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Despite the recent floods, an extraordinary change of mood has gripped the Philippines, the sense of a new beginning. After a depressing decade of misgovernment under two corrupt presidents, Joseph Estrada (1998-2001) and Gloria Macapagal-Arroyo (2001-2010), with the election in 2010 of the honest and reformist President Benigno ("Noynoy") Aquino 111, a clean and competent government is successfully attracting foreign investment. It also benefits from simple good luck. This (partly) English-speaking country finds itself ideally positioned to take advantage of the global outsourcing boom. Employment is surging, skyscrapers are going up, unemployment is falling, the malls and restaurants are full, and there's the happy sound of money ringing in shopkeepers' tills.


As always happens in countries enjoying economic growth and fundamental structural reform, house prices are rising sharply. In the first quarter of 2012, the average price of a luxury 3-bedroom condominium in Makati CBD rose 4.8% to PHP 114,000 (USD 2,727.53) per sq. m. (q-o-q), according to Colliers International, or by 10.68% during the year to Q1 2012 (7.34% when adjusted for inflation).

Average prices in other key areas of Metro Manila, namely Rockwell Center and Bonifacio Global City, rose by 11.4% during the year to PHP 119,500 (USD 2,859.12) in Rockwell, and by 8.6% to PHP 112,900 (USD 2,701.21) in Bonifacio Global City.

High-end residential real estate prices are likely to rise by another 9.9% during the next twelve months, according to Colliers. Rockwell Center is predicted to have the highest growth with a 9.9% y-o-y increase. Makati CBD and Bonifacio Global City values are expected to rise by 8.2% and 5.9%, respectively.

This year will see a significant rise in housing stock, with 8,253 units expected added to the Metro Manila supply by end-2012. Condominiums now turning over include the Eton Residences Greenbelt (302 units), Eton Parkview Greenbelt (236 units), and One Pacific Place (240 units).

The highest rents are still in Rockwell Center, with condominium average rentals of PHP 780 (USD 18.66) per sq. m. per month in Q1 2012, up 1.3% on the previous quarter. In Makati's CBD, a 290-sq. m. unit rental averages PHP 658 (USD 15.74) per sq. m. per month.

The real estate market relies on a combination of remittances from overseas Filipinos, and on the dramatic growth of the local business-process outsourcing business:

  • Housing projects and mid-scale subdivisions in Metro Manila and nearby provinces are sustained by remittances.
  • The expanding business-process outsourcing (BPO) industry (primarily call centres), is responsible for growth in higher-end demand .

Still well below pre-Asian Crisis values!

Between 1997 and 2004, luxury condominium prices dropped 30.4% (53.7% in real terms), as the Philippines experienced the biggest property crash of all economies affected by the 1997 Asian Financial Crisis. As with the present housing crisis in the US and Europe, a speculative bubble had formed in the 1990s after financial liberalization and economic reforms, pushing luxury condominium prices up 63% (35.3% in real terms) between 1995 and 1997.

Recovery from the subsequent crash has been slow. Nominal prices are now back above 1997 levels, but prices are still 46% below pre-Asian crisis peak levels in real terms (Q1 2012) - an astonishing reminder of how much the crash cost.

But in recent years, employees of new IT-related firms such as call centers and other business process outsourcing (BPO) firms have boosted demand for rental housing, with a ripple effect on the construction, retail, and telecommunications sectors, resulting in property price increases of 59.3% (16.2% in real terms) from 2005 to 2008.

In 2009, luxury condo price growth slowed to a meagre 0.2% y-o-y (-3.81% in real terms), hit by the global financial meltdown. But the significant economic recovery of the Philippines that started in 2010 is now propelling prices up again, with 5.5% price rises in 2011 (0.72% in real terms).

OFWs buy affordable properties, BPOs expand local demand

Overseas Filipinos' remittances are powering the low-end to mid-range residential property market. They are snapping up housing projects and mid-scale subdivisions in regions near Metro Manila such as Cavite, Batangas and Laguna Provinces, while the expansion of the upper residential market, including the luxury market, is due to increased housing demand from BPO employees and expatriates, according to the World Bank.

Overseas Filipino Workers (OFW).account for around 17% to 18% of residential sales of Ayala Land, one of the country's major developers. In the next five years Ayala Land President Antonio Aquino expects to double this, by branching out to the affordable and low-end market segment.

