as published in property-report.com By Al Gerard de la Cruz

Donald Trump was on typically succinct form on a recent visit to the Philippines when he called the country a “most prime piece of real estate.”

The US president was referring to the nation’s strategic importance as a military ally in southeast Asia. However, he could just as easily have been talking about the property sector in the archipelago – which is benefitting from lavish infrastructure spending, stable growth and interest from foreign investors.  

The market is also encountering a different kind of cycle at home: one more contingent on the owner-occupier instead of the casual investor, with analysts stating that the current property boom is based on real demand rather than the vagaries of speculation.  

Any talk of residential real estate in the Philippines requires mention of impressive recent economic stats. In 2017, the country posted a full-year GDP growth of 6.7 percent, among the fastest rates in southeast Asia. Consumer spending, which represents 70 percent of economic activity, is experiencing record year-on-year growth of 6.1 percent.

“The Philippines continues to be one of APAC’s leaders in economic growth, backed by robust consumer spending from the young demographic,” says Sigrid Zialcita, managing director for research at Cushman & Wakefield Asia-Pacific.

“Moreover, the current administration is boosting government spending, stressing the importance of infrastructure spending,” she adds, referring to President Rodrigo Duterte’s programme – known as his Build, Build, Build policy – which is jacking up infrastructure outlay to PHP8.44 trillion (USD168 billion).

Homes in the luxury segment posted the highest average annual pricing growth in 2017, rising 28 percent to reach PHP350,000 per square metre in Metro Manila’s various CBDs, according to real estate consultancy Santos Knight Frank. Meanwhile, the take-up of pre-sold condominium units in the metropolis increased 24 percent to 52,600 units, the highest figure ever recorded by Colliers.

Overseas Filipino workers (OFW), one of the nation’s traditional markets for housing investments, sent a record USD28.1 billion in remittances last year. Foreign direct investments (FDI) also soared to a record-breaking USD2.017 billion in October, as investors from Singapore, Hong Kong, China, Luxembourg, and the US pledged to pour capital anew into the country.

The government has pencilled economic reforms that analysts perceive to be catalysts for a further influx of foreign capital. These include a planned reduction of the minimum paid-up capital requirement for foreign retailers to establish a presence in the country; the removal of restrictions against 100-percent foreign-owned investment houses; and the easing of prohibitions on foreign contractors participating in property projects.

So far so promising, it must be said. However, the Philippines has long had a reputation for being on the chaotic side. And still overtones of anarchy threaten its veneer of newfound stability. Credit watchers Moody's and Standard and Poor's flagged the country for political risk in 2016 as President Duterte declared a bloody war on drug traffickers that has taken at least 12,000 lives to date. 

The siege of the southern city of Marawi by ISIS-linked terrorists last year and Duterte’s subsequent declaration of martial law also spooked international locators. Office take-up by BPOs in Metro Manila plummeted 26 percent to 385,000 sqm last year as a result, data from Leechiu Property Consultants shows.

The drama has not yet turned into a full-blown crisis though – at least when it comes to international perceptions of Duterte’s distinctive brand of tough love.  In December Fitch upgraded the country’s sovereign credit rating with the admission that there is “no evidence so far” that the war against the illegal drug trade has undermined investor confidence.

“Despite the political risks, it’s still business as usual given the attractiveness of the Philippines as an investment hub within Asia-Pacific,” says Zialcita.

Duterte has charted an unprecedented path in diplomatic allegiances, vacillating from affinity with the Trump presidency to strategic dalliances with China, the Philippines’ territorial rival over vast tracts of real estate in the South China Sea. On his watch, the Philippines became a signatory of the One Belt, One Road (OBOR) Initiative, China’s sweeping global construction spending spree.

WITH A GROSS RENTAL YIELD OF BETTER THAN 6 PERCENT, THE PHILIPPINES OUTPERFORMS CITIES IN CHINA AND ALMOST ANYWHERE ELSE IN ASIA EXCEPT INDONESIA

Chinese buyer inquiries in the Philippines in fact surged 246.4 percent in the fourth quarter of 2017 from the same period a year earlier, according to Chinese property portal Juwai.com.

