The Philippine property sector: Opportunities despite the slump?

By VERONICA SILVA

The real estate industry is one sector where economists and analysts alike have been cautious in making predictions. Apart from the fact that the sector involves long-term investments, there are many risks involved.
Nevertheless, it is one of the important sectors of the country’s economy and one of the indicators of its economic health. Services generated from the real estate industry form part of the economy’s services sector, one of the fastest growing industry sectors of the economy.
Real estate covers the management and operation of property for residential and non-residential use. It includes buildings and houses, and estates for rent. It also covers services involved in the ownership of the house, technically referred to in the national income accounts as the "ownership of dwellings."

The construction industry is one of the allied industries of the property sector. Photos by Ben Razon
The sector’s importance lies in its linkages with other sectors.
It is linked with the construction sector which is responsible for building the structures on top of the land. It also has linkages with the services sector, such as urban planning, architecture and design. And finally, when the structures are built, real estate also contributes to the uptick in the consumption sectors, considering that occupants of structures spend for food and utilities and other services.
The real estate industry alone accounts for 4.5% of the country’s economic output. One of its chief allied industries, construction, which includes the provision and manufacture of construction materials, makes up another 4.5%.
As an important sector of the economy, real estate is sensitive to economic and political conditions. Thus, economists and market analysts regularly monitor macroeconomic and political developments that may bear on the sector.
For instance, high interest rates turn off real estate investors, including developers and home buyers. An unstable political situation easily discourages foreign investors, including locators in industrial estates.
Conversely, other sectors bear on the growth of the real estate sector. For instance, the growth of investments in the country spur real estate development.

BOOM-BUST CYCLE

As an indicator of the country’s economic health, the industry has had its share of highs and lows. Economists have noted a boom and bust cycle of between two to four years. Economic indicators reveal a sensitive real estate sector vulnerable to local and international developments.
Shortly after Ninoy Aquino’s assassination in 1983, the sector suffered a decline, posting a negative growth rate of 3.7% in gross value added from a growth rate of almost two per cent in the early 1980s.

Economists and analysts note that the bubble burst after the 1997 crisis is about to breach the two- to four-year boom-bust cycle.
The sector somehow rebounded in the early 1990s, shortly after the national government had seemingly solved the energy crisis.
Paolo Azurin, an economics researcher at the University of the Philippines, noted a temporary boom period during the term of President Fidel V. Ramos (1992-1998).
But with the bubble burst after the 1997 Asian financial crisis, economists and analysts conclude that the growth was based on speculative investing.
From then on, it was downhill for the real estate industry, no thanks to local developments like a presidential crisis, including the impeachment hearings in December 2000. Now, it is anybody’s wild guess as to when the sector can regain its lost glory.
Economists and analysts note that the bubble burst after the 1997 crisis is about to breach the two- to four-year boom-bust cycle, and recovery is not yet seen in the mid-term.
"The sectors cyclical downturn, which in the past lasted only two to three years, has stretched beyond four years already, flouting historic norms," said FPDSavills Philippines in its 2002 Property Update.

SUB-SECTORS

The real estate sector is divided into five subsectors, namely: housing/residential, retail/commercial, office space, industrial estate, and tourism-related property or the recreation/leisure subsector. A smaller subsector is memorial lots.
Among the five subsectors, three have long been in the doldrums. These are the office space, industrial estates and tourism/leisure subsectors. The latter includes the resorts and golf courses.
Office real estate are concentrated in major business districts in the country. In Metro Manila, these are the Makati and Ortigas central business districts.
Industrial estates were encouraged to flourish in the country with some government incentives. Called economic zones, these estates intend to lure investors into the country.
Investors are encouraged to develop real estate property outside Metro Manila and major urban cities to bring jobs to the countryside. Today, there’s a proliferation of hectares and hectares of industrial estates right outside urban areas. Examples are in Laguna, south of Metro Manila, and Pampanga and Bataan, north of Metro Manila. Most of the locators in these estates are multinational companies doing traditional businesses such as manufacturing.
Lately, however, smaller real estate properties within Metro Manila are beginning to sprout. These specialize in non-traditional businesses such as services like information technology. These industrial estates are known as IT parks with both locators and developers receiving incentives from the government in certain cases.
Economists and analysts have noted several problems with the three subsectors: an oversupply of office space, high vacancy rates, lack of foreign investors and a drop in tourist arrivals.
A joint study by the UA&P and SBE Consulting Group indicated an oversupply of office space in the major central business districts (CBDs) in Manila, namely Makati and Ortigas. Unfortunately, CBDs outside Metro Manila have also not caught up quick, though these areas are seen as opportunity areas for growth.

