan, Boracay, Cebu, Clark, Iloilo City and Tagaytay.

Since the first year of President Benigno Aquino III’s six-year administration and the 2010 launch of his National Tourism Development Plan 2011-16, the country has been renovating airports and historic churches and upgrading access roads. It also built a convention centre in Iloilo City, established designated sustainable tourism zones throughout the country and launched a cluster of gaming resorts alongside Manila Bay. Throughout this five-year period, annual capital investment in travel and tourism increased more than 40%, reaching P90bn ($2bn) in 2015, according to the World Tourism & Travel Council (WTTC). Travel and tourism directly accounted for some 4.2% of GDP in 2015, with this expected to grow to 5% in 2016.

There have been many memorable international promotional efforts in recent years, including MTV music videos and print ads, as well as television and online campaigns. Debuting in 2012, the country’s tourism slogan initially proclaimed, “It’s more fun in the Philippines”. The 2015 theme, “Visit the Philippines”, highlighted the attractions of individual provinces, such as the Iloilo’s historic trading port and Spanish heritage, Davao’s “highlands and islands”, and the Palawan islands’ scuba diving and underground river. In 2015 readers of Condé Nast Traveller magazine selected Boracay as one of the 10 best party islands in the world, while guidebook publisher Lonely Planet named the Philippines as one of the ten best countries to visit in 2015.

Growth Results

Even though visitor targets were difficult to meet, the investments have paid off, with foreign visitor arrivals increasing an average of 8% per year in the past five years, according to the Philippine Statistical Authority (PSA). The number of domestic travellers has been growing much faster – by an average of 14% annually – thanks to the greater reach of budget airlines and a young and growing middle class. Filipinos constitute 90% of overnight travellers, yet, according to the WTTC, only 76.5% of tourism receipts.

Next Phase Of Expansion

A key question that sector participants raise is whether the momentum that sustained the sector through the 2010-15 period will be maintained after the transition of presidential leadership in 2016. The country is expected be able to reach the 2016 target of 56m domestic travellers, since that number was already exceeded in 2015. However, tourism officials in both the public and private sector have indicated that international arrivals are expected to be lower than the original 2016 target of 10m.

Compared to its neighbours, the Philippines has room to catch up. Thailand and Malaysia each greeted nearly 30m foreign visitors in 2015. Given current global trends, it could take a few years for the Philippines to reach such levels. Data from the Pacific Asia Travel Association (PATA) projects 5.4m foreigners will visit the Philippines in 2016, and the numbers are expected to first surpass 6m in 2018. “The Philippines is known for its hospitality and warmth but we need to improve services, especially airport and road infrastructure,” Michelle Reyes, president of PATA, told OBG. “Right now it is difficult to do a tour in one day of Makati and Manila, and traffic prevents you from seeing much.”

Visitor Targets & Spending

“We may not have the numbers, but we have the receipts,” said CésarCruz, president of the 365-member Philippines Tour Operators Association. From 2010 to 2015, long-haul visitors on average increased the number of nights they stayed in the country from eight to 10.5,he noted. Short-haul visitors, meanwhile, lengthened their stays from 1.5 nights to almost three nights over same period. Short-haul visitors include domestic travellers as well as those from Korea, China, Hong Kong and Malaysia.

With the longer stays, travellers are also increasing their spending on trips. Total expenditure by Filipinos on travel increased 30% between 2013 and 2104, according to the “Travel and Tourism Competitiveness Report 2015” from the World Economic Forum (WEF). The report states that “budget airlines and the booming outsourcing sector have enabled millions of newly middle-class Filipinos to become tourists in their own country”. This increase in domestic activity has paid dividends for the sector. According to the Philippines Department of Tourism (DoT), in the first seven months of 2015, visitor receipts increased 2.4%.

Tourist Spend

Total expenditures by foreign tourists have been on the upswing, from an average of P150bn ($3.3bn) in 2010 to P275bn ($6.1bn) in 2014, according to the PSA. A foreign visitor typically spends $1062 per trip compared with $800 a few years ago, according to Domingo Ramon Enerio III, chief operating officer of the Tourism Promotions Board (TPB). Overall growth in foreigners’ spending has been slower than that of Filipinos, however. The WTTC forecast that it would actually fall 0.3% in 2015, then grow 5% annually in the coming decade. Revenue from foreign visitors – so-called inbound tourism – now ranks as Philippines’ third-largest export; it has surpassed data processing, which ranked third two years before. Following “miscellaneous services” and semi-conductors, inbound tourism generated P275bn ($6.1bn) in 2014 by the WTTC’s estimate. About one-quarter of tourists’ expenditures were allocated for accommodation, a share that has been growing in recent years; meals and shopping take up the next largest shares.

