Market in Depth

Philippines: nationwide house prices rising strongly, but Metro Manila's CBD is slowing

July 21, 2016

The Philippines' residential property market has performed spectacularly, due to robust economic growth. During the year to Q1 2016, the nationwide residential real estate price index rose by 9.2% (8% inflation-adjusted), according to the Bangko Sentral ng Pilipinas (BSP), the country's central bank.

Quarter-on-quarter, the index rose 1.9% (1.9% inflation-adjusted) in Q1 2016. The residential real estate price index, published every quarter, is based on bank reports on residential real estate loans.

By property type:
  • Condominium units saw y-o-y price increase of 12.9% (11.6% inflation-adjusted) in Q1 2016
  • For single detached/attached house prices rose by 8.1% (6.9% inflation-adjusted) y-o-y in Q1 2016
  • For duplex house prices rose by 6.7% (5.5% inflation-adjusted) y-o-y in Q1 2016
  • Townhouse prices rose by 8.5% (7.3% inflation-adjusted) over the same period

In the National Capital Region (NCR), residential property prices surged 9.7% (8.5% inflation-adjusted) during the year to Q1 2016 while in Areas Outside the NCR (AONCR), prices rose by 9.4% (8.2% inflation-adjusted), according to the BSP.

On the other hand, prices of high-end condominium units in Metro Manila's CBDs rose at a much slower pace. The average price of a luxury 3-bedroom condominium unit in Makati central business district (CBD) rose by a modest 2.4% (1.23% inflation-adjusted) during the year to Q1 2016 to PHP151,622 (US$3,203) per square metre (sq. m.), according to Colliers International - the lowest y-o-y increase in Makati CBD since Q3 2010. During the latest quarter, condominium prices increased 0.2% (0.2% inflation-adjusted) in Q1 2016.

Price rises also slowed in other major Metro Manila CBDs:
  • In Rockwell Center, the average price for a 3-bedroom condominium rose by 5.5% (4.3% inflation-adjusted) to PHP162,500 (US$3,433) per sq.m., or a 0.2% q-o-q growth.
  • In Fort Bonifacio, the average price for a 3-bedroom condominium increased by 2.6% (1.4% inflation-adjusted) to PHP150,000 (US$3,169) per sq. m., or a 2.6% q-o-q rise.

Nationwide residential property prices are expected to continue to rise strongly for the remainder of the year, boosted by robust economic growth. On the other hand, Metro Manila's CBDs are expected to slow due to a demand /supply mismatch.
The Philippine economy grew by 6.9% in Q1 2016 from a year earlier, up from growth of 6.5% in Q4 2015, 6% in Q3 2015, 5.8% in Q2 2015, and 5% in Q1 2015, according to the Philippine Statistics Authority (PSA). The economy is projected to grow by 6% in 2016, and 6.2% in 2017, according to the International Monetary Fund (IMF).

Foreigners cannot own land, but can own condominium units or apartments in high-rise buildings as long as the foreign proportion does not exceed 40%. They can also buy a house but not the land on which it is built. Leases on land up to 50 years, renewable for another 25 years, are available.

Analysis of Philippines Residential Property Market »

Rental Yields

Philippines: yields good, though lower than in recent years

Yields in Metro Manila are exceptional, by international standards.

However transaction taxes (known as ‘capital gains taxes´, but not actually such), and (if observed) official income tax rates applicable to non-resident investors, are high. You may think that it will be easy to avoid these taxes, it being the Philippines. But it ain't necessarily so. Once the local authorities have their eye on you, they won't willingly let go. Plus, the sheer bureaucracy of actually paying can be irritating.

Buying prices for condominiums are from US$2,800 to US$4,200 per square metre, considerably up on previous years. Unusually, yields are not always highest on the very smallest units, which suggests that smaller condominiums are oversupplied. It therefore makes a lot of sense to get a larger unit, since the general management cost and hassle of a larger unit is less.

The highest-yielding units that we found are 50 square metre units in Ortigas (which have gross rental yields of nearly 9%). Great! We don't have enough information to know whether these high yields apply in Ortigas to other apartment sizes.

The year before last we found that yields were surprisingly good generally on very large condominiums in Metro Manila (250 square metres), at around 9%, but this year we were not able to assemble a database of this dimension. This may be an optimal size for investment.

Read Rental Yields »

Taxes and Costs

Moderate taxes for foreigners
engaged in trade or business

Rental Income: Nonresident foreigners who are engaged in trade or business are taxed at progressive rates (5% to 32%) on their net income. Rents above PHP12,800 (US$26) per month are also liable to VAT at 12% of gross rent.

Capital Gains: Capital gains realized by nonresident foreigners from selling properties used in trade or business are taxed at the standard progressive income tax rates (5% to 32%). Taxable gains are the difference between selling price and acquisition cost of the property.

Inheritance: Non-resident foreigners pay estate tax only on property located in the Philippines at rates from 5% to 20%.

Residents: Resident citizens are taxed on their worldwide income at progressive rates, from 5% to 32%. Resident foreigners and nonresident citizens are taxed on Philippine-sourced income at progressive rates.

Read Taxes and Costs »

Buying Guide

Transaction costs can be very high in the Philippines

The total roundtrip cost of property purchase is around 7% to 16.25% of the property value.