There are other emerging growth areas outside the Makati and Ortigas (above) central business districts.
The UA&P-SBE study noted that vacancy rates in the Makati and Ortigas CBDs have reached a high of almost 35% in 2000. From 1997, demand for office space have declined while supply has continued to rise, tapering off only in 2000. Prior to the financial crisis, demand for office space and keeping up with supply.
The decline in demand is attributed to companies which have either closed down or transferred. Or, existing occupants have cut office space.
UA&P economics professor Winston B. Padojinog told BusinessWorld Online that despite a decline in rental rates, the lessees are still not biting. Meanwhile, capital yields continue to plunge.
Colliers International noted that average land values in the Makati and Ortigas CBDs have peaked during the 1997 financial crisis but dropped drastically in 1998. Currently, land values are approximating at their 1994 levels--a 60% drop in the case of Makati. The decline has bottomed out but Colliers noted in its July report that it is "discounting the possibility of an immediate upturn."
FPDSavills expects the 2002 vacancy rate to dip to 22% and 19% in 2003 "as the supply situation moderates." In its third quarter Office Briefing update, the property consultant noted an office take-up in Makati but demand in Ortigas was still down.
Colliers International expects the current stock of office supply to be in the same level in the next three years. "At the trough position of the property cycle, low rents and the supply overhang act as disincentives to developers," the research firm said. Vacancy levels are not expected to fall to single-digit levels until 2004.
Industrial estates are likewise not increasing in number though expansions in existing estates have been noted.
The UA&P-SBE study indicated that the occupancy rates in industrial estates has been declining. From 72% in 1997, it was estimated that only 63% of the available 27,075 hectares of industrial land are occupied. The study concluded that there is ample supply of industrial land in the next five years.
Mr. Padojinog noted that a slowdown in the global demand for electronics is dampening business for industrial estates.
Many of the locators in industrial estates are in the manufacture of electronics, the country’s chief export, making up at least 65% of total exports annually.
FPDSavills added: "The industrial sector has continued to lag behind the three main sectors in the economy, managing only 2.1% growth in the first three quarters of 2001, largely due to the continued worldwide decline in electronics exports."
The two other sectors are agriculture and services. The services sector has lately been the country’s main driver of economic growth. Traditionally, it was agriculture. In the third quarter last year, services grew 4.9% and industry, 4.4% while agriculture dipped 0.4%.
In a media briefing with BusinessWorld Online last September, property developer Ayala Land Inc. officials noted that neither are they seeing investments in more industrial lots in the near term. Instead, company officials said they are counting on expansions of existing locators to boost revenues.
The lack of demand for industrial lots is expected to devalue industrial land, said FPDSavills. In fact, its research show that land values have began to drop in 1998. "In the near term, industrial land prices and rents are expected to decline in the order of 10 to 20 percent as developers compete to attract the locators and expansion projects."
The tourism and leisure subsector is likewise disappointing for real estate investors.
Tourism real estate developers invest in resorts, hotels and service apartments. Some invest in golf courses which now number 36 nationwide, according to the UA&P-SBE study.
Occupancy rates in tourism-related real estate investments naturally followed the decline in tourist arrivals.
September 11, 2001 terrorist attacks on the United States only exacerbated an already struggling tourism industry on which the tourism real estate subsector depended. After the 1997 financial crisis, the spate of kidnappings in southern Philippines contributed to the decline of the tourism industry.
Visitor arrivals in 2001 dropped 9.8% to 1.797 million from 1.992 million the year before, Department of Tourism (DoT) data show.
Occupancy rates in tourism-related real estate investments naturally followed the decline in tourist arrivals. Hotel occupancy in Metro Manila for 2001 dropped almost 3% to 55.85% from 58.77% in 2000.
"The decrease was recorded as a result of the decline in occupancy levels registered by De Luxe and Standard hotels which could have been brought about by the decline of tourist arrivals by about 10%," the DoT said in its report.
However, tourism seems to have picked up last year. Data from the National Statistics Office show that visitor arrivals in the country had surged 10.6% in July to a total of 170,831 from 154,480 in the same month in 2001. The growth rate in July was the highest in the past 61 months or since June 1997 which recorded an 18.16% increase.

