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Trample Thy Sacred Shores

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Trample Thy Sacred Shores

Even with economic forecasts painting the third quarter of 2010 as a promising period for the real estate sector, not everyone is breaking open wine bottles or cutting red ribbons to launch new buildings.

The past two years have been a strain on the real estate industry, with many developers building too many office spaces only to find their ‘for lease’ signs gathering dust.

Developers, assuming that the business process outsourcing industry will expand over the next few years and due to rising construction costs, hoarded construction materials and hardware supplies and erected office spaces one after the other. But, much to the dismay of developers, contact centers deferred their expansion in Manila. Some chose to set up shop in Davao, Cebu, Cavite, and Laguna instead. And then prices of steel and cement started to slide back down.

Developers found it easy to blame the global financial crunch, some, Murphy’s Law, but consultancy firms believe otherwise. After all, it’s just a matter of supply and demand.

Down the Pipeline

Based on the Knowledge Report, the official market overview publication of real estate consultancy firm Colliers International, land values in the Makati Central Business District (CBD) dropped to 270,000 pesos per square meter during the first half of 2010.

Developers are also applying for Licenses to Sell for fewer units. From January to June of this year, the RP Housing and Land Use Regulatory Board (HLURB) granted licenses to a mere 57,419 housing units. This represents a 56% drop compared to the number of units licensed in the first half of 2009. Real estate developers and investors have been wary of starting new projects as they were hurt badly by the performance of the housing and commercial real estate sectors last year.

As for office space, 2010 will see no new office building completed in the Makati area. In all of Metro Manila, only 180,000 out of a million square meters will be completed this year. Rents also reached a plateau during the first quarter of the year.

Good News Abounds

With a 330-billion-peso Economic Resilience Plan (ERP), the Philippines came out of the economic slump relatively unscathed, unlike neighboring countries Hong Kong, Japan, and Malaysia. The National Statistical Coordination Board even reported economic growth of 7.3% during the first quarter of 2010.

Based on that growth, First Metro Investment Corporation (FMIC), the investment banking arm of Metrobank, predicts that the real estate market will be very busy this year. They say the ‘renewed real estate backlog’ will result in a very active debt market for the rest of 2010.

Jones Lang LaSalle country head David Leechiu says the ‘sense of optimism’ in the market has also intensified. Occupancy rates for the hotel industry were at 85% in the last half of 2009, an improvement over the 70% occupancy in 2008. And travel bans were lifted shortly after the automated elections in May, resulting in an influx of tourists.

Unaffected by the real estate price trough, the high- end residential market has continued to soar in the last three years. Prices in Pasig’s Valle Verde, Corinthian Gardens, Ayala Heights in Quezon City, and Forbes Park in Makati have seen a 20% increase. Leechiu says the retail sector has also been a steady market as mon- ey from the growing economy has made its way to the malls.

The office sector, which saw rents halved in 2009, is seen to pick up by the third quarter. Rent for office spaces in Ortigas, Pasig, and Fort Bonifacio in Taguig have started to climb by 15%. Lagging behind is Makati as rent in this CBD will only be corrected by the end of the year due to last year’s oversupply.

The gaming and entertainment industry, following the success of the Megaworld-operated Resorts World Manila in Pasay City, will see an uptick in years to come. Setting an example for developers, Resorts World has shown wait-and-see corporations the tremendous ef- fect of the new entertainment city in boosting tourism and showing that the industry has a big market.

While that market segment has been tricky and tightly regulated (operating a gaming mecca requires a good relationship with the government to acquire li- censes), the development of Resorts World Manila has paved the way for similar-minded developers such as SM Prime Holdings and the government-owned Phil- ippine Amusement and Gaming Corporation (Pagcor) to follow suit in setting up entertainment centers along the bay area of Pasay City.

“A lot of money has been waiting on the sidelines,” says Leechiu. “I think its going to be a big market for this year because there’s going to be a tourism boom. A lot of political issues have been cleared or seems to have gone away with the new administration. So much money will be pouring into real estate now.”

