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An ever-evolving Manila

Today, June 24, marks the 448th founding anniversary of the City of Manila. Early this month, Malacañang declared this day a special non-working holiday in the capital, giving residents and others a chance to celebrate and reflect on the city’s long and colorful history.

Almost four centuries and a half ago, a Spanish explorer by the name of Miguel López de Legazpi, the first governor-general of the Philippines, and his troops came to Manila after founding a Spanish settlement in Cebu. Legazpi was ordered by Luis de Velasco, the second viceroy of New Spain, to claim the country after it was discovered by Ferdinand Magellan roughly half a century earlier. Legazpi found a Muslim community in Manila and had it destroyed and replaced it with Intramuros, a walled city.

“Manila became the capital of the new colony. Outside the city walls stood some scattered villages, each ruled by a local chieftain and each centered on a marketplace. As Spanish colonial rule became established, churches were built near the marketplaces, where the concentration of population was greatest. Manila spread beyond its walls, expanding north, east, and south, linking together the market–church complexes as it did so,” Encyclopedia Britannica says.

More than three centuries later, a war between Spain and the United States took place, and the Philippines fell into the hands of the latter. According to Britannica, the period during which the city was under the rule of the United States (US) was “one of general social and economic improvement.”

“US policy encouraged gradual Filipino political autonomy, and to help achieve this goal, public schools were established in Manila and throughout the archipelago. The University of the Philippines, founded in 1908, became the apex of the educational system. The city developed into a major trading and tourist center,” it explains.

Things changed for the worse when the Second World War broke out. Manila was declared an open city by General Douglas McArthur so as to stop it from getting destroyed by the Japanese forces that had started invading the country in the early. Britannica notes that the city suffered only “little damage” during the Japanese invasion. (Japanese occupation lasted a few years, from 1942 to 1945). “[B]ut [it] was leveled to the ground during the fight for its recapture by US forces in 1945,” it says.

In 1946, Manila, as Britannica describes it, was “in shambles” when it became the country’s capital. However, it managed to get back on its feet with help from the United States. Despite this, in 1948, Quezon City was declared the new capital. It held that title for almost three decades. But in 1976, following a presidential decree, Manila was once again officially recognized as the country’s capital.

Now, Manila is a sprawling metropolis. According to the Philippine Statistics Authority, it had a population of 1.78 million in 2015. It was the second most populous city in the National Capital Region after Quezon City, which had 2.94 million people.

It is also a major economic center, home to a multitude of commercial establishments. It is the headquarters of a number of big businesses, including major publishing companies.

Intramuros and Binondo are two of the city’s most historically and economically important districts. The former is the location of some of the most historic structures in the country, such as Fort Bonifacio, San Agustin Church and Manila Cathedral. Tourism is a major industry in the district. In addition, Intramuros is where several well-known colleges and universities are found, like Mapúa University, Colegio de San Juan de Letran, and Pamantasan ng Lungsod ng Maynila. The latter district is the oldest Chinatown in the world, where businesses by largely Filipino-Chinese entrepreneurs abound. Among its famous attractions are San Lorenzo Church and Escolta Street.

Port of Manila, located in the northwestern portion of the city, is the largest seaport not only in Luzon but in the entire Philippines. In the 2018 ranking of the world’s largest container ports compiled by Lloyd’s List, a British journal, it placed 30th, having a throughput of 4,782,240 teu (20-foot equivalent unit) in 2017, up 5.7% from 2016. Lloyd’s List said of the port, “An aggressive infrastructure push helped growth at the most important international gateway in the country.”

According to the Cities and Municipalities Competitive Index 2018, the City of Manila was the second most competitive local government unit (LGU) in the country after Quezon City. The competitiveness of an LGU was evaluated in terms of four “development pillars,” namely economic dynamism, government efficiency, infrastructure and resilience.

Security risks top of mind in ASEAN

HEADS of state of the Association of Southeast Asian Nations (ASEAN) meeting in Bangkok, Thailand on Sunday led off the ASEAN Leaders’ Vision Statement on Partnership for Sustainability with pledges to “strengthen defense cooperation to tackle traditional and non-traditional security challenges”; “enhance strategic dialogue and promote practical cooperation on regional defense and security issues”; “reaffirm the importance of maintaining and promoting peace, security, safety and freedom of navigation in and overflight above the South China Sea”; promote guidelines to avert “unplanned encounters at sea”; to “combat terrorism in all its forms” and to “enhance cybersecurity cooperation” besides a host of more general resolutions in the economic, social and cultural spheres.

But while security issues accounted for more than a fourth of the 39 points in the leaders’ statement, there was no mention of China’s increasingly aggressive stance in disputed waters in the region nor of the plight of Myanmar’s Rohingya population.

The Chairman’s Statement of the 34th ASEAN Summit issued separately afterwards generally kept to that outline, though with more detailed background. It also said ASEAN leaders “discussed the matters relating to the South China Sea and took note of some concerns on the land reclamations and activities in the area, which have eroded trust and confidence, increased tensions and may undermine peace, security and stability in the region.”