Source Markets

Korean nationals are consistently the largest group of visitors to the Philippines. They regularly constitute almost one-quarter of all foreign tourists. More than a million Koreans visited in 2015. Americans are the second-largest group, numbering nearly 780,000 in 2015. According to the Office of Tourism Planning, Research and Information Management, the nationalities of other leading visitor groups in 2015 were, in order, Japanese, Chinese, Australians, Singaporeans and Taiwanese. Britons continued to be the largest group of European visitors, totalling about 155,000; they ranked 10th overall, having been overtaken by Malaysians during the 2014 season. Hotel consultancy firm HVS forecasts that, from developed markets, Australian numbers have the most potential for growth.

While acknowledging that the Aquino administration’s original target of 10m visitors by 2016 is ambitious, the DoT is still aiming to increase tourism revenue to between $6bn and $8bn during the year, by focusing on high-yield source markets, such as Japan, the Middle East, Russia and Europe. Tourists from these countries typically spend an estimated $1000 during their visits to the Philippines. The 2016 target for visitors from Japan is 1m, more than double the number in 2015.

To encourage Russian visitors, since August 2013 the Philippines has eased the visa process and Russian tourists need no visa to enter the country and can stay for 30 days. The new rules may have come too late, however, given the plunge in the rouble’s value against major currencies since 2014. In Thailand, Russian tourists’ favourite South-east Asian country, the visitor numbers peaked at 1.7m in 2013, sliding to 756,000 in 2015. Russian visitors to the Philippines also peaked in 2013, numbering 35,400, but dropping to 8700 in 2015.

Easing Visa Requirements

The lowering, or in some cases the complete dropping, of visa barriers between the ten member states of ASEAN is evidence of increasing regional cooperation and integration. Visa rules for the Philippines are among the most open, allowing citizens of the other nine countries to enter the country without a visa and stay for up to 30 days. The Philippines has generally been supportive of a single tourist visa that would be accepted by all member states of ASEAN, but the mainland members have been more reluctant to give up sovereign control of the process.

China & India

In April 2015 the Philippines introduced an innovative scheme to encourage Indian tourists, a fast-growing segment in East Asia: Indians are now automatically granted visa-free entry to the Philippines if they already have a valid visa for Australia, Canada, Japan, Singapore, US or some Western European countries. For the full year of 2015, 61,000 Indian tourists visited the Philippines, but it is anticipated that this will rise.

In recent years, the Philippines has also successfully promoted tourism from China, another regional source market that is outpacing its peers. The integrated casino resorts in particular are hoping to attract a large number of visitors from China. While the Philippines has not been as successful as Thailand, Vietnam or Singapore, the number of Chinese visitors have nonetheless risen substantially. The Philippines received 155,000 Chinese tourists in 2009 and by 2015 this had more than doubled to 416,000, according to PATA.

However, growth has not been steady, because Chinese group tours stay away when tensions rise between the two countries due to Chinese incursions in coastal waters off the Philippines. If current growth trends continue, however, by 2017 Chinese visitors could surpass the number of American visitors and reach 1m by 2019, PATA forecasts.

World Rankings

Travel and tourism were directly responsible for 11.2% of the Philippines’ GDP in 2014, nearly $32bn; the WTTC forecasts that it will rise by at least 5% annually in the following ten years. This growth will create more jobs for Filipinos, many of whom already work in hospitality industries overseas. According to official sources the travel and tourism sector directly supported 1.26m jobs in the Philippines in 2014. Taking into account both direct and indirect jobs, it is estimated that tourism supported some 4.3m jobs in 2015. Furthermore, the number of jobs in the sector is projected to rise by around 2.6% per year over the coming decade, according to the WTTC, bringing the total to 5.3m by 2025, equivalent to 11.3% of total employment.