Colliers International’s Aguirre says more than the change in the country’s leadership, “What has changed are the perspective and the confidence of the market.”

The Price is REIT

The passage of the Real Estate Investment Trust (REIT) Act, Republic Act 9856, is also a welcome devel- opment for the real estate sector.

The REIT has been a long time coming for the Philippines as countries like Japan and Singapore en- tered REITs in 2001 and 2002, respectively. Australia, which currently sits on top of the Global Real Estate Transparency Index (GRETI), entered REIT as early as 1971.

The implementing rules and regulations of the Philippine REIT law have only recently been endorsed by the Philippine Stock Exchange (PSE) and are await- ing approval by the RP Securities and Exchange Commission.

The implementing rules and regulations of the Philippine REIT law have only recently been endorsed by the Philippine Stock Exchange (PSE) and are await- ing approval by the RP Securities and Exchange Com- mission.

REITs allow companies to own a share in revenue- generating real estate assets like hotels, shopping cen- ters, and offices. Existing big corporations like SM De- velopment Corporation, Robinsons Land Corporation, Megaworld, or Ayala Land, can raise more easy money by lifting their assets on the REITs.

The REIT is also seen to infuse liquidity into the market because of tax breaks that will signal the ar- rival of many developments. Overseas Filipino Work- ers (OFWs) will have the chance to invest more in real estate as the REIT Act allows them to receive tax ex- emptions on dividends during the first seven years of the law.

Foreign investors will also be given the chance to own a share in REITs. Like OFWs, they will also be giv- en a preferential withholding tax rate, around 10% of the dividend income.

One problem with the REIT is the limit on the number of available assets that can be developed or leased out for a good price and can generate long-term income for the country. Leechiu says the Philippines has approximately 20 assets outside the ownership of industry heavyweights SM, Megaworld, Ayala, and Fil- invest.

Recuperating, Hong Kong Style

In China, the government has laid out mitigation measures to control the property price bubble. Due to low interest rates, property prices in major cities like Shanghai and Beijing have doubled within the last four years. The Chinese cabinet worries that China could soon follow the 2008 US housing market crash.

During an interview with the Chinese and interna- tional press last year, Premier Wen Jiabao announced that the Chinese government was hell bent on “crack- ing down on illegal moves” to manipulate the market, including hoarding land and delaying property sales for larger profits. Jiabao added that the government has been working hard to provide affordable housing to its people.

Breaking away from the restrictions imposed by the Chinese government, mainland Chinese investors started flocking to Hong Kong in late 2008 to take ad- vantage of low property prices. This helped speed up the recovery of the region’s ailing real estate sector. Residential property prices rebounded by 20% in Au- gust of 2009 based on data released by the Hong Kong Government Rating and Revaluation Department.

Aside from the November 2008 (US$585 billion) and May 2009 (US$2.2 billion) stimulus packages pro- vided by the government to uplift its property industry, Hong Kong recovered immediately because the region has always been a mine field for real estate developers and investors.

Hong Kong has also regarded the economic crisis as opportunity. According to Jeremy Sheldon, manag- ing director of Jones Lang LaSalle’s Asia Pacific Market team in his online seminar “Timing is Everything— Finding Opportunities in a Recovery,” Hong Kong East offered “relatively affordable, good quality space” while rents in the CBD have been rising. It has been a win- win situation, nevertheless, for Hong Kong’s recuperating real estate market.

Ownership

Colliers’ Aguirre explains that this is where the Philippine real estate industry’s problem lies. Philippine law allows only 40% of condominiums to be owned by foreigners and forces them to lease space for the next 50 years. There’s basically no way for foreign investors to own a patch of land here. “We’re so afraid of foreign ownership. I think we have been really battered by our history,” Aguirre says.

Aside from the country’s colonial past, Filipinos are known to hold their belongings dear. Aguirre re- counts an incident where a landlord failed to make a sale because he didn’t want to lower the property price from 16,000 pesos per square meter to 14,000 pesos.

Moreover, Filipinos value connections. Before a Filipino—or a foreign investor for that matter—can be given ownership of a property, they need to have a re- lationship with the family or, better yet, business in the country.