ASEAN leaders on Saturday adopted a joint declaration against marine plastic pollution and pledged to conclude this year talks on the Regional Comprehensive Economic Partnership scheme pushed by China.

In his own statement at the summit’s plenary session, President Rodrigo R. Duterte voiced concern about the ongoing “trade war between the United States and China” that has been “creating uncertainty”, has been “taking a toll on global growth” and “could hinder the ongoing processes of economic integration” in Southeast Asia.

“The US and China must… resolve their differences before the situation spirals out of control and we in ASEAN must strengthen our support for a rules-based and open multilateral trading system.”

At the same time, he noted that “[t]errorism, violent extremism and transnational crimes continue to threaten our security” while “[i]llegal drugs… corrode the very fabric of our societies.”

But while Mr. Duterte had said in Davao City last Friday that he would “talk lengthily” about China’s claim to much of the South China Sea — in the wake of an incident involving suspected Chinese militia posing as fishermen who rammed and sank a Philippine fishing boat — he left this maritime row and this incident out of his speech in Bangkok.

Malacañan Palace — in a press release issued late Sunday afternoon by Salvador S. Panelo, chief presidential legal counsel and presidential spokesperson — insisted that Mr. Duterte “expressed concern and disappointment over the delay in the negotiations for a Code of Conduct (CoC) in the South China Sea.”

“The Chief Executive explained that the longer the delay for an early conclusion of the CoC, the higher the probability of maritime incidents happening and the greater the chance for miscalculations that may spiral out of control.”

Sought for comment on the absence of any reference in Mr. Duterte’s speech to China’s actions in the disputed waters, Maria Ela L. Atienza, chairperson of the University of the Philippines-Diliman Political Science department, replied by e-mail on Sunday, saying: “Unfortunately, by not even mentioning the West Philippine/South China Sea dispute in his intervention, President Duterte is missing the opportunity to use the ASEAN Summit as a forum to discuss the territorial dispute.”

“ASEAN, together with dialogue partners including China, may be in a good position to discuss the issue given that several ASEAN countries also have overlapping claims in the disputed territories,” Ms. Atienza noted.

“In fact, ASEAN has agreed to pursue and explore the creation of a Code of Conduct on the South China Sea with dialogue partners which can involve joint exploration and more peaceful settlement of disputes.”

She further said that “failure to mention the dispute may also mean that the President is still downplaying the issue publicly or does not want to use the recent incident where 22 Filipino fishermen were thrown at sea when their fishing vessel figured in a ramming by a Chinese vessel as a starting point to discuss the urgency of discussing the disputes, ASEAN’s relations with China, and the security of fisherfolks and communities not only in the Philippines but in other ASEAN countries that are vulnerable due to the lack of a Code of Conduct in the disputed territories.” — with Arjay L. Balinbin and Reuters

China no match for Japan in infra race

SINGAPORE — Japan is still winning the Southeast Asia infrastructure race against China, with pending projects worth almost one and a half times its rival, according to the latest data from Fitch Solutions.

Japanese-backed projects in the region’s six biggest economies — Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam — are valued at $367 billion, the figures show. China’s tally is $255 billion.

The figures underline both the rampant need for infrastructure development in Southeast Asia, as well as Japan’s dominance over China, despite President Xi Jinping’s push to spend on railways and ports via his signature Belt and Road Initiative. The Asian Development Bank has estimated that Southeast Asia’s economies will need $210 billion a year in infrastructure investment from 2016 to 2030, just to keep up the momentum in economic growth.

The latest Fitch figures, provided in an e-mailed response to Bloomberg, count only pending projects — those at the stages of planning, feasibility study, tender and currently under construction. Fitch data in February 2018 put Japan’s investment at $230 billion and China’s at $155 billion.

Vietnam is by far the biggest focus for Japan’s infrastructure involvement, with pending projects worth $209 billion — more than half of Japan’s total. That includes a $58.7-billion high-speed railway between Hanoi and Ho Chi Minh City in Vietnam.

For China, Indonesia is the primary customer, making up $93 billion, or 36%, of its overall. The prized project there is the Kayan River hydropower plant, worth some $17.8 billion.

Across all of Southeast Asia and by number of projects, Japan also carries the day, though by a smaller margin: 240 infrastructure ventures have Japanese backing, versus 210 for China in all 10 Southeast Asian economies. — Bloomberg

New trade patterns unfold as ‘rule-maker’ China rises

By Marifi S. Jara
Mindanao Bureau Chief

HONG KONG’S Maritime Museum gives a glimpse of China’s trading prowess in the centuries when seafaring was the order of the day, and how its rules back then controlled foreign merchants.

One of the eye-catching pieces in the collection is the Alexander Hume scroll painting, a panoramic illustration of foreign factories — Danish, French, Swedish, English and Dutch — lined up along the Pearl River with their respective flags hoisted.

