The Philippines - Asia’s Other Hot MarketSoutheast Asia is booming. Thailand and Indonesia have moved onto investor radar at record speeds in the last few years. Emerging Vietnam and Cambodia are slowly, quietly stealing China’s manufacturing thunder. Myanmar is still a question mark, but it’s endless coastline and pristine beaches have hotel operators chomping at the bit. In the coming years, however, the stealth star could be the Philippines.

Solid Foundation

With 100 million people scattered over 7,000 islands speaking nearly 200 languages, the Philippines is an enigma; the country’s robust economy, one of the region’s strongest performers since 2011, is not. Despite a glitch in 2014, Colliers International’s first quarter research stated, “The Philippine economy finished strongly during the fourth quarter, ending with a full year growth rate of 6.1 percent. This strong performance is expected to carry over to 2015, as spending from on-going infrastructure projects and robust domestic consumption continue to support growth.” Colliers went on to state that office, residential and retail property were all expected to trend upward this year, and the Philippines is positioned as one of the coming decade’s tiger economies. Already, “The real estate sector has benefited from having the highest residential yields, proving that Philippine investment shows good signs of stability across the region,” argues Mika Bautista -Naguiat, head of international sales for Rockwell Land Corp.

“The commercial sector is not showing any signs of slowing down thanks to the very well performing occupier market,” agrees Antton Nordberg, head of research at Savills associate KMC MAG Group. Manila, he says, offers attractive risk-adjusted returns leading to a positive investment climate. With industry rooted increasingly in services and manufacturing, strong office performance is to be expected. In May, Jones Lang LaSalle noted Philippine offshoring and outsourcing giant Convergys, SM Prime Holdings and India’s Tech Mahindra were among the active expanders and developers, adding new space at Clark, Cebu and the Mall of Asia complex.

All of which of course impacts the residential market, arguably the backbone of Filipino property. Like Australia, Vietnam and Thailand there is a cap on how much of a single development overseas nationals can purchase. And like the country’s closest investment rival, Indonesia, there are ways to purchase outside those lines, though less questionably.

Living for the City

“You can purchase land as a corporation … That’s very legal. It cannot be a fake,” explains boutique developer Bill Dousse at Angeles City-based Maison Tropicale. “The risk is of your [partners] ganging up on you. From my experience this risk can be mitigated.” Oddly, the Philippines has limited resort appeal, regardless of all those islands. “When you talk about Boracay and Cebu, that’s where the ‘action’ is. In other spots access isn’t as easy and some parts aren’t as well organised as Thailand,” reasons Dousse of the resort lag. “It is a process. Things are better than they were 10 years ago, and they’ll be better 10 years from now. So now could be the time.”

Urban investments still outpace resorts, and, “The same holds true for performance as an investment, at least in the medium term,” adds Thomas Mirasol, president of Ayala Land International sales. For now, the resort market is a long-term play.

Urban centres concentrated in Manila (Makati CBD, Fort Bonifacio) are the current stars, where the clearly structured condominium act allows overseas investors to purchase up to 40 percent of a development and as many properties as they wish (corporate shares are also limited to 40 percent where land is involved). As Mirasol notes, foreign president of Ayala Land International sales notes, foreign ownership is actually quite common. “Foreign buyers represent the biggest growth segment of Ayala Land’s current customer profile. Much of this growth is coming from Asia-Pacific because prices are very low and yields are good, and legal protection for property owners is good,” he says, adding the close proximity of Hong Kong, Singapore and Tokyo make management easy.

Though Nordberg suggests a slowdown may be looming, he points out that, “In the luxury segment, the capital values have significantly outpaced the rental growth in the past few years so I think the growth there will be more conservative in the next year or two — just to catch up with the rental market again. However, the lower segments will take care of the overall residential growth. That’s where most of the demand is.” Demographics are underpinning the mass market’s side: the population is young, inflation is low, domestic liquidity is high, structural reforms loom and overseas remittances continue. Colliers’ projects Metro Manila residential condo rental rates to climb 5.1 percent and capital values by 6.3 percent by 2016. But stronger legal and investment infrastructure elsewhere and corruption, however, keep the Philippines from really taking off with investors. As Mirasol points out, the government’s aggressive efforts to deal with it have boosted investor confidence.

Looking Ahead

The Philippines faces challenges the way all markets do. Mirasol cites keeping the BPO sector happy at a manpower level (though easier labour would mean quicker growth), and the pace of development is intrinsically linked to manpower development. “The upside of this is that it’s putting a lot of people to work with new opportunities in the Philippines,” notes Mirasol. Unsurprisingly, lack of developable land is a major hurdle.

Dousse also sees changes in overseas purchase laws and changes to the tax regime as critical to the continued growth of the property market. “A revolution would happen if foreigners were allowed to buy small lots of land. With conditions of course, you don’t want big corporation buying half an island. Just something in your own name. I’m sure that would give the market a boost … And the tax regime in the Philippines is opaque. The price you sell for and the price that’s publically listed are totally different, because of the taxes.”

Rockwell’s Bautista believes educating overseas investors is crucial, particularly when fighting for investment dollars against popular markets like the UK and Australia. “The challenge will always be educating the investor about the Philippines and its growth story … We are presented with the challenge of expanding our market share in a competitive arena. The goal is to introduce our country as the prime investment destination in the region and highlight attractive returns.”

Still, Dousse left Thailand for the Philippines. FDI reached a record high in 2014 and HSBC forecasts the Philippines will have Asia’s fifth (and the world’s 16th) largest economy by 2050. Dousse is justified in his optimism. “I see it as a country of opportunity. There are risks, it’s messy,” finishes Dousse. “But no matter, it’s on the rise.”