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Are the Philippines headed for improving its real estate sector?

WINDS OF CHANGE FOR THE PHILIPPINES

July 2016

Controversial President-elect aims to boost foreign investment by improving transparency and stamping out corruption.

 

 

 

The Philippines has long been seen as a country with attractive real estate investment opportunities, although it has been plagued with problems of transparency and corruption for many years, forcing interested investors to view the country with cautious optimism.

Things may change yet. The country’s new controversial President looks to stamp out corruption, fuel an already robust economy and transform the country into a market-friendly investment hub in Asia. In May voters in Philippines elected a new president, tough-talking Davao City Mayor Rodrigo Duterte, who transformed his southern city with a combination of controversial tactics and skilful strategies, into one of the country’s success stories.

While global observers and experts believe his policies and methods to be unorthodox and somewhat troubling, Duterte has vowed to continue the macroeconomic policies of the outgoing administration of Benigno Aquino III. In recent years, the Philippine economy has grown at a rapid pace under Aquino, a President who was credited by analysts as a champion of economic revival and public-private partnership (PPP) projects that helped drive real estate activity.

Nevertheless, during his campaign trail, Duterte maintained that when he takes over office he would prioritise tax reform, education and infrastructure spending, fight corruption and increase transparency in the market. In addition, he has stated that his aim is to decentralise Manila and focus on improving provincial locations, making them more appealing to potential investors.

Analysts say that Duterte’s 22-years of experience as Mayor of Davao speaks for itself, with a track record of lowering crime rates and an emphasis on making the city more appealing to investors.

“Before a city or province can really prosper, you have to establish order so that investors would be coming in, comfortable in their thoughts that there would be no corruption, that they are sage and that their businesses will prosper,” he said in an interview earlier this year.

Duterte’s appointment as President is a stark reminder that the Philippines, while it has much to offer investors, also requires necessary policies and changes in order to attract real estate investment.

THE ECONOMY

According to the Philippine Statistics Authority (PSA), the country’s GDP grew by 6.9% during the first quarter of 2016, faster than China’s at 6.7% and Vietnam’s at 5.7%.

In a recent interview with Bloomberg, Hong Kong based economist Joseph Incalcaterra forecast that the Philippines will outperform in the region this year, driven by a strong domestic demand. For him, an increased infrastructure spending, strong remittances in peso-terms and consumption spending tell a robust growth story.

Following Duterte’s win, many were apprehensive that he would reverse the decisions made by the previous government; however his administration quickly calmed investors who were worried that Duterte would undo the previous administration’s economic agenda that helped drive economic growth over the last few years.

Duterte’s economic agenda includes the continuation of trade policies, including fiscal and monetary, increase competitiveness and the ease of doing business, and pursue the relaxation of the Constitutional restrictions on foreign ownership, except with land ownership, in order to attract foreign direct investment.

Things included on the government’s economic policy agenda are “accelerating annual infrastructure spending to account for 5% of GDP, with Public-Private Partnerships playing a key role” and “ensuring security of land tenure to encourage investments, and address bottlenecks in land management and titling agencies.”

ADDRESSING TRANSPARENCY

In previous years, JLL Philippines has classified the country’s property sector as “semi-transparent.” Duterte’s desire to end crime and corruption, and make the market more transparent could improve this, says Lindsay J Orr, Country Head of JLL Philippines, explaining that perceived corruption in the Philippines has had an impact on the transparency rate.

For Associate Director, Head of Research, Consulting and Valuation at JLL, Claro dG. Cordero Jr, the main challenge for the local real estate sector is still the state of overall market transparency that discourages market players and investors from participating in the market. “Levelling the playing field for all players and investors (by ensuring availability of market information and the imposition of fair rules/practices) will make the market more competitive and attractive to international investors.”

Cordero believes that by improving transparency and accountability, especially in the public sector, will translate into a positive change for the local real estate industry in the country, especially in a country that has been dogged by issues of corruption.

“Investors, be it foreign or local, look at the level of transparency in the market as an arbiter on their decision to pursue investing in a market. The Philippines certainly has a lot of room for improving transparency to attract investors in the real estate market, such as titling practices and processes, the availability of credible market information to foster more credible property valuation and cutting ‘red tape’ anomalies in government transactions, to name a few,” he says.

REAL ESTATE

For Cordero it’s too early to tell the changes that Duterte’s presidency will bring to the real estate sector as some of the policy plans have yet to be made public or finalised, however “there is reason to be optimistic about the probable positive changes that the incoming administration can do, especially on the area of reviving the REITs market,” says Cordero.

Cordero believes that due to the strong and solid growth of the offshoring and outsourcing (O&O) and business process outsourcing (BPO) industries, combined with the growth of the remittance levels coming from overseas-based Filipinos, demand currently exists primarily for the office/commercial sector as well as the residential condominium sector.

Cordero cautions that in order for the real estate market to improve its competitiveness and attractiveness, there is a need to ensure policies are fair and that they apply to all types of investors. “While full control of land (real estate) may not be possible, providing majority control for investors (as is being done in other markets) will make a difference in the interest level for the local real estate market,” he says.

Only a few months in office, Duterte has not revealed official plans to transform the real estate sector, but he believes that the first step is through transparency.

Although, whilst campaigning he revealed that his aim was to make the industry more attractive. In an interview earlier this year, Duterte said, that once elected, he would lease some of the country’s islands to establish the next Singapore or Hong Kong in order to create more jobs and gain more investment.

He has also maintained that secondary and provincial markets could be boosted by decentralising the capital Manila and promoting impoverished provincial locations.

OUTLOOK

Considered a firebrand by many, Duterte’s presidency will nevertheless implement changes within the Philippines. For JLL, the outlook is positive due to the projected growth/expansion of the economy, “coupled with renewed optimism in governance with the fresh mandate given to newly-elected President Duterte,” says Cordero.

“The major demand drivers are still projected to grow. Business outsourcing will continue to develop in the Philippines as the O&O/BPO industries move to higher value chain services. On the other hand, the marked slowdown in the global economy and the projected slow recovery of oil prices may influence some downside, albeit temporarily, specifically on the growth of remittances coming from the overseas-based Filipinos,” adds Cordero.

While many believe that Duterte could accelerate growth further if he removes investment limits, stamps out corruption and creates a transparent market, there are others who maintain that he has a long road ahead of him and only time will tell.

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