“[Chinese investors] believe their investments are sanctioned by the Chinese government, which favours OBOR-related countries,” says Juwai.com CEO Carrie Law. “They also believe that the massive development projects and growing commercial ties will lead to price growth in the Philippines that will reward any property acquisitions made in the near term.

“Partly this is driven by returns. With a gross rental yield of better than 6 percent, the Philippines outperforms cities in China and almost anywhere else in Asia except Indonesia,” she adds.

Indeed, when it comes to rental yields the nation’s capital outshines Bangkok (4 percent), Singapore (2.9 percent) and Shanghai (2 percent). “Manila today is the Hong Kong and Singapore of 30 years ago,” says Santos Knight Frank CEO Rick Santos.

Another factor that is set to provide a boost to the property sector both directly and indirectly – given the financial bonanza it will hand Duterte’s infrastructure programme – is the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the most comprehensive reform to the country’s tax regime in 20 years. Among other show-stopping provisions, the law exempts those earning below PHP250,000 a year from paying personal income taxes and higher-value properties from estate taxes.

“The law may boost rental demand due to the higher purchase power from decreased personal income taxes, coupled with the increased threshold for value added tax (VAT) exemption for housing lease transactions from PHP12,800 to PHP15,000,” says Zialcita. “This in turn may encourage investors to purchase more properties in anticipation of a stronger rental demand.”

TRAIN does remove VAT exemptions from residential properties costing between PHP2.5 million and 3.2 million, which could lead to higher contract prices for homes. That said, TRAIN primes real estate investors for longer-term bonanzas. Implementation of the law is estimated to net the government close to PHP90 billion in additional revenues this year, around 70 percent of which will be allocated to Build, Build, Build.

“These infrastructure projects should unlock land values in the countryside,” says Joey Roi Bondoc, research manager at Colliers International in the Philippines.  “Coupled with decentralisation, this ramp-up of public infrastructure outlay should open opportunities for firms engaged in construction, and operation and maintenance (O&M) of key transport infrastructure.”

Such a “golden age of infrastructure,” as Bondoc calls it, will compel developers to pursue more integrated urban township projects in provinces near Metro Manila such as Cavite, Laguna, Bulacan, and Pampanga, where road networks are aggressively expanding.

Duterte appears to be as committed to upgrading Metro Manila’s infrastructure as decentralising wealth from the capital. The government has unveiled plans to expedite construction of Metro Manila’s first underground rapid transit system as well as complete the Bonifacio Global City-Ortigas Center Link Road and C-5/Katipunan Viaduct projects.

With their live-work-play-shop components, integrated urban townships have become even more attractive bubbles of calm to property seekers. Development giant Megaworld, a pioneer in the construction of townships and cyberparks in the late 1990s, expects a great knock-on effect from the recent raft of government programmes.

“With the tax reform programme in place and consumer spending on the rise, we see more people investing and buying residential properties this year,” says Megaworld International senior vice president Marivic Acosta.

“The growth of the BPO and POGO (Philippine Offshore Gaming Operators) in office leasing will also have a domino effect on the residential market, especially in townships.”

The private sector is increasingly chipping in to power the infrastructure drive in the capital. Ayala and construction firm Eton Properties are jointly building a bridge that will link Pasig to Quezon City. Alliance Global Group Inc, Megaworld’s parent company, is using its capex programme to build Skytrain, a two-kilometre monorail, at no cost to the government. 

Trump pronouncements often struggle to elicit credulity from listeners. But with such sanguine macroeconomic fundamentals, hyperbole around Philippine real estate is starting to suspend disbelief. Whether it’s a finishing touch on a 57-storey Manila skyscraper or a gargantuan Belt and Road agro-industrial estate, property developments in the Philippines are currently well placed to thrive.