Ayala Land is a late entrant to this market, previously dominated by companies such as Vista Land and Lifescapes Inc. Around 55% of Vista Land's reservation sales currently go to OFWs in Asia, Europe and Middle East, while US-based OFWs account for another 5% to 10% of sales.

There are approximately 9 million Overseas Filipinos (OF) worldwide, or around 10% of the Philippine population. Of all OFs, 46.8% are permanent.

Among the permanent OFs, 65.2% reside in the US, followed by Canada (13.1%), Europe (7.1%), Australia (6.8%), and Japan (3.4%), according to the Commission on Filipinos Overseas (CFO).

Employment in the Philippine Information Technology and Business Process Outsourcing (IT-BPO) industry grew by 22% to 638,000 people in 2011, according to the Business Processing Association of the Philippines (BPAP) President and Chief Executive Benedict Hernandez.

The BPO industry had USD 10.9 billion in revenues in 2011, but is expected to employ 1.3 million workers and generate USD 25 billion in revenues by 2016.

Slower remittance growth

Remittances from OFs reached USD 20.1 billion in 2011, around 9.4% of GDP, up 7.2% on 2010. It is estimated that 60% of these remittances go directly or indirectly to the real estate sector, according to the World Bank.

Remittances are expected to grow by only 5% in 2012, sharply down on growth before the global financial meltdown in 2009. In 2008, remittances rose 13.7%, following a 13.2% rise in 2007, 19.4% in 2006 and 25% in 2005.

The World Bank believes the remittances slowdown is due to:

  • Stricter Implementation of the migrant workers' bill of rights;
  • Political uncertainties in host countries; and
  • The slowdown in the advanced economies.

It's happening despite a problematic mortgage market

Most houses in the Philippines are sold for cash or pre-sold, due to an underdeveloped mortgage market. Property buyers also face high transaction costs, corruption and red tape, fake land titles and substandard building practices.

These are real problems. Few major banks offer housing loans. Different banks' loans have strangely similar terms and conditions, and approval of loan applications takes a long time. Land titling and registration problems are prevalent, as are delays in the foreclosure process. Because of these factors, the ratio of housing loans to GDP remains small, at around 2.3% in 2011.

Outstanding real estate loans for acquisition of residential property grew by 17.3% in 2011, and by an average of 16% annually from 2001 to 2007, to PHP 220.8 (USD 5.28) billion. Real estate loans for acquisition of residential properties were up by 21.1% during the year to Q1 2012.

Housing loan demand has increased due to lower interest rates, and banks' more attractive financing terms. Credit standards for housing loans somewhat eased in Q1 2012, according to the Senior Bank Loan Officers' Survey, conducted by the Banko Sentral ng Pilipinas (BSP) (see latest results). Further growth seems likely.

In July 2012, the BSP cut its key policy rates by 25 basis points to 3.75% for the overnight borrowing or reverse repurchase (RRP) facility, and 5.75 percent for the overnight lending and repurchase facility (RF). Despite that, housing loan rates charged by major commercial banks remain high at 7.1% for one-year fixed loans, and at least 8.75% for mortgages with fixed rates for five years or more.

The government-owned Pag-ibig Fund (Home Development Mutual Fund) offers lower interest rates ranging 6% to 11.5%, depending on the amount borrowed and loan conditions. Compared to bank loans, the amount that can be borrowed is lower (maximum amount of PHP 3 million can be borrowed), but the payment periods are longer and loan-to-value ratios are higher (80% LTV ratio). Membership requirements have to be fulfilled to get a loan.

Rental yields are high in Manila

The average rental yield for condominiums in Metro Manila was around 8.72% in October 2011, according to the Global Property Guide research.

  • The highest returns are on the 80 sq. m. units with gross rental yields of nearly 10%, suggesting an oversupply of the very smallest condos.
  • Yields are also high on very large condominiums, at around 7.9%.

Rentals are visibly rising, as confidence continues to increase, with more foreign investment and improved infrastructure coming into the country.

In Q1 2012, the average rent for luxury three-bedroom condominiums in Makati CBD reached PHP 658 (USD 15.74) per sq. m., up by 4.8% from the previous quarter (4.3% in real terms), and 17.5% up on a year earlier (14% in real terms), according toColliers International.