A wall panel in the same section of the museum explaining China’s “Tribute or embassy” policy narrates how the English attempted more than once to “place trade and political relation with China on a western footing… without success…”

But the Opium Wars in the mid-1800s “eventually led to a system of interstate relations and international commerce,” the chronicle concludes.

A similar narrative loudly resonates today following China’s formal reentry in the global market with its accession to the World Trade Organization (WTO) in 2001 and the ongoing US-China trade war.

“Up until 2005, China was very quiet in the WTO negotiations… Later, China participated more actively… China has emerged from being a rule-taker to a rule-maker,” Henry Gao, associate professor of law at the Singapore Management University, said during the National Press Foundation’s International Trade Training held in Hong Kong on June 17-20.

Mr. Gao said the Chinese government has been engaging in proposals on e-commerce, investment facilitation and trade remedies, among others.

The rise of China as an economic power and its feud with longstanding giant US have sent jitters across the globe given today’s interlinked supply and value chains.

Global merchandise trade in 2018 was valued at $19.48 trillion while commercial service trade was $5.80 trillion, according to a WTO report released April 2.

Investors are anxious, not just about the US-China dispute per se, but also due to uncertainty over the trade war’s outcome.

“Of course people are worried, it is really starting to hit business and affect business in many ways, but in different ways depending on what sector you’re working in,” said Tara Joseph, president of the American Chamber in Hong Kong.

Businesses are “trying to figure out” what to do at this point, she said, “but there’s an issue there because they don’t know where the trade war is going, it’s very hard for them to make strategic decisions.”

‘NEAR-DEATH EXPERIENCES’
Stephen Olson, research fellow at the Hinrich Foundation, a non-profit organization that promotes sustainable global trade, said there is a silver lining to the shaky global economic outlook.

“Trade negotiations always have near-death experiences,” Mr. Olson said, “New patterns of trade emerge during impasse.”

One of the patterns that has been emerging is the bigger role for Southeast Asian countries in the global economy.

“We’ve started to see more people doing business in Southeast Asia… the movement of the supply chain away from China because of the US-China trade friction and also, to be frank, because of the rising cost of running factories in China has also had an impact on Southeast Asia… Cambodia, Vietnam, Philippines, Indonesia — all those places have become more important,” said Ms. Joseph.

“It would be really interesting to see if in the long term, southeast Asia or ASEAN (Association of Southeast Asian Nations) can really get its act together and become a formidable force in trade discussions,” she added.

China’s Belt and Road Initiative, a grand proposal to expand land and sea connectivity that would involve more than 100 nations, also has far-reaching “geopolitical shifts, implications” on global trade and investments, said Julien Chaisse, a law professor at the City University of Hong Kong.

In the reshaping of global trade patterns, bilateral and multilateral free trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) as well as bilateral investment treaties become more critical in ensuring fair trade. The RCEP involves the 10 ASEAN member-nations, Australia, China, India, Japan, New Zealand and South Korea.

Michaela Browning, Australian consul general for Hong Kong and Macau and previously a trade negotiator in the WTO, emphasized the importance of continuously pushing for “open and rules-based and enforceable trading systems” through agreements.

She said, “(It) is particularly important to medium and small economies, to vulnerable and developing economies.”

In the meantime, as the American and Chinese trade panels prepare for the anticipated Trump-Xi meeting at the G20 Summit in Osaka this week, the global trade and investment community watches and waits with bated breath.

Singapore-based Steven Okun of strategic advisory firm McLarty Associates said, “There is a deal to be had, but whether we can get there, we’ll have to see.”

DoubleDragon readies assets for REIT offer

DOUBLEDRAGON Properties Corp. is anchoring its next stage of growth on the hospitality and industrial sectors, after it completes its target of having 1.2 million square meters (sq.m.) in gross floor area involving mall, office, hotel and industrial space by next year.

“We still have a lot of growth beyond 2020 which we see coming from the hospitality and industrial sectors,” DoubleDragon Chief Investment Officer Marianna H. Yulo told reporters on the sidelines of the 3rd Asia Pacific REIT Investment Summit in Parañaque City last week.

Ms. Yulo said this in line with the company’s preparations for a real estate investment trust (REIT) offering, noting that the capital they raise from the activity can be used to finance their expansion moving forward. “We’ll redeploy them (the funds) in the Philippines to further expand because I don’t think we’ve revealed yet our plans beyond 2020.”

The listed property developer is waiting for the release of final REIT guidelines, with the Securities and Exchange Commission (SEC) expected to lower the minimum public ownership requirement to 33% from 40-67% currently.

Ms. Yulo said the company is looking to place its more mature assets into a REIT, such as malls, office properties or a combination of both.

“We’re about 93% leased out on average for all our retail and we’re actually 100% leased out for all our office buildings as well…” Ms. Yulo explained.

“We don’t really intend to sell majority of our assets. We just want to show the investing public what the real value of the assets are in terms of the cash flows that we receive.”

