RealTMOR Asset Mgmt LLC and RealTMOR Apartment Mgmt LLP
The Philippine residential real estate market is a note-worthy and interesting investment option. It combines the advantages of a fast-growing and relatively stable South-East Asian (ASEAN) economy with a relatively high annual rental yield. As with most markets, it is NOT monolithic but a combination of micro-markets. RealTMOR’s focus and description for the Philippines real estate market covers prime residential/commercial areas of Metro Manila, Makati and Bonifacio Global City (BGC).
Current State:
The current outlook for Metro Manila is somewhat conflicting and needs to exhibit more clarity. During 2018, emerging markets, in general, faced significant challenges mainly due to the strong US Dollar. Main issues were related to Fed interest rate hike risks and potential deleterious effects of the US-China Trade-war. Makati and BGC condominium markets encountered risks of over-supply and rapid price appreciation, during the past few years. However, the Fed’s recent statements seem to indicate rate-hike risk may have abated, for now, providing relief of “flight to quality” risk from emerging markets.
Capital Gains: The Metro Manila residential market has had an uninterrupted upward move since 2004. In the last 14 years the total capital gain has been 170%+/-, based on various sources, which translates to capital gains CAGR of 7%. Factoring a 4-5% annual rental yield, during this period, Makati’s residential market provided total returns CAGR in the low teens, in Philippine Peso. However, the key factor to consider is that Metro Manila real estate “bottomed” during 2002-2004. East and South-East Asian countries experienced currency meltdown, equity crash and real estate crash during the Asian Financial Crisis (1997/98). The negative effects lingered and Metro Manila real estate was down 35% from 1997 till it bottomed in 2004. The peak values reached in 1997 were passed in 2010. There was a 13 year recovery period after the crisis and real estate crash. Thus, when the current growth/price appreciation is viewed in context of the Asian Financial crisis and its aftermath, the market doesn’t seem to have experienced “unnatural gains”. From 2010 to 2018, the capital gains in the Metro Manila residential real estate market was 77%+/-, with a capital gains CAGR of 7%.
Additionally, in recent times, Philippines has experienced an annual inflation rate of 3%+/-. Analyzing the gains in US Dollars further illustrates that these are not extra-ordinary gains, from 2004 to 2018 the Philippine Peso appreciated by 6%+/-. However, the Peso also bottomed in 2004. From 2010 to 2018, the Peso has depreciated 15%+/-. From 2010, the Peso and real estate turned positive and finally shook off the ghosts of the Asian Financial Crisis. The Peso peaked around 2013 and was hurt during the infamous “taper tantrum” originating from USA. It was not an isolated currency depreciation and the currencies of other high-growth emerging markets, like India, were hurt too. So, considering these factors, the capital gains from 2010 to 2018 would be 65%+/- in US Dollar terms, with a CAGR of 6%+/- and this is not a major deviation from the mean for residential real estate capital gains. Annual total returns of 10%+ in a high growth economy like the Philippines is not out of the ordinary.
Non-Price Parameters: parameters like supply of units for sale, rental vacancy rates etc. also indicate that the market is not currently overpriced. It is quite plausible to believe that the market is high but may not have peaked yet and there is some room for forward growth. Many analysts believe that by end of 2019, Metro Manila may have a supply deficit of “for-sale” condominium units. Around 4-5 years ago, analysts were projecting a future condominium oversupply and warning of overbuilding in Metro Manila. But, currently, it seems that those fears may have been overly pessimistic. It seems current inventory of under-construction property could be quickly absorbed and not create a supply glut.
There are multiple reasons for the attractive dynamics of Metro Manila.
Increasing Prosperity of Filipinos and Overseas Filipino Workers (OFWs): Currently, the local Filipino population is experiencing significant employment opportunities and relatively well-paying jobs. The Philippines has a large and growing BPO and KPO sector. The Call Center industry servicing English speaking countries is now out-pacing Indian competitors and attracting Indian out-sourcing investment. It has a defensible position for some future time because competitors like Vietnam do not have a large enough population with English proficiency. Further, the economy has been relatively well managed by the prior and the current governments, as compared to other emerging markets. The current government is making a push in infrastructure spend, embodied by the slogan, “Build, Build, Build”. This creates employment opportunities and spawns multiple ancillary/ supporting industries. OFWs have always been an important pillar of the Philippine economy and in 2018, per government sources, remittances hit a record high of $32B and grew 3%+ from previous year.
Lack of Other Major Investment Options for Filipinos: Historically, real estate has been the preferred investment option for Filipinos compared to financial securities. The local equity market (PSEi) is not deep or diverse and many locals view it as “risky”. The index is dominated by utilities, developers/land owning companies, retail companies and food companies. Additionally, the CD rates offered by banks in Manila are low, for a high growth economy, and close to inflation rates. An added advantage is that rental yields in Metro Manila have traditionally outperformed dividends or CD/high quality bond yields.
Increasing Interest from Chinese Buyers: Foreigners have historically been active in the Philippine real estate sector. Now, Chinese buyers (HNIs) are taking an active interest in Philippine real estate. Chinese HNIs are now investing in South East Asian countries because of the restrictions faced by foreigners in certain western countries. Recently, the Chinese government enacted certain restrictions on Chinese citizens regarding overseas money transfers. The lower amounts now available to Chinese HNIs, makes “lower priced” (in absolute terms) properties in SE Asia an attractive option. Additionally, Chinese companies have started outsourcing some of their technology and customer service segments to the Philippines and that creates Chinese expats. The Chinese are now an important segment in Metro Manila both as tenants and owners. This can only be advantageous for Philippine real estate.
Economic Miracle in ASEAN: Philippines has transformed itself from being the “sick-man of Asia” to being a major “tiger economy”. Philippines is now one of the fastest growing economies in the world, its estimated 2019 growth rate is 6.0%. It grew at 6.7% and 6.1% in 2017 and 2018, respectively, and 2018 GDP is estimated at $320B+. Unlike Malaysia and Indonesia, it is NOT a resource-driven economy. Unlike Thailand, it is NOT an export-driven economy. Unlike its neighbors, it is not as affected by commodity prices or foreign exchange rates. It is like India (fastest growing major economy), wherein relatively, it has a large domestic market and relies on skills of its population. Philippines is currently the 3rd largest economy of SE Asia and the fastest growing. Metro Manila contributes 38% of its GDP, 2.5x greater than the 2nd biggest area. Population-wise, Manila is one of the world’s largest and most densely populated cities. Many businesses are centered in Makati and BGC, which are economic nerve centers. The forward economic picture of the Philippines and Metro Manila looks positive.
These and other factors make investments in the Philippines an interesting option. Of course, it should be viewed as an ancillary investment, in my opinion, and not as the “primary” investment for non-Filipino HNIs. It is too attractive a market to ignore. But, it’s important to note that currently, the Philippine economy faces headwinds from the global situation just like many other countries. Being watchful at this time (6 months+/-) is important, focus on a purchase if the PRICE IS RIGHT or a Good Yield is available. In my opinion, over the long-term, Metro Manila real estate will be a good ancillary investment and should be considered in HNI real estate portfolios.