For international tourism competitiveness, the WEF upgraded the Philippines to 74th overall in the world, up from 82nd place only two years before and just ahead of South-east Asian neighbour Vietnam. At the individual category level, the Philippines ranked behind Vietnam for safety; among 141 countries, Philippines placed at 128th, just behind Russia and Jamaica. In terms of relevant human resources, the Philippines was in 62nd place, and 86th for information and communications technology readiness. In terms of its prioritisation of the tourism sector, the WEF ranked the Philippines as higher than the average among South and South-east Asian countries, ahead of Thailand and Malaysia, but behind Singapore and Indonesia.

Looking at its emphasis on tourism and travel, the Philippines was ranked 27th in the world by the WEF, behind Singapore and Thailand among the South and South-east Asian countries. In terms of valuing cultural resources, promotional campaigns have emphasised historic sites and the country has moved to restore the churches of Bohol devastated by a typhoon and earthquake in 2013; however, the WEF still ranked the country a low 62nd. The Philippines also ranked a low position of 122nd in the world for environmental sustainability, behind neighbours Thailand, Malaysia, Laos and Myanmar.

Infrastructure Challenges

As for tourism infrastructure, the WEF ranked the Philippines a relatively low 82nd, far behind Thailand (21st) and Malaysia (68th), although comfortably ahead of Indonesia (101st). The country particularly ranks poorly for its air services infrastructure; at 67th overall, it is just ahead of Vietnam but far behind Thailand (17th), Malaysia (21st), China (25th), and even India (35th), according to the WEF. Recent refurbishments at the flagship Ninoy Aquino International Airport in Manila have renewed its appearance, but there is little room to improve efficiency when only two runways serve four terminals. Under Aquino’s administration little progress was made in developing alternative sites to service the capital. His successor faces the challenge of upgrading Clark Airport, which lies 95 km north of Manila, or replacing Cavite Airport, 30 km south of the city. An expressway between Clark and Makati is under way, but critics say a fast train between Clark and Manila would be the ideal solution. Currently under discussion is a public-private partnership to construct a rail line linking Cavite to Manila.

New Gateways

Transforming domestic airports into global gateways for the country has facilitated growth in international visitors, of whom 99% arrive by air. Upgrades to airports in Davao City and Iloilo City in the past few years have enabled direct charter flights from Singapore and Hong Kong. Clark serves scheduled flights from Doha, Hong Kong, Kuala Lumpur, Macau, Seoul and Singapore, as well as domestic destinations. Renovations to Legazpi City’s Bicol Airport, 470 km south of Manila, are expected to enable direct charter flights from China in 2016. The airport will open up the Bicol region, its national park, active volcano and whale shark sight-seeing. Meanwhile, long accustomed to serving both scheduled and charter flights from throughout East Asia, Mactan-Cebu Airport in 2016 is slated to begin receiving long-haul flights when three Philippines Airlines begins flying between Cebu and Los Angeles, California. More direct international flights to Cebu, Boracay and Davao may also be on the way.

Aside from improving infrastructure, developing human resources may also prove important for the future of the tourism industry. “A main challenge to address besides infrastructural concerns in the country is to develop human capital for tourism,” Al Legaspi, president and CEO of the resort developer Ten Knots Development Corporation, told OBG. “Fortunately, the Philippine culture is hospitable, welcoming and English-speaking, however, expertise needs to be developed further.”

Tourism Promotion

Every September Philippine tourism operators and government agencies celebrate Tourism Month, with events that promote properties, destinations and tours to buyers from at home and abroad. The annual marketing congress, Philippines Travel Exchange, attracted 192 buyers from 30 countries and 220 domestic sellers in 2015. The main feature was the business-to-business event, Travel Exchange (TRAVEX), in which local suppliers had 15 minutes each to pitch their products. The Philippines Tour Operators Association and government agencies promoted their services to domestic companies at the Philippine Travel Mart. “We need to offer new destinations in order to encourage Filipinos to visit their own country as a viable option for holidays, instead of travelling overseas,” Enerio told OBG. Under Aquino, the pioneering Philippine Convention and Visitors Corp was subsumed under the TPB, which is now responsible for attracting meetings and conventions to Philippine venues. Also held in September, its premier event, the fifth annual Meetings, Incentive Travel, Conventions, Exhibitions and Events Conference ( MICECON) event, was held over two days at the Manila Marriott in the Resorts World casino complex near Manila airport. Attended by 800 representatives of international organisations, governments and companies, MICECON offers educational presentations for tour operators, hotel marketers, event managers and local government units, as well as opportunities for seller-buyer appointments.