SEC Commissioner Ephyro Luis B. Amatong had said investors should see the first REIT offer within the year, even as he had noted that an MPO requirement of up to 67% may still be in force.

Ayala Land, Inc. has already announced its intention to conduct a REIT offer under existing rules within the year, while other firms such as Megaworld Corp. and Robinsons Land Corp. said they will wait for the SEC to lower the MPO requirement.

DoubleDragon is scheduled to finish the year with 800,000 sq.m. of leasable space, on track to meet its goal of having 1.2 million sq.m. by 2020. This will come from a combination of 100 CityMalls, 5,000 hotel rooms carrying brands Hotel101 and JinJiang Inn, eight industrial projects under Central Hub, and office projects mostly in Pasay City.

It grew net income attributable to the parent by 46% to P767.30 million last quarter, as gross revenues increased by 33% to P2.44 billion in that period. — Arra B. Francia

How strong is the link between rice prices and inflation?

How strong is the link between rice prices and inflation?

Extractives data: How can transparency stimulate domestic resource mobilization?

LET us be clear about an implicit assumption about the work of the Extractive Industries Transparency Initiative (EITI): Its objective goes beyond transparency of revenues, contracts, and ownership. Neither is the objective limited to generating domestic resources, done in a transparent way. The EITI’s distinct contribution is to promote revenue, contract, and ownership transparency, which in turn is a necessary condition to finance and build development, anchored on fairness, equity, and sustainability.

From this viewpoint, transparency and financing are intermediate goals, albeit absolutely critical goals. In this light, “transparency to stimulate domestic resource mobilization” and the resources generated from the extractive industries are variables that affect people’s well-being, economic growth, and all-round development.

Nevertheless, the reverse causality can also happen. Growth and development lead to greater transparency and better tax effort.

But setting aside endogeneity, we see that transparency and better domestic resource mobilization are correlated with growth and development. Transparency and domestic resource mobilization are likewise associated with better institutions. Economics and political science literature has established that good, strong institutions predict well-being, development, and prosperity.

Thus, in this discussion, we emphasize not only how transparency in the extractive industries enables better tax effort. What is equally important is to stress transparency AND tax effort as part of shaping good institutions and likewise being an outcome of good institutions.

Incidentally, John Nye in his book, War, Wine and Taxes (2007), asserts that Britain’s or the United Kingdom’s wealth and prosperity, set in motion as far back as the very late 17th century, can be principally attributed to taxes (particularly commodity taxes on wine), which financed the building of a good civil service and bureaucracy. This shows how taxes can shape institutions. But how taxes will be wisely spent is part of the equation. And here, transparency matters.

Let me give a couple of examples of how these variables — transparency, tax effort, institutions, and growth or development interact.

On the policy level, EITI is a seal of good housekeeping and hence attracts tax-compliant companies that value reputation. Said another way, companies that want to avoid reputational risk or, worse, shame, will have the incentive to be tax-compliant, join EITI, and observe rules on transparency.

This also makes the tax administration work of revenue-collecting agencies simpler and more efficient. They can shift attention to other firms in ferreting out tax evasion.

Still in relation to policy, the EITI enables a policy dialogue that can lead to the appropriate tax design or the crafting of optimal tax rates. In this regard, the policy and institutional quality of the different stakeholders is improved.

And how about those who guard the guardians, the communities and civil society organizations? They bring to the table developmental concerns beyond economics and finance. Communities and indigenous peoples highlight the political, the social, and ecological issues. Thus, the EITI, springing from the platform of revenue transparency, becomes an all-around development affair.

For the communities and indigenous peoples, EITI participation is empowering in many ways. One area that is perhaps underemphasized is how the EITI process becomes an alternative learning system for those in the marginalized communities who have no formal education. They learn the rules: local, national, and global. They learn to appreciate numbers and signs. They learn practical skills in negotiating, in scrutinizing contracts, and in understanding value chains and the formal economy, among other things.

All this is good for transparency, for revenue generation, and for building institutions.

A final point: The contribution of the extractive industries to total revenue, output, and employment might be low at the aggregate level. But in certain local areas, and these are usually the poor isolated areas plagued with armed conflict, the extractive industries play a major developmental role, for better or for worse. They can either alleviate or worsen poverty, abet or reduce conflict.

In addition, even though the contribution of the extractive industries to the economy is relatively low, the good practices that EITI brings on tax compliance, transparency and accountability, cooperation, and inclusiveness can spill over to the broader economy.

Thus, the whole is greater than the sum of EITI’s parts, especially with regard to improving the quality of our institutions.

 

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.

www.aer.ph

Vox populi

I am pleased to share with readers the political section of a primarily macroeconomic and financial quarterly report my colleague, Christine Tang, and I wrote last month for GlobalSource Partners (globalsourcepartners.com). GlobalSource Partners is a New York-based network of international analysts whose client subscribers are mostly international banks and asset managers.

