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Infra woes to bug Manila, Cebu property boom?

The Philippine real estate industry continues to grow in strength, and remains an attractive option for investors, but poor infrastructure and connectivity could pose problems in future.

At a recent forum in Makati City, KMC MAG managing director Michael McCullough acknowledged that  “major transactions confirm that strong economic policies and a stable political environment will sustain the real estate industry.” He added that while investment banks are scaling down their growth forecasts, “we believe the long-term economic outlook remains positive, which will provide a favorable foundation for the property market.”

But McCullough warned that the government should pay extra attention to the issues of infrastructure and connectivity, as these will dictate the country’s future economic growth, as well as its attractiveness to foreign investors.

Caveat. Jose Carmelo Porciuncula, KMC MAG head of capital markets and investments and Michael McCullough, managing director, argued for the need to step up efforts to make transportation and communication easier across the islands. 

“Low rental costs can bring investors into the Philippines, but the quality of the infrastructure and the limitations in connectivity can keep the Philippines from sustaining and even improving on its growth,” he told the Manila Standard. “The government cannot afford to have these issues further impact the ease of doing business and the quality of life.”

“For the Philippines to be able to compete with the rest of Southeast Asia and the rest of the region, it will have to make transportation and communication easier across the islands, and ensure that this experience is consistent throughout the country,” McCullough said. “Otherwise, other markets will find a way to take up the slack, and the rest of its advantages will become irrelevant.”

Growth a given

The Philippine real estate industry recently recorded a record-high quarter for transaction volumes, driven by large-scale land deals, with the volume estimated to be at US$505 million. Some of the major transactions include SM Prime’s EDSA Guadalupe property (worth Php1.6 billion), the Hyundai Balintawak property (worth Php1.2 billion), and 8990 Holdings’ EDSA Cubao property (worth Php366 million).

Foreign investors looking to set up shop in Southeast Asia have good reason to look at Manila. The city offers low prime office rental costs, averaging at Php1,510.00 (US$32.30) per square meter, inclusive of taxes and management fees,” said McCullough. He noted that Manila’s prime office rental costs continue to be lower than some of Asia’s major cities, such as Tokyo, Beijing, Seoul, Ho Chi Minh City, Jakarta, and Hanoi, and is second only to Kuala Lumpur.

“Manila’s prime office rental costs, sound macroeconomic conditions, and relatively cheap labor costs make a strong argument for the city,” he said. “Multinational companies looking to expand to Southeast Asia or set up another office in Asia should seriously consider Manila as a destination.”

Another argument for moving to Manila is the ongoing ease in rentals; which is due to the influx in new supply in Bonifacio Global City and higher vacancy rates in Alabang.

“We expect over 430,000 square meters of new office stock by the end of 2015 and a sharp rise in vacancy rates by the second half of 2016. says McCullough. “We would advise businesses to look into pre-leasing addresses in the central business districts, while they can still leverage on their increased bargaining power.” 

Growing middle class, private consumption a boon

International retailers looking to capture a share of Asia’s growing middle class can also look at setting up in Manila, which offers the lowest rental costs for prime retail malls. Manila’s rental rates are lower than some of Asia’s more popular shopping destinations, such as Hong Kong and Singapore, and even lower than some Asia-Pacific cities, such as Tokyo, Taipei, Sydney, and Melbourne.

To respond to the demands of the country’s rising middle class, local developers are launching projects within Metro Manila and in the provinces. In Metro Manila, local developers have put 600,000 sq m in the pipeline, with 75.2% to be delivered by Ayala Land, SM Prime, and Robinsons Land. The largest single project in Metro Manila is SM’s 200,000-sq m Mall of Asia expansion, increasing the property’s total size to 550,000 sq m. Other pipeline retail projects include Ayala Land’s Paradigm Pasig, SouthPark Alabang, and Circuit Lane, Megaworld’s Uptown Mall, and Wilcon’s Wilcon City Center. Outside of Metro Manila, SM is currently working on SM City Seaside, located in Cebu.

Cebu, a magnet for investment

Cebu is becoming one of the country’s bright spots.  During the local government’s recent auction of two properties on reclaimed land in South Road Properties, the Ayala Land and SM Prime consortium won the bid for a 26.3-hectare parcel, which was sold for Php10 billion, making it the largest single ticket transaction in the country since late 2013. In the same auction, Filinvest also won the bid for a 19.2 hectare property, sold for Php6.7 billion.

“With South Road Properties slated to be transformed into a mixed-use central business district, these deals will certainly influence the dynamics of Cebu’s real estate market,” said McCullough. “This upcoming central business district will account for significant real estate activity in the future. With townships becoming the norm, these deals may also encourage local developers to become more aggressive.

The office market in Cebu continues to be robust. McCullough observed that rolled out the first tower of its Php5 billion Cyberzone complex, and Norkis is expected to complete the first office tower in Norkis Cyberpark later this year. Ayala Land is also rolling out Php8 billion for Central Bloc, which is located within the Cebu IT Park. Lastly, Megaworld is expected to add 150,000 sq m to its Mactan Newtown property by 2021.

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