Philippines property market a gem hidden to most investors

A look at commercial real estate transaction volumes in Asia quickly reveals which countries dominate the investment landscape. Japan, China, Australia and South Korea have accounted for the lion's share of direct investment in the past decade. Within Southeast Asia, Singapore stands alone as a heavyweight, making up at least 80 percent of investment activity, according to a South China Morning Post report.

The Philippines, therefore, receives little attention. It lacks the economic weight of Indonesia, the manufacturing prowess of Vietnam and the tourist appeal of Thailand, often taking a back seat to its regional peers. However, the Philippines is at the forefront of important, and often overlooked, trends in the real estate industry.

Luxury Residential Market Booming

At a time when global house prices are rebounding, Manila's luxury market is experiencing a surge. According to a Knight Frank index of prime residential prices in 100 cities worldwide, the Philippine capital recorded the fastest growth last year. Prices grew a staggering 26.3 percent, surpassing even Dubai. Manila also held the top spot in the first quarter of this year.

Strong demand from a rising number of high-net-worth individuals and limited supply have driven up prices. The Philippines was Southeast Asia's fastest-growing economy last year and has enjoyed annual growth rates in the past decade that have nearly equaled India's.

However, capital values remain much lower than in leading Asian cities. According to Knight Frank, $1 million bought 158 square meters (1,700 square feet) of prime residential property in Manila in 2022, compared to just 34 square meters in Singapore, 60 in Tokyo and 113 in Mumbai. Manila's luxury market is booming but remains relatively affordable.

Bricks-and-Mortar Retail Thriving

While physical retail faces challenges due to the rise of online shopping, the Philippines is a haven for shopping center landlords. With private consumption accounting for more than 75 percent of economic output and online retail spending at just 2 percent in 2022, Manila's shopping centers are in a prime position.

Surprisingly, Manila is home to two of the world's largest shopping centers. In a country with heavy rain and high temperatures and humidity, large shopping centers serve as both a refuge and an entertainment destination. "Malling is a way of life here, providing shelter from the rain and heat," said Joe Curran, chief executive at KMC Savills in Manila.

Business Process Outsourcing Drives Office Market

The expansion of the business process outsourcing (BPO) industry is the biggest story in Philippine commercial real estate. The sector is not only the country's largest employer, but also a key driver of growth and the main source of demand for office space. Revenues have been increasing at an annual rate of 9 percent since 2019 and are expected to reach a substantial $38 billion this year.

The Philippines overtook India as the world's call center hub over a decade ago. As a former U.S. colony with a large population of young English speakers, the Philippines is fertile ground for multinational firms seeking to streamline operations and optimize back-office functions. A popular approach is to leverage lower labor costs and deep talent pools in emerging markets.

Data from Knight Frank shows that offshoring-related wage costs in the Philippines are still significantly lower than in India, while prime office rents in Manila are nearly 50 percent lower than in Bengaluru, Mumbai and New Delhi. This incentivizes multinational companies to locate more call centers in the Philippines. "For every 100 jobs they outsource to India, they add 10 to 20 in the Philippines," said Anshul Jain, head of Asian tenant representation and managing director for India and Southeast Asia at Cushman & Wakefield.

In the first quarter of this year, outsourcing and offshoring accounted for 53 percent of leasing activity in metropolitan Manila's office market. In Cebu, the share was as high as 80 percent, according to JLL.

Challenges and Opportunities

Unsurprisingly, there are concerns about the Philippines' vulnerability to the rise of generative artificial intelligence (AI). A large portion of BPO jobs in the country are low-skilled, but AI could serve as a catalyst for upskilling and higher-value services. "The industry saw this coming and knows it has to move up the value chain," said Morgan McGilvray, senior director, occupier strategy and solutions, at Knight Frank in Manila.

The bigger threat to the office market is remote work, which has become more prevalent since the COVID-19 pandemic. Long commutes from suburbs to central Manila, exacerbated by decades of underinvestment in infrastructure, have increased the appeal of hybrid work models and spurred the decentralization of the office market.