The tourism or leisure sub-sector is down due to security concerns, among others.
Total number of visitors for the first seven months of 2002 stood at 1,144,230, up 1.5% against the 1,127,143 a year ago.
Hotel occupancy rates are also up. Occupancy rate of DoT-accredited hotels in Metro Manila reached 60.77% in July, up 6.25 percentage points from 54.52% in July last year.
These data, however, do not include trends in areas outside Metro Manila, some of which, particularly southern Mindanao, have been block-listed in travel advisories of other countries.
The government expects an uptick in the tourism industry this with the World Tourism Organization proclaiming Visit Philippines 2003.
FPDSavills is predicting a difficult year for hotels in 2002 because of terrorist threats.
The UA&P-SBE study noted that the number of golf shares have bottomed out after the 1997 crisis.
"Development projects for the recreation and tourism markets will momentarily stay at the sidelines," said Mr. Padojinog in the UA&P midyear economic review last year.
"Golf club shares are now being offered as amenities to housing (projects)," Mr. Padojinog told BusinessWorld, owing to the fact that demand in the tourism industry in the country remains soft.
Messrs. Azurin and Padojinog noted that investment risks are high in the real estate sector, prompting investors to think twice before making decisions.
In some of the subsectors, such as industrial estates, return on investment may take time to realize.
Furthermore, growth in investments is coming from local businessmen, a trend that is not sustainable, said Mr. Padojinog.

BRIGHT SPOTS

Despite the seemingly hopeless outlook for the three subsectors, market watchers are somehow seeing light at the end of the tunnel. The strategies are finding a good location and a niche.
For the office space market, opportunities are in areas outside the traditional CBDs Makati and Ortigas. New CBDs include the Bonifacio Global City in Taguig, Filinvest City in southern Metro Manila and the Lopez-owned Rockwell Center just outside the Ayala Center in Makati CBD. Roxas Boulevard in southern Metro Manila is another growing CBD.
FPDSavills considers the oversupply of office space as an opportunity for developers to heat up competition. Other than this, however, security and political issues will continue to dampen investor confidence, bringing along with it prospects to increase occupancy rates in CBDs. "The sales market will remain flat in the absence of any investment fund flow."
"Confidence is very important. If investments don’t come in, we don’t expect future growth," said Mr. Padojinog.
Economists and analysts see IT services as another bright spot for office space.
"The prospect of IT locators due to the favorable e-business climate generated by government initiatives is expected to continue," said FPDSavills, adding that intense competition is expected among the IT park developers.
IT-enabled services, such as contact centers and animation creation, are the opportunities to chase, said Mr. Padojinog.
In a recent study, Jones Lang LaSalle said the number of contact centers in the country is expected to rise in the next decade because of the Philippines’ competitive advantages such as cost optimization and value-added services. There are at present 28 contact center locators in the country. More new players are expected to enter this market.
Jones Lang LaSalle said the projected revenue for the contact center industry is expected to grow to $42 billion by 2010 from $173 million this year.

TOURISM SUB-SECTOR

Mr. Padojinog noted that the growth in the tourism subsector is in housing for long-staying guests such as apartelles, condotels, or businessmen hotels.
But these tourism spots cannot remain generic. They’ll have to differentiate themselves, for instance, by attaching condotels near malls. "The condominium should have a view of the golf course," he added.
"For growth to be sustained, you cannot stick to the generic type of development; you have to be differentiated," said Mr. Padojinog. And this is true even for the housing/residential and retain/commercial subsectors.
Location is also important. Mr. Padojinog suggested that tourist sites in "isolated" areas will remain attractive to foreign tourists despite the Abu Sayyaf threat.
And if the tourism sector can’t lure these foreigners, there’s no harm in tapping local tourists. "If you talk of foreign tourists, it’s really down. But we have overlooked the fact that our domestic tourists are six times bigger," Mr. Padojinog told BusinessWorld Online.
NO GUARANTEES
Despite these opportunities for growth, Mr. Padojinog said there are no guarantees that the growth is sustainable. At the end of the day, it is still the flow of investments that will fuel the growth of the real estate sector.
These investments will also spell growth for other industries supported by the sector, such as the construction industry.
"Without investments, private construction will remain sluggish, which in turn would hinder future growth," wrote Mr. Padojinog last year.
Mr. Azurin’s prospects for the real estate is not as sunny. "Investors are still cautious," he said, and credibility is needed to sustain growth.
Mr. Azurin is still cautious about what’s in store for the sector beyond 2004. "Recovery (of the sector) is based on sound economic and political environment," he said. "It depends on the 2004 campaign" for the next president of the country.
But property owners and developers can already position themselves as early as now, anticipating a demand in the future. In fact, Mr. Azurin noted that this is already what players in the real estate market are doing.
"Location is important," said Mr. Azurin. For instance, Metro Manila is already saturated with shopping malls. There could be growth areas outside Metro Manila but these are not developing as fast.
Given that the real estate sector is important to the economy, Mr. Padojinog said an implication of a slow growth in the sector could also mean slow growth for its allied sectors. "We don’t see incomes increasing as fast; we don’t see employment increasing as fast," he said.
Government should therefore see to it that it is providing the environment conducive to macreconomic stability.

source:businessworldonline