Philippine Markets Newsletter

MONDAY MACRO: Despite Uniform ROAs declining to just 5% in 2020, this industry is building on pre-pandemic growth prospects, on its way to recovery

January 11, 2021

This industry had been thriving before the pandemic arrived. With the economy weakening due to the lockdowns, recent data shows that their sales are weakening as well.

Will this trend continue? Is this just a temporary setback, or will this be an opportunity for investors?

Highlighted by Uniform Accounting, this industry reveals its true potential amidst the pandemic.

Philippine Markets Daily:
The Monday Macro Report
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The Philippine government collected PHP 245.9 billion in taxes for 2020. This 19% decline from the previous year is a result of subdued economic activity in the country due to the pandemic.

To address the issue of lower taxes, the government enacted the Bayanihan 2 law in September 2020. The law included a provision on collecting 5% franchise taxes from Philippine Offshore Gaming Operators (POGOs), as well as amendments to taxing on total gross bets from total bets net of winnings. This would have doubled the taxes collected from POGOs, which would then be used to increase government funds in their efforts against COVID-19.

However, just last week, the Supreme Court issued a temporary restraining order against the collection of those additional taxes.

With the economy still relatively weak, and with state expenditures having risen by 2% to PHP 374.1 billion in 2020, the postponement of any additional taxes on POGOs meant potentially PHP 15 billion was lost in taxes. That amount could have helped the country’s PHP 128.3 billion deficit, which grew by 110% from 2019.

Meanwhile, the higher taxes would have triggered the departure of most POGOs in the country, leaving an estimated vacancy of 200,000 to 300,000 square meters by H2 2021. In 2020, POGOs had a substantial amount of vacancies for office spaces with 277,000 square meters (sqm), which accounted for an estimated PHP 1.4 billion in losses in office rent and around 127,000 job losses.

Given the recent development of office demand that the POGO industry has contributed across Metro Manila from 2016 to 2019, sustainable growth from POGOs is important to the recovery of office demand after the pandemic.

In addition, property sector experts mentioned that infrastructure projects will positively impact property development and office demand for 2021. In particular, the Skyway Stage 3 will improve traffic flow and boost commercial activities in places such as BGC and Makati.

Moreover, the recovery of office leasing for 2021 will depend on the optimistic outlook of businesses to restart operations as well as the recovery of other countries that tend to outsource services to the Philippines.

Research from the Tholons Global Innovation Index 2020 shows the Philippines is considered one of the most competitive nations in terms of outsourcing services at 6th place. This means multiple factors like the young workforce population of the country remain attractive to foreign countries. This should support a stronger rate of office leasing once business sentiments improve.

Furthermore, the country is aiming to offer at least four Real Estate Investment Trusts (REITs) for IPO (initial public offering) this year, after the approval of more amendments to the IPO rules. This reflects an optimistic sentiment for the industry from REIT management teams and the Philippine Stock Exchange

In our Monday Macro report on REITs, we talked about the availability of capital that it will bring to the market as well as their significance to the economy through their high multiplier effect. The report further explains why office demand is a positive indicator for the economy as it provides employment opportunities to the Philippine economy. If more REITs debut in 2021, then growth opportunities to the real estate sector will improve given the reinvestments the REITs will bring.

Performance and Valuation Prime Chart: Philippine Real Estate Aggregate

The chart above is our Philippine Performance and Valuation (PVP) chart for the largest Philippine real estate companies. It shows a sustainable and upward ROA trend, growing from 1% to 7% in 2019, before declining to 5% in 2020 amidst headwinds from COVID-19. Still, the companies in aggregate are expected to rebound by 2021 at 6% levels as the rollout of the vaccine for COVID-19 is seen to happen around Q2 2021.

However, headwinds such as subdued building activities, which fell by 66% in Q2 2020 across the country, will remain as long as the public fears contracting COVID-19.

That said, the favorable ruling for taxes for POGOs, the impact of infrastructure projects, the competitiveness of the Philippine market for outsourcing services, and the expected IPOs remain key growth factors for the Philippine real estate sector.

About the Philippine Markets Daily
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Daily
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