And so the people have spoken — the final electoral tally showed rousing support for candidates allied with President Rodrigo Durterte at both local and national levels.

Hope and fear accompany the results, which many have taken as a referendum on the highly popular President and his policies. Amidst fears that the President’s stronger hold on power would embolden him to ride roughshod over opposition to his policies, there are hopes that the reform window opened up by a more cooperative Senate would strengthen the administration’s resolve not only to speed up implementation of its programs, especially upgrading infrastructure, but also push for longstanding proposals aimed at increasing the economy’s competitiveness and attractiveness to foreign investments. (See table above.)

The fears on the political front are that the President, in line with his rhetoric, would doggedly carry out his extreme measures for achieving law and order to the end, and, true to his campaign promise, revive his proposal to shift to a federal form of government. In the event, the latter endeavor — involving a complex and lengthy process of amending the Constitution — would most certainly dominate the legislative agenda, leaving Congress little time and energy for other priority reforms. In this regard, worriers fret that the incoming Senate has only four members in the minority bloc (one of whom is in jail) and two “independents”; seven votes are needed to block a proposal for charter change.

On the economic front, there are fears of more populist measures slipping through, as well as mid-stream rules changes for long-term infrastructure contracts. An example of the former that has made the news lately is the proposal, nearing approval in Congress, requiring security of tenure for seasonal hires that businesses argue would raise the cost of labor. An example of the latter is the ongoing Department of Justice review of existing PPP (Public-Private Partnership) contracts initiated by the President, starting with the MWSS (Metropolitan Waterworks and Sewerage System) water concession agreements with two of the country’s largest conglomerates.

Countering these fears is the hope that Finance Secretary Carlos Dominguez, the head of the economic team who appears to have the President’s complete trust, would prevail upon him to follow economically sound policies, including abandoning proposals for federalism which Secretary Dominguez publicly criticized as a fiscal nightmare. In light of the accolades heaped at the administration’s economic reforms following S&P’s decision to upgrade the sovereign credit rating, the more optimistic hope is that the President would instead use his abundant political capital to forcefully back his economic team’s reform program, starting with the remaining packages of the tax reform program. Considering that the reform window is a narrow one, one to one-and-a-half years, having the President himself champion the reforms would ensure speedier passage and less opportunity costs for the economy from the uncertainties associated with rules changes.

Should hope trump fear or the other way around? While it is quite impossible to read this President’s mind, it seems to us that it is not unreasonable to let hope have the edge over fear. After all, politically speaking, whatever the President’s plans are for ensuring effective succession planning in 2022, he would surely have his two decades-long Davao experience in mind and grasp the necessity of having a healthily growing economy to keep strong public support and dissuade challenges. We expect him to spell out his legislative agenda at his State of the Nation Address in late July.

Moreover at this time, political pundits reading the tea leaves from the outcome of the senatorial race have noticed how: 1. Senator Grace Poe, who led the race the first time she ran, has slipped to the second place; 2. the top spot has been taken by Senator Cynthia Villar, the wife of country’s richest man, Manuel Villar, a former House Speaker and Senate President who ran and lost to Benigno Aquino III in the presidential elections of 2010; 3. how unlike her husband, the lady senator does not seem to harbor ambitions for higher office; and, 4. in her speech during the proclamation of winners for the Senate, Senator Villar thanked not only the President but also his strong-willed daughter and mayor of Davao City, Sara Durterte, who was instrumental in forming a coalition of well-funded national and local parties under the banner of her own party, Hugpong ng Pagbabago, which endorsed nine of the 12 winning senatorial candidates, including Senator Villar herself.

Their conclusion? Rather than Senator Villar, the tea leaves seem to point to Mayor Duterte as the lady to watch. And that scenario should not trouble the President.

As a post script, allow me to add two things that happened since we came out with this report last month.

1. A cabinet official confided that he thinks the odds for Federalism taking off are next to nil;

2. It is likely too early to say who will be the “Presidentiables’ in 2022, much less who will prevail. I am reminded that “necropolitics” defined presidential election outcomes on more than one occasion in the past. Another lesson from election history, unlike elsewhere, here it is not the early bird who catches the worm. It is the second mouse who gets the cheese.

Finally, as a wise or wisened man said: “The Presidency is a matter of destiny.”

 

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com

The REIT thing at the right time

A REIT — or Real Estate Investment Trust — is a 33%-publicly owned listed company which uses pooled funds of investors to purchase, lease, re-sell, and manage income-generating real estate assets such as malls, offices, condominiums, warehouses, and other infrastructure. The REIT Law of 2009 that formally established the REITs is meant to help develop and democratize the capital markets, with prospects for even the small investors to earn regular income and long-term capital appreciation, much like participating in mutual funds.

You don’t have to buy the real estate, pay the real property taxes (and association dues if any), hope for rental streams, and pray for a buyer when you want to sell a property. Just buy into a REIT company (through the Stock Exchange) and you can do without ifs and buts, because the REIT company is obliged by law to pay out 90% of net income as dividends — and that goes to you, no tax on dividends, no Value Added Tax (VAT), and no transaction taxes.