The average rent in Bonifacio Global City rose by 4.3% q-o-q to PHP 685 (USD 16.69) per sq. m,. The recent completion of Raffles Residences in Makati is expected to narrow the gap between the rental rates of Bonifacio Global City and Makati CBD, and could cause upward pressure on both districts' average premium rates.

Rents in Rockwell Center were up by 1.3% q-o-q, and now average PHP 780 (USD 18.66) per sq. m., and are expected to hit PHP 800 per sq. m. by the end of the year.

No housing glut

The accumulated supply of high-end and mid-end residential condominiums from 1999 to 2011 was 118,230 units, according to Jones Lang LaSalle (JLL) research.

  • 97% of these are mid-end range (priced PHP 1.5 million to PHP 10 million with an average unit size of 150 sq. m., or PHP 50,000 to PHP 110,000 per sq. m.),
  • 3% (around 3,690) are high-end units (priced PHP 10 million above with an average size of 160 sq. m. up, or PHP 120,000 above per sq. m.).

A sharp increase in new supply began in 2005. Since then, supply growth has averaged more than 30% annually. The total stock of condominiums jumped from 7,000 at the beginning of the millennium, to around 90,000 units by end of 2011, according to JLL. But Jll sees no glut, and CBRE Philippines' executive director for global research and consultancy, Victor Asuncion, shares the same viewpoint.

"It´s still location, location, location. There are some irrational developers who build anywhere and then complain that they don´t sell and say there is a glut. You have to build where the market is and developers are positioning where the market is," said Asuncion.

Vacancy rates in Makati rose to 11.7% in Q1 2012 from 9.4% a year earlier, according to Colliers. The rise is attributable to new condominiums adjacent to, but not in, Makati - and in regions near Metro Manila.

Around 48% of condominiums built between 2004 and 2008 were in CALABARZON, a fast-growing region just beside Metro Manila. The Metro Manila region only had the fourth most residential properties built, among the eight regions (from 2004 to 2008. 17% of the total condo newbuilds were in Metro Manila. On the other hand, 11% of total single house constructions were in Metro Manila).

A noticeable increase of new condominium is also obvious in provincial cities such as Davao, Cebu and Iloilo. Cebu, for example, has strong demand, with a take-up rate of 434 units a month, according to CBRE.

Quezon City heads the surge with 24% of upcoming supply in Metro Manila. It is followed by Makati (18%), Mandaluyong (15%), and Manila (12%). These four cities alone comprise two-thirds of total upcoming supply in Metro Manila.

Around 33,000 units were completed in 2011, while over 50,000 units were launched, according to Colliers International, a 48% rise in completions during the year to Q1 2012. An estimate of 8,253 units of new residential supply in Metro Manila's key districts will be added in 2012, while around 5,028 more completed units will be added in 2013.

Better economic outlook in 2012

The Philippines managed 6.4% real GDP growth during the year to Q1 2012. This makes it the second fastest-growing economy in Asia - behind China (Ang galing ng Pilipino!).

The first quarter growth exceeded expectations with an expansion of 4.9%, according to Socioeconomic Planning Secretary Arsenio Balisacan. The economy's better performance was largely attributable to the expansion of the services (+8.5%) and industry (+4.9%) sectors, respectively.

Balicasan, who is also the National Economic and Development Authority (NEDA) Director General, said that 5% to 6% real GDP growth in 2012 is attainable, given the higher-than-expected preliminary Q1 2012 estimate. Meanwhile, the Asian Development Bank expects 4.8% GDP growth in 2012 and 5% in 2013.

The economic growth generated 1.1 million jobs, helping reduce the country's high unemployment. The government's Labor Force Survey (LFS) reported a 6.9% unemployment rate in April 2012, down from the 7.2% during the same period last year. From 2000 to 2005, the average unemployment rate was 11.4%. Then it dropped to an average of 7.5% from 2006 to 2010. Unemployment fell further to 7% in 2011, according to the IMF.

In July, inflation was 3.2%, according to the National Statistics Office (NSO). It is projected to be within the BSP's 3% to 5% target range in 2012. The BSP decided to cut rates in January and March 2012 by 25 basis points, leading to historically low rates of 3.75% for the overnight borrowing or reverse repurchase (RRP) facility, and 5.75 percent for the overnight lending and repurchase facility (RF), according to the World Bank.