Philippine residential property prices continue to surge
Last Updated: September 30, 2015
During the latest quarter, condominium prices in Makati CBD increased 1.35% (1.1% inflation-adjusted) in Q2 2015.
Other major CBDs in Metro Manila, the country’s capital, also showed strong house price rises.
- In Rockwell Center, the average price for a 3-bedroom condominium rose by 11.5% (10.2% inflation-adjusted) to PHP158,000 (US$3,364) per sq.m., or a 3% q-o-q growth.
- In Bonifacio Global City, the average price for a 3-bedroom condominium increased by 9.7% (8.4% inflation-adjusted) to PHP148,000 (US$3,151) per sq. m., or a 1.2% q-o-q rise.
Demand remains strong. Residential real estate loans in the country soared by 25.9% y-o-y to PHP411.44 billion (US$8.76 billion) in Q1 2015, according to the Bangko Sentral ng Pilipinas (BSP), the country’s central bank.
Residential property prices in the country’s CBDs are expected to continue rising in the coming year.
Since Benigno (Noynoy) Aquino III became president in June 2010, he has instituted a no-holds barred anti-corruption and good governance campaign which has wowed foreign investors and caused consumer confidence to surge. Rising investment, plus low interest rates, have increased condominium prices by 42.2% (22.6% inflation-adjusted) between Q3 2010 and Q4 2014. Property prices have risen as much as 113.3% (34.1% in real terms) from 2004 to 2014. Philippine property experienced the fourth highest price rise in the world during the year to Q2 2015, according to the Global Property Guide’s Q2 2015 report.
The Philippines is now one of the fastest growing economies in Asia, with 6.7% growth forecast by the IMF for 2015, almost at par with China’s 6.8%. Moody, Standard & Poor’s, and Fitch Ratings, all affirmed the Philippines’ investment rating upgrade to investment grade, amidst strong economic growth and efforts to curb corruption. Based on the Global Competitiveness Index of the World Economic Forum (2014-2015), the Philippines ranked 52 out of 144, up from 59 and 65 in the past two years.
However, all these improvements depend partly on the political environment. The next presidential election is less than a year away. The fate of the housing market and the economy as a whole will significantly depend on who will be elected as the next president of the Philippines. The Philippine one-term presidential system reposes enormous power in the hands of the president, and a repeat of the disastrous experiences under presidents Joseph Estrada (1998-2001) or Gloria Macapagal-Arroyo (2001-2010) could reverse many gains made by the present administration.
In the second quarter of 2015, the Philippine economy grew by 5.6%, up from the growth of 5% in the previous quarter, but down from last year’s 6.7% growth, amidst a regional slowdown, based on figures from the National Economic and Development Authority (NEDA). Economic growth is expected of between 6% and 6.5% this year, after GDP growth rates of 6.1% in 2014, 7.2% in 2013 and 6.8% in 2012.
Philippines: yields good, though lower than in recent years
Yields in Manila remain good, but somewhat lower than during the past few years (when they were excellent). 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.
Buying prices for condominiums are at around US$2,800 to US$3,200, considerably up on previous years. Unusually, yields are not highest on the very smallest units, which suggests that smaller condominiums are oversupplied. The highest-yielding units are 80 square metre units (which have gross rental yields of around 7.7%). Last year we found that yields were surprisingly good on very large condominiums (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.
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$272) 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.
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.
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.
Robust economic growthIn the second quarter of 2015, the Philippine economy grew by 5.6%, up from the growth of 5% in the previous quarter, but down from last year’s 6.7% growth, amidst regional slowdown, based on figures from the National Economic and Development Authority (NEDA). This can be attributed to the strong performance of industry and services sectors, and robust government spending.
The robust economic growth in Q2 2015 reflects the country’s "resiliency from the prevailing weaknesses of the global economy," said NEDA chief Arsenio Balisacan.
Economic growth is expected between 6% and 6.5% this year, after real GDP growth rates of 6.1% in 2014, 7.2% in 2013 and 6.8% in 2012, according to government estimates. The Philippine economy is boosted by consumer spending, private investments and a recovery of government expenditures, according to the Asian Development Bank (ADB). In addition, election-related spending is also expected to buoy domestic demand through May 2016, when the national and subnational elections are held.
In July 2015, the nationwide unemployment rate fell to 6.5% from 6.7% in the same period last year, according to the Philippine Statistics Authority (PSA). The country expects unemployment to fall between its target range of 6.6% to 6.8% this year, buoyed by strong job generation in manufacturing and tourism sectors.
In June 2015, the country’s inflation rate slowed to 1.2%, down from 1.6% in the previous month and the lowest level in about two decades, according to NEDA. The tamed inflation was mainly due to the steady and sufficient supply of food and reduced electricity prices due to lower fuel costs. The government’s inflation target for this year range from 2% to 4%.
The country’s inflation is projected at 2.8% this year and 3.3% in 2016, from 4.4% in 2014, according to the ADB. "There are risks to this forecast from El Niño weather conditions that are expected to last through the first half, as well as from possible power shortages and pending petitions for higher electricity tariffs," the ADB said.
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