BMI View: : Developments in the Business Processing Industry (BPO) and contributions from Overseas Filipino Workers (OFW) remittances will maintain the view of a strong peripheral economy in the Philippines, ensuring the commercial real esta te industry remains resilient, with particular opportunities looking to arise in the retail and office sub-sectors, despite laggards from weakening economic dynamics.
After nominal growth of 20% in 2012, the BPO industry of the Philippines is estimated to gross revenues of upwards to USD25bn by 2016. According to these figures, the Philippines' BPO industry will account for approximately 10% of the nation's GDP. Surpassing India as the largest BPO industry in the world (as of 2010), considered as location of choice for subsequent investment owing to the attraction of a proficient English speaking, highly educated, cost-effective labour pool. Call centers have emerged as plain providers of email response and managing services, and now constitutes a substantial source of employment in the country. We expect both industries to continue to flourish in the wake of the surprise economic slowdown witnessed in Q115 as investor sentiment remains strong, and will continue to do so over out forecasted 2015 to 2019 period.
Cebu city is the hub of the BPO industry, and is witnessing increasing investment activity as a result, with a steady pipeline ahead. Manila, the capital, is highly recognized as the dominant retail real estate sector location; seeing to a rise in non-essential revenues and promoting a healthy growth in the NCP region economy. Makati city, the financial hub of the country, looks to dwindle in terms of developments and potential investments regarding all areas of commercial real estate attributed to the factor of the city containing the lowest vacancies across all three sub-sectors we cover, a trend that is influencing high demand but not spurring construction activity, even forcing some corporations to seek real estate in other cities that offer better returns on investment, such as Manila and Cebu.
BPO industry growth will spur continued office real estate developments and keep investor attention strong in this sector. Manila and Cebu city look to be the primary locations of choice, owing to their ample supply and steady demand chain. Domestic conglomerates look to capitalize on the available space with increasing condominium project expansions into each respective area, however we expect opportunities to surface in the wake of growing demand allowing potential investors to penetrate the market.
The retail real estate market is expected to attract more development activity due to increases in OFW remittances, which have shown to have a huge impact on domestic spending power and this is quickly transforming the purchasing habits of the young and large population; for more contemporary retail choices. These changes affect the retail environment by presenting new opportunities for willing investors, not only in Metro Manila but also in second-tier cities.
The industrial segment has shown weaker performance when compared to the office and retail segments; although, we do anticipate some growing industrial production in the medium term, boosted from domestic corporation demand for industrial space. With adequate support, on the back of the ASEAN group integration allowing a common market and relatively stable monetary policy, the Philippines has the potential to turn into a regional export hub, which will further fuel expansion in the segment.
Some areas of weakness remain; including a severely underdeveloped real estate investment trust (REIT) market and the potential for political instability. The government has recently begun tackling the pervasive issue of tax evasion; and while this is helping improve transparency in the business environment, foreign direct investment remains fairly low as a result.
Developments in the Business Processing Industry (BPO) and persistent contributions from Overseas Filipino Workers (OFW) remittances will maintain the view of a strong peripheral economy in the Philippines, ensuring the commercial real estate industry remains resilient to laggards from weakening industry dynamics; attributed to deceleration in the Chinese economy and a stronger US dollar that will affect the level of exports, which constitutes a pertinent issue considering the Philippines is a newly industrialized country and would therefore directly affect Industrial real estate as a result. Opportunities look to be rife in the sub-sectors of the real estate industry over the remainder of the 2015 period and into 2016, owing to substantial project completion in office and retail real estate. It is important to contemplate the fact that there is still no evident REIT market, which would look to provide the economy another boost in revenues. New legislative framework would look to amend this detail and investors would look to remain aware of this in parallel to the post 2016 presidential elections, which could potentially throw volatility into developments concerning delay in infrastructure projects and the general approach to foreign investment.
Overall, domestic investors look to benefit in the short term. Although, amid increasing foreign relations and easing restrictions, there is a promising environment expected for foreign corporations to break into the market over the remainder of 2015 and leading up to the 2019 forecast period, with the greatest opportunities arising in late 2016 and onwards.