Focus: Property sector’s prospects seen boosted by infrastructure drive

July 27, 2016
By Krista Angela M. Montealegre
National Correspondent

THE AGGRESSIVE infrastructure drive of President Rodrigo R. Duterte has boosted the prospects of the property sector, easing concerns of an overheating market and accelerating the development of residential, office, retail and hotel projects in the countryside.

Inheriting a fast-growing economy plagued by gridlocked roads and congested airports, the new administration vowed to ramp up infrastructure spending to account for up to 7% of economic output. This is in line with a broader effort to decentralize the Philippine capital and boost economic activity outside Luzon in order to achieve inclusive growth.

“Additional spending would increase the demand for money. That could ease the liquidity going into the real estate industry and in the process mitigate any possible formation of an asset bubble,” Bangko Sentral ng Pilipinas Deputy Governor Diwa C. Gunigundo said in a mobile phone message last week.

Policy makers have repeatedly downplayed concerns of an overheating property market.

The results of the central bank’s maiden residential real estate price index in June bared a 9.2% housing inflation in the first three months of 2016 from a year ago, indicating a “vibrant” housing industry.

The government’s accelerated infrastructure spending and proposed income tax cuts — which are expected to increase the spending power of consumers — have improved the outlook for the property sector. Brokerages have issued “buy” calls on real estate firms with strong recurring income and exposure to tourism.

“It [government spending on infrastructure] will somehow ease the fears of a property bubble, as we noted excess capacities/build-up can also be seen now in second-tier areas outside of Metro Manila. With improved infrastructure condition, new demand can be generated to absorb these new build-up,” said Claro dG. Cordero, Jr., head of Jones Lang Lasalle’s research, consulting and valuation advisory services.

Rising disposable income due to a robust outsourcing industry and steady remittance inflows from overseas Filipino workers have been fueling consumer spending, driving the rapid expansion of the property market.

A bubble forms as property developers scramble to build more units in a bid to meet a projected rise in demand and is said to “burst” when purchases do not increase as expected, triggering a steep drop in prices.

“What we had was a soft landing; developers have held back on launches. In the next few years, the completed units will come to the market so we may see a more difficult leasing market,” said Julius M. Guevara, head of advisory services at Colliers Philippines.

UNLOCKING VALUE
For property giants Ayala Land, Inc. and Megaworld Corp., the new government’s thrust means townships incorporating residential, office, commercial and hotel components in new sites and enhanced values for their properties in traditional markets.

“When you have more mass transit systems and farm-to-market roads, it unlocks the value of the property. How can you price properties in far-flung areas at a premium when you have no way to get there?” Megaworld Corp. Senior Vice-President Jericho P. Go said.

For most developers, the diversification outside the Philippine capital has been happening for some time now because of the expansion of the business process outsourcing industry, with real estate companies venturing into other key urban centers such as Cebu and Davao and the fringes of Metro Manila such as Pampanga, Cavite and Laguna.

“We always had that impression that these are markets that weren’t served in the past,” Ayala Land Chief Financial Officer Jaime E. Ysmael said.

“But when infrastructure and connectivity improved significantly, we were surprised with the kind of demand they generated. We’re seeing signs of significant demand and economic activity in these new areas.”

Metro Manila’s contribution to Ayala Land’s business is now down to 80% from 90% in 2009 when it kicked off its aggressive diversification. This may go down to as much as 70%, depending on how fast these regions develop, Mr. Ysmael said.

NEW HUBS SPROUTING
In the last five years, land values in Cebu and Davao cities — which have become the centers of activity in the Visayas and Mindanao, respectively — have risen at a compounded annual growth rate of 10%, faster than the 7.5% expansion in Metro Manila.

Mall developers SM Prime Holdings, Inc. and Filinvest Land, Inc. have joined Ayala Land and Megaworld in moving to non-traditional locations, building more than 1 million square meters of retail space in areas like Cebu, Davao, Cagayan de Oro, Dagupan, Cavite, Rizal, Bacolod, Laguna, Iloilo, Tacloban, Ilocos Norte and Naga, Mr. Cordero said.

Likewise, DoubleDragon Properties Corp., Robinsons Land Corp. and Vista Land & Lifescapes, Inc. are pioneering the development of community malls in the countryside, he added.

Even foreign-branded hotels are setting their sights beyond Metro Manila, with Hilton Hotels & Resorts opening Hilton Clark Sunvalley Resort in 2017, Starwood Hotels and Resorts launching Sheraton Mactan in 2019 and Dusit International rolling out Dusit Thani Davao in 2018 and Dusit Princess Hotel Cebu in 2019, JLL Country Head Lindsay Orr said.

So far, the President and his economic team have been saying all the right things, but the trick is getting all plans off the ground as quickly as possible.

“There is a gestation period for these [infrastructure] projects to take off so the government must act fast, make an early decision — be it the airport strategy, the Angat [Dam] alternative or an energy supply chain — and build the momentum from the previous administration’s work,” AC Energy Holdings, Inc. President and Chief Executive Officer John Eric T. Francia said.

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