Back in 1982, Manila was rated the top Asian city for conventions by the Union of International Associations. For 2014, its successor organisation, the International Congress and Convention Associations (ICCA), ranked Manila at 23rd place among Asian, Pacific and Middle Eastern cities, having hosted 22 ICCA-certified meetings that year, the same number as Doha and Abu Dhabi. In 2014 Singapore continued to rank as number one in the region, with 142 meetings. Worldwide, the Philippines ranked 50th, having hosted 46 ICCA-certified meetings over the course of 2014.

As the city’s offerings have become better known, Manila’s new integrated casino-entertainment resorts may push those meeting numbers upward. Resorts World Manila provides convention facilities as does the City of Dreams, which opened in February 2015. Along with the scores of meetings associated with the Philippine leadership of APEC, major events held in the country in 2015 included the ASEAN Law Association’s General Assembly, ASEAN Corporate Social Responsibility Awards, Asia Pacific Retail Conference, PATA New Tourism Frontiers Forum, ASEAN Corporate Governance Awards, and the UN Refugee Agency’s Asia Pacific Regional Seminar on Translating International Human Rights Commitments into National Realities.

Luxury & Upscale

In both Manila and around the country, hotel room occupancy since 2010 has hovered above 66% annually, according to STR Global, a hotel segment consultancy. During the same period, room supply increased by about 7% annually. Demand for rooms has kept pace and sometimes grown faster than supply, which Hong Kong consultancy Horwath HTL attributes primarily to demand from the business sector.

Room demand fluctuates with the seasons, with occupancy rates reaching the mid to high 70’s in the busiest travel month of February and sinking to the low 60’s in the rainy season of June. Since Typhoon Haiyan in 2013, both daily rates and occupancy have crept up in luxury and upscale Manila hotels; hotel consultancy HVS forecasts that occupancy in these segments could reach 74% in 2016.

Although the Philippines has not attracted as many visitors as most of its Asia and Pacific neighbours, it has outperformed many of them in terms of hotel occupancy rates and revenue per room. While generating more revenues than hotels in Kuala Lumpur, Hanoi, Bangkok and Jakarta, Manila hotels in general are not more profitable, due to higher expenses. Horwath HTL concludes that the primary outputs are salaries for food and beverage staff and utility costs, especially for electricity.

Revenue per room in the very top tier of Philippines hotels, which Horwath ranks as “luxury” (roughly equivalent to six-star), grew 5% between the third quarter of 2014 and the third quarter of 2015, according to the firm. The fastest revenue growth, however, was exhibited by the “upper mid-scale” category (roughly equivalent to three-star), which grew 11% during the same period. The Philippines as a whole is expected to add 5768 hotel rooms in 2016, bringing the total to 57,233, according to projections of STR Global. More than half of these will be in the Metro Manila area: the urban area is expected to add 4617 hotel rooms in 2016, bringing the total to 25,341 by the end of the year. In late 2015 Horwath estimated that 14,389 rooms in 49 hotel projects would be added to the national supply within the next few years. Of these, it estimates that 14% of rooms will be in the top luxury category and 20% will be in the “upper upscale” five-star tier. The largest share, almost one-third, will fall in the unknown “independent” category.

Among the Metro Manila hotels opening in 2015 were a Conrad, Crowne Plaza, Grand Hyatt, Nobu (in casino resort City of Dreams), Novotel, and two Mercure and two Holiday Inn hotels. Within the next few years, hotels under the management of Novotel Emerald Suites, Okura, Radisson Clark, Savoy, Sheraton, Shangri-La, Swiss-Belhotel and Westin are scheduled to open doors in the capital area. Beyond Manila, activity is more subdued. A Courtyard by Marriott is opening in 2016 in the 400-year-old Iloilo City, the urban centre of Panay Island and the Western Visayas. North of Iloilo City, Philippines’ own Crimson Resorts will launch two five-star holiday properties in 2017: one at Boracay and the other at Yapak, a diving resort north of Boracay. Mö ven-pick and China’s Plateno Group are also set to open five-star properties in Boracay in 2016, while a Dusit Princess and a Sheraton are scheduled to open in Mactan, Cebu, some time in 2018.