That seems rosy for you, the investor. Then why has REIT investing been withheld from the public even until now, ten years after Republic Act No. 9856, “The REIT Law,” when the Implementing Rules and Regulations (IRR) were approved by the Securities and Exchange Commission (SEC) on May 13, 2010?

The very generous tax incentives for the REIT companies were perhaps the main reason for the hesitancy of the SEC, the Department of Finance (DoF), and the Bureau of Internal Revenue (BIR) during the administration of President Benigno S.C. Aquino III to award such gallant opportunities to the real property development sector when there already was a property boom that we now know has sturdily lasted these past 10 years. The DoF wanted to temper the estimated revenue losses of P3.7 billion a year that would be incurred from the implementation of the REIT Act in the IRR’s original interpretation. Conflicts of interest issues bothered the Finance group, but eventually the corporate separateness of big real estate development companies with their property management subsidiaries blurred in subsequent definitions of eligibility to do REIT. Eventually, the SEC offered a compromise of a 33% public float versus the proposed 40% required float.

Early on, Megaworld Corp., DoubleDragon Properties Corp., and Robinsons Land Corp. expressed interest in doing REITs. But why did they banish the thought? REITs must have a minimum paid-up capital of P300 million, with 1,000 public shareholders having at least 50 shares each. Sigh. And the REIT Law slept through the change in administration to that of President Rodrigo Duterte in June 2016. Then the new DoF became busy with its “Tax Reform for Acceleration and Inclusion” (TRAIN Law) and launched an aggressive “Build, build, build” program to pump-prime the economy.

Three years into “Build, build, build” and a steady GDP growth bolstered by a BBB+ credit rating, the real estate development, construction, and related industries are booming. And in this glorious setting, the REIT concept, with its generous subsidies, was reinvigorated — with the expression by Ayala Land to raise $500 million (P26.25 billion) as it prepares to participate in the erstwhile unappreciated REIT (“Ayala Land files first real estate investment trust listing,” Philippine Star, April 24, 2019). Ayala Land, a real estate division of Ayala Corp., is one of the largest developers in the land, with a net income attributable to parent of P29.2 billion in 2018 according to the company’s annual report.

At the Banco de Oro (BDO) Global Feeder Funds Forum last week, a segment of the forum offered investor participation in a developed markets property index fund totally invested in global REITs. A cumulative performance of 15.29% for three years of the target fund can be expected. Global real estate securities, in general offering 3.5 to 4% dividend yield, forecast earnings growth of 5% per annum. But why invest globally, when the Philippines needs all the financial resources for its hyped-up infrastructure development projects?

In a summary of 2019 macro forecasts, actual GDP growth of 6.2% will go down to 6% or a little lower. The BSP Policy Rate will be cut to 4.2% to 4.7%, vis-à-vis the 10-year Peso GS yield which will likewise be going down from 7.07% to 5.5-6.0%, to tame inflation from 5.2% in 2018 to 3.2% expected at end 2019. The peso will go down from P52.72 to P54 to the US dollar. Short term net yields on investments will stay in the areas of 3%, hardly covering inflation. The PSE Index will pull up from 7,466 to 8,300, assuming returning confidence in equities.

Impliedly, this anxious scenario is why the forum recommended that investors look at the more reliable global markets. Here, will the local REITs be the Avengers, in this noble war for financial inclusion and acceleration?

But financial inclusion may not come hand in hand with intended economic acceleration, and may have to be slowed to push that obsessive desire to “go, go, go” to the peak of what our country can be. The poor will always have their entitlements, but what about the middle class? Real financial inclusion must include the middle class, who must at least keep marching in place lest they be left behind in the reallocation of socio-economic status.

Unfortunately, it looks like the REIT will give added (and unsolicited) financial advantage in terms of superfluous subsidies to big businesses much more than the middle class investor can hope for as promised in the REIT plan of distributing 90% dividends after deducting all costs of operations — can you imagine the “flexibility” of the REIT company? And this is rewarded by the lowering of their corporate income tax on just the 10% remaining income.

What will now happen to my small rental business, a widow asks? I bought my condos at “pre-selling” from the developers, meaning they used my money to build the units I bought, and now their REITs are again taking advance money from the people for rental and property management of developments that were financed in advance by that “pre-selling.” Direct rentals will struggle like the small Mom-and-Pop stores that suffer thin margins to price themselves cheaper than the big businesses that enjoy advances from the public, economies of scale in production and operations, and, for the REITs, the subsidies. And what about the real estate brokerage industry? We will have to make do with the small retail says, a sad broker cries.

Location, location, location — they say of real property valuation and rentals or sales. REITs will create their own favored location, a “community,” which will draw buyers or renters to them. These choice locations can scatter around the country, and land banking by big developers has assured perpetual control, strengthened by the REIT entrenchment, to keep their property interesting and in demand always. There are so many developments, not only residential units. Malls are expected to add 250,000-square meters of space this year (The Philippine Star, Feb 1, 2019).