“I think that mentality has to change. The key is to attract people who are not really related to the Philip- pines,” Aguirre points out. “I don’t know if it’s going to happen but it could be a great way for us to catch up. I mean, we’re no Hong Kong, which is the center of at- tention when it comes to real estate.”

Another problem is how Filipinos are afraid of taking risks. The country has an estimated 4.6 trillion pesos in savings according to statistics released by the Philippine Deposit Insurance Coportation last June, a substantial 9.5% increase from the 4.2 trillion pesos in savings during the first quarter of 2010.

This means we are awash in stagnant money, Agu- irre laments, “Filipinos just put it in the bank and let it gain interest. I think we have to find ways of spend- ing our money—other investments, businesses, and of course, engage in real estate. It’s still a big market.

Although Filipinos keep their money in the bank, it is interesting that wealthy Chinese Filipinos have very significant investments in China. Jones Lang LaSalle’s Leechiu says he knows private individuals who have in- vestments in China that are larger than what they have in the Philippines.

For instance, Ben Chan, owner of Philippine life- style and clothing brand Bench, has 80% (48 out of 62) of his Bench franchises located in China. His old- er brother, Carlos Chan, started a snack food empire called Liwayway (China) Company Limited. Liwayway is composed of 12 very successful companies in main- land China. Reports state the company earned US$250 million as early as 2005.

“Only local money is circulating here,” Leechiu says. “And foreign money is so huge. I think we have a lot of room to grow in the Philippines because we have been largely unaffected by the global crisis and only a few countries can say that. We have to find a way for foreign investors to see that.”

According to the seventh edition of the GRETI re- leased by consultancy firm Jones Lang LaSalle Leechiu, the Philippines ranks 48 out of 81 global real estate markets, realizing a market semi-transparency score of 3.15. According to Jacques Gordon of LaSalle Invest- ment Management, the result was based largely on fi- nancial data and the efficiency and fairness of regula- tions on the market and on transactions.

The Philippine real estate market only rose a notch from its place in 2008, still a disappointing leap down from number 33 in 1999. This means that the country’s property industry is lagging tremendously behind tiger economies like Singapore and China in terms of direct foreign investments.

Because of the lack of both regulations and a com- plete understanding of how the said private sector works, the country’s real estate industry remain unat- tractive to foreign investors.

Brighter Side

Still, the local real estate industry is optimistic for several reasons. With the BPO market, consumer spending, and the OFW remittances strengthening the backbone of the economy, the real estate sector is expected to stay afloat despite any downturn. In fact, 60% of the project sales of developers Camella Homes, DMCI, Empire East, Megaworld, and Filinvest come from OFW families, who snap up units priced from 800,000 to 2.5 million pesos.

As for the Chinese Filipinos who remain signifi- cant players in real estate, what Aguirre calls a ‘big gen- eration’ of them still prefers to live where they work. Chinese Filipino businessmen prefer to set up shop on the ground floor of a building, and live in a residential unit upstairs. This is generally the case in Caloocan, Manila, Quezon City, and San Juan.

Developers are now also toying with the idea of ex- pansion beyond our borders. SM Prime Holdings, Inc. the country’s largest mall operator led by Henry Sy, has very big plans to enter the China market, says Leechiu. Sy plans to establish two to three shopping malls in China every year after 2010. Other companies are now also willing to take more risks by entering an already tough market.

Occupancy has been fueled by inquiries from ex- patriates, who opt to live in residential units and hous- es in Makati, Fort Bonifacio in Taguig, and Alabang in Muntinlupa.

With a strong combination of remittances, ex- pansion plans, good governance, real estate laws, and programs to make the Philippines attractive to foreign investors, the country may be able to escape the los- er’s bracket in the real estate hippodrome. As Leechiu points out, the Philippines “has long been a neglected economy.” And, perhaps, as Filipinos break bad and outdated real estate practices, we will see a boost in the country’s worldwide real estate market score.

Print ed: 08/10

 

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