BMI View: Ongoing improvements in the Philippine's economy have been supported by the rapidly expanding business pro cess outsourcing (BPO) industry, which is helping boost demand for commercial real estate across the country. We see particular opportunities for investors in the office market due to the strength of the BPO industry, as well as retail developers looking to benefit from the country's increasing levels of private consumption.
Despite remaining underdeveloped when compared to Thailand and Malaysia, the Philippines' commercial real estate industry has achieved continued growth thanks largely to business process outsourcing (BPO) which is fuelling a rapid expansion in the services sector. The success of this industry will significantly influence the overall strength of the office real estate segment, as well as indirectly on the retail segment.
We are expecting to see Real GDP growth of 5.9% in 2015 on the back of significant levels of inward remittances and this will bode especially well for the retail sector. Cash transfers from workers abroad rose by 5.8% year-on-year (y-o-y) to USD11.4bn in H114. Remittances 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. These changes in the retail environment are presenting new opportunities for willing investors, not only in Metro Manila but in second-tier cities.
The industrial segment has shown weaker performance when compared to the office and retail segments; however, we expect to see growing industrial production in the medium term, which should boost demand for industrial space. With adequate support from both domestic and international investment, the Philippines has the potential to turn into a regional export hub, which will further fuel expansion in the segment.
A relatively stable monetary policy, increasing tourist numbers as well as stronger economic ties within the ASEAN are also helping cultivate a clear sense of optimism in the commercial real estate sector. 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.
In light of this, we are optimistic that the commercial real estate industry will continue to be a regional outperformer, with strong demand expected to support consistent rental rates rises through 2015 and beyond, as well as providing growing opportunities for new developments. While we expect demand to remain strong in the cities we cover, Manila (the capital), Makati (the financial centre) and Cebu (a centre of BPO and industry), as these cities' real estate sectors become developed, interest will likely rise in developments elsewhere in the Philippines.
Filinvest Land Inc. (FLI) grew its profit by 19% to PHP 2.9bn year on year during Q314, pushed by strong revenues from its residential and BPO office developments.
Resort World Bayshore City, Inc. a subsidiary of Philippines-based Travellers International Hotel Inc, has entered into a management agreement with Hotel Okura Co. Ltd to open a luxury hotel in Manila by 2018. The hotel will be part of Bayshore City Resorts World, a large-scale integrated resort, which will be the last of four multibillion-dollar private-sector casinos licensed by the Philippine Amusement and Gaming Corporation to create a gaming zone.
Property developer Vista Land & Lifescapes Inc. saw a 12 % year on year growth in its Q314 net profits to PHP4.2 bn, backed by a double-digit expansion in revenues from core housing products.
Key BMI Forecasts
Top-end office rents are forecast to reach USD29 per square metre (sq m) per month in Manila, USD26 in Makati and USD19 in Cebu in 2015, with a forecast rise of 2-3% in Manila and Makati in 2016.
In 2015, top-end retail rents are set to be the highest in Makati, at USD33 per sq m per month, expected to increase by 1-2% in 2016. No rises for 2016 are forecast in Manila and Cebu, where top-end retail rents are expected to remain at USD31 and USD29, respectively.
In 2015, top-end industrial rental rates are forecast to reach USD9 per sq m per month in Makati, USD8 in Cebu and USD6 in Manila, with no increases expected for 2016.