Philippine Real Estate: Is It Still a Good Investment in 2014?

“Investment” is a commonly used word by many people but only a few really understand the true meaning of it.

Investment in this context, the real essence of the word, means resource (time, money, energy) that is invested with an expectation of profit. Therefore, if we talk about real estate investment here, it pertains to properties whose main purpose is to generate profits.

That leads us to the question, is Philippine real estate still a good investment in 2014? Let us look at some indicators in order to make well-informed conclusions and decisions.

First, the economic status of the Philippines

Overall, the Philippines is a rockstar in Asia for 4 consecutive quarters with over 7% economic growth rate despite the slow global recovery.

To complement this good news, the recent Moody’s credit rating for the Philippines was increased from Ba1 (below investment grade) to Baa3 (initial investment grade).

There are some drivers for this recent impressive economic improvement. To name a few:

• 7.5% Gross Domestic Product growth which is considered best in Asia and the world. (source here)
• Consumer Confidence Index (CI) climbed from -11.2 percent to -5.7 percent. (source here)
• Low inflation rate remains below 3% as of August 2013. (source here)
• In the labor sector, there is slight decrease of unemployment from 7.5% in Q2 2013 to 7.3% in Q3 2013. (source here)
   
  Although this slight change is barely noticeable, there is an optimistic, long term action-plan to remedy the unemployment problem initiated by World Bank. (see the plan)
• Low interest rate: on 4-year low of 3.5% bench mark rate. (source here)
•  Changes in the our political system have impacted a lot to improve foreign investors’ confidence in our country.

These are just a few drivers to Philippines’ economic improvement.

Second, Philippine real estate market is strong and favorable to investors

Given the indicators above, it is a great opportunity to take advantage of today’s market performance.

The industry is not localized to one region of the country. So, to narrow down the focus of this article, the following information are about the Metro Manila real estate sector only.

When it comes to real estate, here are what some experts say:

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Markets in Manila have performed well in the past couple of years as a result of the growing economy, a transparent and business friendly government, and the country’s ongoing success—an “eye-opener”—in attracting foreign corporate clients to its business process outsourcing (BPO) facilities. Bureaucracy has declined and transparency has improved considerably over the past few years. It is therefore, currently “the best market I’ve seen in my life. according to one local investor interviewed by Urban Land Institute.

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Philippines: “Funding is very easy if you’re a good corporate client with a good track record with the bank. You can get seven- to ten-year money at between 6 – 8%

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(source here)

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The Philippine real estate industry is one that is benefiting from low interest rates, sound macroeconomic fundamentals, and booming demand. Constantly rising OFW remittances and a successful BPO industry continue to help maintain demand through the recent years, and with their current growth, are expected to be drivers of consumer appetite. With more investments even in other industries coming in, foreigners relocating to the country have become a fast growing source of demand for residence.

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(source here)

Looking at the micro scale, a survey was conducted by Bangko Sentral ng Pilipinas regarding the behavior of the public when it comes to family budget allocation. It revealed that in the NCR, buying intentions increased for consumer durables and housing. More respondents considered the current quarter as a favorable time to buy big-ticket items.

The outlook was most upbeat for buying real property, followed by consumer durables and motor vehicles.

Supply

The supply pipe of the residential condominium in Metro Manila is predicted to reach 7,253 units in 2013 only. In 2016, 4 years down the track, the supply will reach 78,212 condominium units in Manila Metropolis.

Majority of the supply comes from Makati and Bonifacio Global City which collectively accounts roughly 60% of the total condominium units.

In Makati alone, the inventory of studio to one bedroom unit is roughly 1,700 units which accounts to 85% of the total new supply for this year only.

Demand

Even though the number of units to be delivered by 2016 is quite enormous, Makati and Bonifacio Global City combined demands from expatriates and other end-users are still not met for the multi-bedroom units.

2013 general vacancy rate in Makati central business areas, across all grades, is currently at 9.6% from first quarter’s 9.8%. Low vacancy rate of Makati’s premium units from 4.7% to 3.4% is also noted for this quarter.

Rental rate for Makati CBD premium residential condominium units is steady at P790/sqm on average, monthly. While Bonifacio Global City is at P780/sqm monthly average.

Rents in both CBD according to Collier’s International Research “will improve by 7-8% in the next 12 months as the demand and supply gap remains narrow.”

On the other hand, quite the opposite is true in the smaller unit sector. Lessors for smaller units have a hard time beating the competition thus resort in decreasing the bargaining price of the rent to attract tenants.

However, this is seen as short term effect of the surge in availability of smaller units like studio and 1 bedroom units.

(source here)

Risks

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…Risks to the growth projections will primarily come from a slower global recovery, domestic reform lags caused by increased resistance from vested interests, and possible asset bubbles in the real estate sector and the stock market. Global uncertainties stemming from weak demand and financial market volatility in high-income countries pose substantial risks to Philippine growth…

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…says WorldBank.

In other words, real estate bubble, market crash and other catastrophies in the Philippine economy will possibly be caused not only by our government’s slow implementation of reforms, decisions of the controlling business dynasties and poor management of household debts.

It may also be caused by the slow economic recovery in the Eurozone market, the implications of the recent government shutdown and economic turmoil in the United States and other foreign uncertain conditions.

Lastly, there are 2 sides of the coin…

1. You will earn. This will happen by doing your due diligence like market research, understanding the figures, seeing the long term effect and creativity. Real estate profit is unlimited and huge! And once it is in your pocket, it can be addictive!
2. You will learn. Surely, market crashes and financial bubbles happen. However, no one can really tell when. Just like an earthquake, there might be signs of an impending event but no one can really foretell when the exact time is.
    
   So be emotionally prepared. If you have set your mind to possibilities, chances are you are more receptive to lessons along with the experience.

Closing Thoughts

Many investors said that real estate should be approached with the long term perspective in mind. I agree on this. However, there are a number of ways to meet either your short term or long term financial success through real estate investments. You just have to be diligent in doing your homework and creative in formulating your strategies.

I personally believe that Philippines as a developing country has a lot of room for investment growth especially in the real estate industry. There are hectares of lots around the country that are either undeveloped or underdeveloped.

So, that is why 2014 or even 15 years into the future will still be bright for real estate investment. Further, a true sophisticated investor knows how to make profitable investments no matter where the market goes.

And the first step to become one is to get in the game and get started.

Simple reminder…

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Nowadays, savers are losers while debtors are winners

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– Rober Kiyosaki.

Learn to take advantage of the uncertainty of the market. Only the courageous heart will take a step of faith. At the end of the day, keeping your money in your vault or somebody else’s, will not make your situation any better.

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