Is REIT the right thing at this time, for financial inclusion and economic acceleration?

 

Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.

ahcylagan@yahoo.com

Right time to invest in Metro Manila property?

A part from being an economist and columnist for this paper, I am also a business owner of a medium-sized food group and a country head of an American multi-national firm. Like many involved in the food business and investments, 2017 and 2018 were good years for us. The favorable business conditions in our industries is something we are grateful for and do not take for granted.

Suffice to say that we have outgrown our two rented offices in the Ortigas Center and must now look for bigger spaces to accommodate our expansion. This time, we are contemplating investing in the property instead of just renting it. After all, it will look better on our balance sheet if our office space forms part of our asset account rather than a monthly operating expense.

The idea of purchasing office space prompted me to look deeper into the real estate industry. Is the property market facing a bubble? Is it the right time to buy? Are property values seen to increase in the medium term? How strong is demand in the re-sale market? Will it be easy to rent if ever we decide to do so?

The collective industry reports from the country’s three experts — Colliers International, Jones Lang LaSalle, and Leechiu Consultants — provided me the answers. Fortunately, they all tell the same story.

Lets talk about the worst-case scenario first. Is the property market in the midst of a price bubble? It will be recalled that the steep rise in property prices in Metro Manila over the last seven years raised rumors of a bubble last year. With all factors taken to account, the three property experts refute the idea, saying that if one compares property prices today versus what it was in 1997 (the year of the financial crisis), you will find that current prices are still 20% cheaper than it was back then when adjusted for inflation. Besides, the experts argue, the majority of buyers today acquire property to use, not to speculate. The price increases are justified by the spike in demand.

Four sectors are driving demand for office spaces in Metro Manila. The largest is still the IT-BPO industry. Although growth in this sector decelerated from double digits to just seven percent this year, it still comprises 41% of total take-up. Offshore gaming operations from China is another driver, comprising 28% of take-up. Growing rapidly too are flexible workspaces such as WeWork, KMC, Penbrothers, and Regus who collectively lapped-up four percent of all available office spaces in the city. Other large consumers of space are the finance & insurance industry, tech companies and multinational companies.

As of the end of 2018, Metro Manila had an inventory of 11.01 million square meters (sqm) of grade A and B office space, with 2.88 million sqm more coming on-line between 2019 and 2023. The bulk of new office spaces, 725,000 sqm to be exact, is presently being built in the Ortigas-Pasig-Mandaluyong corridor. Makati, BGC, Quezon City and the Bay Area each have between 400,000 to 580,000 sqm in the pipeline. Alabang and Las Piñas have 192,000 sqm under construction.

What is interesting is that out of the 2.88 million sqm under construction, 28% is already pre-leased or pre-sold. This is a strong indication of strength in demand. It is therefore safe to assume that prices will continue to climb in the medium term.

There has been a mad rush for PEZA-certified buildings since the investment agency stopped awarding new certifications in the National Capital Region region a few years ago. From 2019 to 2023, only 19 buildings were awarded PEZA certifications, leaving in limbo 48 other application. PEZA hopes that limiting the number of PEZA-certified buildings in Metro Manila will induce developers to expand outside the city center, thereby paving the way for development and employment opportunities in provincial areas. It is also a way to shore-up generous incentives given to IT-BPO companies. These companies need to be located in PEZA-certified buildings to qualify for a package of fiscal incentives. Hence, having the opportunity to invest in a PEZA building will ensure easy rentals at premium rates and tremendous value appreciation.

As far as vacancies are concerned, unsold or unleased properties were lowest in the Bay Area, Alabang, and Makati at one percent, two percent, and three percent of total inventory, respectively, as of the end of 2018. Vacancy rates stood at six percent in Ortigas-Pasig-Mandaluyong and seven percent in BGC. It was highest in Quezon City at 15%.

The nature of our business requires us to be in the center of the financial district. Hence, we are looking at properties in the Fort, Makati, and Ortigas areas. We do not require the building to be brand-new but we factored-out those that are seven years or older. Also important is for the developer to have a good track record in construction, maintenance, and management.

In BGC, we looked at the new Finance Center building. For a 245-sqm space, the asking price is P61.2 million or roughly P250,000 per square meter. In Ortigas, there are no new grade A buildings for sale (the new BDO towers above the Podium Mall are exclusively for lease). The next best option is the 25-year-old Tektite Tower whose office space goes for P73,000 per sqm. In Makati, we are looking into the Stiles Enterprise Plaza for which the going rate is P250,000 per square meter.

Our analysis would not be complete without looking into lease rates. We found that lease rates for grade A office spaces in Makati is most expensive at P1,300 to 1,600 per sqm depending on the age of the building. This represents a 100% increase from rental rates in 2010. Rates in BGC range from P1,000 to P1,400 per square meter, a 140% increase from what it was nine years ago. Having the lowest rise in least rates is Quezon City whose rental costs stand at P600 to P800 per sqm, a mere 40% uptick from a decade ago.

