Philippine Property:Notes from Manila
Property sector firing on all engines: While the supply side has been welldocumented, incremental demand drivers for the sector have shifted investorexpectations over the course of the year with regard to the sector’s prospectsover the near-medium term. For the BPO office segment, demand for space hasbeen underpinned by Philippines Offshore Gaming Operators (POGOs) inaddition to the traditional occupiers of such space. Demand for residential hasalso seen a resurgence (in particular in high rise residential from Chineseinvestors) resulting in a reversal of a much discussed “inventory problem” in late-2016. 1H17 foreign tourist arrivals are also up 13% y-o-y driving demand forhotels and the spill-over impact of these together with an uptick in global growthand remittances is also likely to be felt on the retail sector. In line with this,developers are looking to continue on with their planned cap-ex, and remaincomfortable with leverage around current levels and see this as remainingsustainable and within their comfort range for the next 12-18 months.
Tax reform package could drive growth: This was talked about as key to a7%+ GDP growth environment driven by spending on infrastructure projects,which could have a knock-on effect on the property sector. Some aspects of thepackage such as the removal of the VAT exemption for residential propertypriced below PHP3.2m remain controversial and would likely be moderated butcould nonetheless impact developers targeting investors of high rise residentialpriced below PHP3.2m in Metro Manila. On REITs, most developers think thiswill be up for discussion only after the tax reform package is passed.
Delays are a possible risk, could get worse for smaller developers: Smallerdevelopers have usually faced the brunt of delays as contractors prefer workingwith larger developers. With expectations around large developers embarking onmajor projects and the government embarking on infrastructure projects as well,this could accentuate the problem for smaller developers, in our view.
Buy ratings on ALI, MEG and RLC: Despite the strong year-to-date performancefor the sector (the Philippine property sector has outperformed the broad index aswell as most regional peers barring Singapore developers), we foresee continuedupside. Among the four developers we cover in the Philippines, we have Buy ratingson three – Ayala Land (ALI PM – PHP43.35, TP: PHP50.95), Megaworld (MEG –PHP5.32, TP: PHP6.20), and Robinsons Land (RLC – PHP25.20, TP: PHP36.75) –reflecting our continued optimism.