Philippine Markets Newsletter

MONDAY MACRO: With the REIT timing, Uniform Accounting reveals that this industry has the capacity to recover to near pre-pandemic levels at 6% levels

October 12, 2020

With 20 out of 60 registered POGOs having moved out of the country so far this year, investors with exposure to Philippine real estate sector are likely worried about how this change will impact the industry’s potential growth.

We use Uniform Accounting numbers to provide a snapshot of the current real estate conditions of the country, as well as, analyze its near- to medium-term prospects.

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In January 2020, the Department of Finance (DOF) approved the amendments to the Real Estate Investment Trust (REIT) Law with the objective of providing big and small investors the opportunity to participate in the growing real estate industry.

The amendments include the lowering of the minimum public ownership requirement from 51% in the first year of listing to 33% and the removal of value-added tax on real or personal property transfers.

This development in implementing rules and regulations (IRR) sparked the interest of property developers, particularly DoubleDragonAyala Land, Vista Land, and Megaworld, in filing for a REIT offering.

REITs are companies that own various revenue-generating properties. These are modeled similarly to mutual funds where investors’ capital is pooled together. Investors earn income through dividends from the real estate investments, without possessing the properties themselves.

So far, Ayala Land’s AREIT Inc. is the only REIT listed on the Philippine Stock Exchange.

AREIT’s listing is interesting not just because it’s the only REIT on the stock exchange but also because of its timing. Normally, a company who plans to do an initial public offering (IPO) will schedule it in a bullish market when demand for the stock is stronger than in a bear market. With the Philippine stock market down 24% year to date, investors naturally thought AREIT’s market debut would be postponed.

However, management did not delay the stock’s debut, signaling their confidence on the desirability of REITs and the associated tax incentives for the firm, translating to higher retained earnings that can be used to create more value for its stockholders. Management’s conviction seems to have paid off as AREIT made its market debut on August 13, 2020 with a 2x oversubscription.

With its listing, Ayala now has the opportunity to unlock a substantial amount of liquidity, enabling the firm to capitalize on a whole host of investment opportunities for the domestic real estate and infrastructure sectors.

The establishment of the Philippines’ first REIT is a milestone for the country. REITs provide an additional investment option that gives individuals immediate exposure to a diversified holding of real estate properties. The firm, in turn, will have access to additional funds to grow the business.

In economics, reinvestments from REITs have a high multiplier effect that influences the aggregate demand and the economy. When REITs reinvest in the real estate sector, as required by law, they increase spending in the construction and infrastructure industry. That also provides more employment and business opportunities, resulting in lower unemployment, and eventually, higher consumer spending on goods and services.

The growth of the real estate industry plays a huge role in the economy as it provides a source of income for many and housing for the people living in it. Furthermore, the industry influences the aggregate demand as it stimulates consumer demand around the communities built.

This is why a rising demand for office spaces would be a positive indicator of a growing or recovering economy. It would indicate business demand is improving, which translates to employment opportunities as well.

The chart below is our Philippine Performance and Valuation (PVP) chart for the largest Philippine real estate companies where earnings show that it has grown since 2000.

Performance and Valuation Prime Chart: Philippine Real Estate Aggregate


Driven by the Business Process Outsourcing (BPO) and offshoring & outsourcing (O&O) industries, the demand for office spaces has been growing in the past few years. Both industries have averaged at more than 400,000 sqm in demand over the last 10 years.

On the residential side, the Philippine real estate industry has been improving since the early 2000s thanks to the continued increase in OFW remittances. With rising household incomes and rising demand for housing, the industry has been able to continue its growth.

Meanwhile, historical underperformance in 2001, 2005, 2007, and 2015 were caused mainly by assets growing at faster rates than earnings. Nonetheless, the industry saw recovery in the years that followed once earnings levels managed to catch up with asset growth. In 2020, this is expected to compress again to 5% levels, before returning to near pre-pandemic levels at 6% by 2021.

The expected lower profitability for 2020 is caused by declines in both earnings and asset growth with the pandemic constraining construction and Philippine Offshore Gaming Operators (POGOs) activity in Metro Manila.

POGOs had become the main driver of demand for office spaces in the Philippines, accounting for 36% of office demand across Metro Manila in 2019 as a result of their aggressive expansion. Because of their huge influence, they are also expected to drive continued weakness in demand for the remainder of 2020 as they vacate their office and condominium spaces amidst the pandemic.

Fortunately, analysts and experts see a recovery in 2021 with the assumption that the coronavirus has been contained by the end of 2020. In addition, construction activity is also expected to recover faster because of the low interest rate environment that would enable affordable financing of construction projects.

To conclude, a revitalized consumer demand, and continued corporate investments, particularly but not exclusively to real estate, are needed to lift the economy out of this technical recession. Additionally, a faster recovery from this recession is warranted since the recession has not been debt-driven, leaving the local financial system healthy enough for a rebound.

About the Philippine Market 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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