For taxation purposes, properties are treated as capital assets if it is not used in trade or business, and properties are treated as ordinary assets if it is used in trade or business, such as rental property. The 6% Capital Gains Tax applies only on properties treated as capital assets and not on properties treated as ordinary assets.

It takes about 32 days to go through the nine procedures to register a property in the Philippines. Pre-selling, or the selling of units during construction, is the fashion nowadays. The buyer should be careful when buying unfinished buildings or condominiums.

Read Buying Guide »

Landlord and Tenant

Rents are paid one year in advance in Manila

The luxury rental market is generally pro-landlord. However, for the rest of the market the balance of power between landlord and tenant in the Philippines is neutral.

Rents: The parties can freely determine the amount or rent and rent increases. At the upper end of the market, the landlord receives one year’s rent in advance in post-dated cheques.

Legal System: The legal system is cumbersome. Tenant eviction can go through a long and expensive trial. In practice, the landlord’s success in evicting a tenant may depend on his influence in influencing the police (or local gang members) to apply pressure.

Read Landlord and Tenant »


Robust economic growth

Philippines gdp inflationThe Philippine economy grew by 6.9% in Q1 2016 from a year earlier, the fastest among major Asian economies and up from GDP growth rates of 6.5% in Q4 2015, 6% in Q3 2015, 5.8% in Q2 2015, and 5% in Q1 2015, based on figures from the National Economic and Development Authority (NEDA). The strong growth was investment-driven on the demand side, with significant contribution from investments in durable equipment.

During Q1 2015:
  • Fixed capital investment grew 25.5% and contributed 5.8 percentage points to real GDP growth
  • Construction grew 12%, up from growth rates of 7.6% in the previous quarter and 4.5% in a year earlier. In fact, public construction expanded by 39.9%, in sharp contrast with a 23% decline a year earlier
  • Exports rose by 6.6% while imports grew by 15.9%

In addition, election-related spending buoyed domestic demand through May 2016, when the national and subnational elections were held.

“All these investments give us confidence that the economy will continue to perform well in the succeeding quarters of the year and beyond,” said former NEDA chief Emmanuel Esguerra.

The economy is projected to grow by 6% in 2016 and another 6.2% in 2017, according to the IMF, from GDP growth rates of 5.8% in 2015, 6.1% in 2014, 7% in 2013, and 6.7% in 2012.

In Q1 2016, the nationwide unemployment rate stood at 5.8%, up from 5.7% in the previous quarter but down from 6.6% a year earlier, according to the Bangko Sentral ng Pilipinas (BSP). Unemployment is expected to fall to 6% in 2016 and to 5.8% in 2017, from an annual average of 7.2% from 2006 to 2015, according to the IMF.

In June 2016, the country’s inflation rate was 1.9%, up from 1.6% in the previous month and 1.2% in the same period last year, according to the Philippine Statistics Authority (PSA). The rising inflation was mainly due to the slight recovery in oil prices and the lingering effects of El Niño weather conditions in the country. Inflation is expected at 2% this year, according to the IMF. Inflation started to slow sharply in 2015 to 1.4%, from 4.2% in 2014, 2.9% in 2013, 3.2% in 2012, 4.7% in 2011, and 3.8% in 2010.

The Philippine peso is expected to depreciate to US$1 to PHP49 by end-2016, mainly due to continued external volatility related to Brexit and the weak Chinese yuan, according to BMI Research. Currently, the exchange rate stand at US$1 = PHP47.35, about 8.2% depreciation from a year earlier.

Former president Benigno (Noynoy) Aquino III (president June 2010 - June 2016) instituted a no-holds barred anti-corruption campaign which wowed foreign investors and caused consumer confidence to surge.  The Philippines is now one of the fastest growing economies in Asia, with an average growth rate of 6.4% during the past four years, according to the IMF.

The Philippines’ investment ratings were upgraded to investment grade by Moody, Standard & Poor’s, and Fitch Ratings.  The country now ranks 47th out of 140 economies in the Global Competitiveness Index (2015-2016), up from 52 in 2014, 59 in 2013, and 65 in 2012.

Rising investment, plus low interest rates, increased condominium prices by 48.9% (26.5% inflation-adjusted) between Q3 2010 and Q4 2015.  Property prices have risen as much as 114.9% (38.5% in real terms) from 2004 to 2015.

Will this success continue? During the May 2016 presidential election, former Davao City mayor Rodrigo Duterte won a landslide victory, capitalizing on discontent with rising inequality and on the perceived incompetence of Aquino's chosen successor, Mar Roxas.  Duterte vowed to bring progress to all Filipinos, to eliminate government corruption and to substantially reduce crimes, especially the use of illegal drugs. While in his former job he was strongly suspected of running death squads to accomplish this goal, Duterte's hands-on work ethic made Davao an efficiently run city.

The new administration’s 10-point socio-economic agenda include:
  • Current macroeconomic policies
  • Tax reform
  • Competitiveness and ease of doing business
  • Infrastructure spending
  • Rural and value chain development
  • Security of land tenure
  • Human capital development
  • Science, technology, and creative arts
  • Social protection programs
  • Responsible Parenthood and Reproductive Health Law

Just recently, the Asian Development Bank (ADB) commended the Duterte administration and offered greater financial assistance to show strong support to the new administration’s 10-point agenda.

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