Hotels & Real Estate

The 64-story Shangri-La Hotel opening in Bonifacio Global City in 2016 is set to be a landmark and the sixth-tallest building in the country. Befitting a hotel which claims six-star extras, it has a number of high-end restaurants and retail shops, five fitness zones (including an NBA-grade basketball court), and Leadership in Energy and Environmental Design (LEED) Gold certification as a green building. Certification by either LEED, the US green building standard, or by the Philippines’ Building for Ecologically Responsive Design Excellence green building rating system has become a requirement for new offices or hotels being constructed in Bonifacio Global City.

Commonly known as “BGC”, Fort Bonifacio or “the Fort” for short, this carefully planned district has sprung up only since the mid-1990s on a former site of the Philippine army headquarters. BGC’s centre is about 5 km south-east of Makati, still the commercial heart of the urban area. At the turn of the century, as call centres and other business processing outsourcing (BPO) companies began pouring into Manila, many set up here as did national and regional headquarters for multinationals such as Accenture, Google and Coca-Cola. International schools, a hospital and leisure centres soon followed.

The multinational companies require buildings that minimise carbon emissions and conserve energy as part of their corporate social responsibility programmes, which has had a knock-on effect for other buildings in the BGC.

The Shangri-La will also have 96 luxury condominium units on the upper floors of the property. This hotel-condo combination is indicative of a wider trend in the Philippines and the South-east Asia region, according to Bill Barnett, managing director of consultancy C9 Hotelworks. In the past, local property developers partnered with international hotel companies to build and manage condos in holiday locations. In the Philippines, they were primarily in Boracay. Now, due to escalating urban land prices, these “hotel and real estate marriages” are emerging in cities. Barnett estimated there are 11,000 such residential units in the Philippines, virtually all in the Manila area and Boracay. Most of the buyers are Filipinos, including Filipinos working overseas who constitute a large portion of all buyers of housing in the Philippines. Other than those that formerly hold Philippine citizenship, foreigners cannot own real estate in the Philippines. There is, however, an exception for condo units: foreigners can own up to 40% of the units in a single project.

Foreign Ownership

According to the DoT, “100% foreign equity may be allowed in all areas of investment except those reserved for Filipinos by mandate”, which typically include strategically sensitive sectors such as national defence and therefore do not impact tourism investments. Foreigners may lease land for an initial period of 25 years, renewable in 25-year increments up to a total of 75 years. However, this rule only applies to those investing at least $5m, 70% of which must be invested within the first three years. Similarly, foreigners can own 100% of a restaurant – but only if they fully invest $2.5m.

For foreign projects involving investments of $5m on up, the government promotes four locations as special economic zones for tourism development: Metro Manila, Boracay, Cebu City and Mactan Island. With a population close to 1m, Cebu City, on the large island and province of Cebu, is the country’s second-largest base for BPO firms and slated for much more growth, and only 14 km away is the resort island of Mactan, a key attraction for the area. All four locations are already the principal areas where international hotel brands have properties. The incentives for tourist-oriented enterprises investing in these zones include income tax holidays, resident visas and 100% foreign ownership.

Outlook

The Aquino administration made visible progress throughout its six-year tenure to place the Philippines on the international tourism map and make tourism an engine of economic growth. With the end of Aquino’s term in the first quarter of 2016, there is some concern whether his successor will share the same level of commitment. In particular, airports and other transport infrastructure in the Metro Manila area still requires urgent attention. However, the main drivers of tourism growth now have a momentum of their own. Existing promotional campaigns and infrastructure upgrades target half a dozen regions that now have tours and facilities built around them. Furthermore, the parameters for developing the beaches and natural resources of the Palawan islands in a sustainable way have also been established.

The Resorts World integrated gaming complex located near Manila’s airport is already entertaining visitors waiting to fly to holiday destinations, as well as attracting conventions and international meetings. Two of the four billion-dollar casino complexes that will constitute Entertainment City on Manila Bay have also already opened, and the investors backing the remaining two should be on course to complete all construction by early 2019. While the pace of inbound tourism has yet to build up steam, the double-digit annual growth in Filipino travellers will continue to stimulate demand for hotel rooms.

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The Report: The Philippines 2016

Tourism chapter from The Report: The Philippines 2016

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