Alabang properties command between P650 and P750 per sqm, while those in Ortigas-Pasig-Mandaluyong go for as low as P500 per sqm.

Taking all the information into consideration, my board and I concluded that the office property market in Metro Manila is in the midst of a long road of growth which will ride in tandem with the economy. For as long as the economy grows at its current pace, the momentum of the property market will follow. In fact, studies show that office space value will spike anew in 2022 when demand outstrips supply. Several analysts equate the Manila property paradigm to that of Hong Kong in the early 1980s.

So, what can foil the otherwise rosy picture of the property market? Eco-political turbulence. These include uncertainty brought about by shifting tax laws, the specter of federalism and the uncertainty it brings, government’s pro-China foreign policy backfiring, and a deteriorating current account deficit.

So in the end, we conclude that the risks to the property market are not due to weaknesses from within nor demand-supply issues. The risks are external. Far as long as one has confidence in the government and the policies it espouses, then investing in property is a safe bet.

 

Andrew J. Masigan is an economist.

PAL urged to drop Europe flights

PHILIPPINE Airlines (PAL) must cut down its widebody fleet to help it reduce low-yielding routes from its long haul operations, particularly to Europe and North America, an aviation think tank said.

Australia-based Center for Asia Pacific Aviation (CAPA) said in a report over the weekend the flag carrier should consider replacing its long-range jetliners with new aircraft that would more suitably meet the demand for long haul flights.

“Operating fewer long haul aircraft would enable PAL to cut capacity to North America and/or drop Europe entirely… The Philippines-Europe market is extremely competitive, due to aggressive competition from the Gulf carriers and from other Asian airlines. PAL is best off retreating from Europe entirely,” it said.

PAL currently has 16 long haul aircraft in its fleet: six Airbus A350-900s and 10 Boeing 777-300ERs. These are flying to London, Los Angeles, New York, San Francisco, Toronto and Vancouver.

The CAPA report noted PAL has not been making profit out of its Manila-London route, despite numerous attempts to adjust its schedule, frequency and aircraft since it was launched in 2013.

While PAL is looking at the possibility of halting London flights and opening a Paris route instead, CAPA said the better option is for the carrier to stop flying to Europe altogether.

“The Philippine carrier is probably better off dropping its European ambitions entirely and reducing the size of its widebody fleet. PAL is looking at acquiring more (Airbus) A350s or ordering (Boeing) 777Xs to replace its older model (Boeing) 777-300ERs, but should instead use upcoming lease returns as an opportunity to cut long-haul capacity and improve profitability,” CAPA said.

PAL’s 10 units of 777-300ERs are on lease, which would all be expiring starting 2022 to 2025.

“PAL should consider returning the first two 777-300ERs without replacing them — and therefore postpone a selection of new widebodies for another two years, when it will have to decide on the eight 777-300ERs that can be returned in 2024 and 2025,” the report said.

“Without a reduction in the fleet, it is difficult for PAL to cut back in North America or axe London without launching Paris (as is tentatively planned),” it added.

Regarding flights to North America, CAPA said the potential new destinations are “competitive and have significantly less local traffic to the Philippines,” hence it is better for the carrier to only keep its flights to Los Angeles, New York and San Francisco.

“PAL could be better off with a reduced year-round schedule to North America. For example, a 10% to 15% cut would still result in significantly more North America capacity than in prior years and provide impetus to improve load factors and yields,” it said.

PAL has been recording losses since 2017, which CAPA attributed to the operations of long-haul flights. “Suspending London and shelving the launch of new US destinations is a sensible initial move by PAL as it tries to restore profitability,” it said.

In the first quarter of 2019, the listed carrier posted an attributable net loss of P838.17 million, 24.3% slimmer compared to in the same period last year, driven by a growth in passenger volume from added flight frequencies and new routes. — Denise A. Valdez

Chelsea investing $34 million in two new ships

By Denise A. Valdez
Reporter

CHELSEA Logistics and Infrastructure Holdings Corp. is investing around $34 million (about P1.7 billion) for the acquisition of two new ships this year, which will be used to boost its existing passenger routes and open new ones.

Chelsea President and Chief Executive Officer Chryss Alfonsus V. Damuy said in a mobile message Friday the company received a 67-meter roll-on, roll-off passenger (ropax) vessel in April, which will be deployed for the Cebu-Surigao-Cebu route in July.

“Next month, we will deploy one brand-new ship for the Cebu-Surigao-Cebu (route)… We (also) have a big one coming in November,” he told BusinessWorld.

Mr. Damuy noted one vessel is priced around $14 million (about P720 million), while the other is estimated at $20 million (about P1 billion). No firm plans have been made yet on the route where the 98-meter ship arriving in November will be deployed.

Last year, Chelsea acquired nine new vessels namely: MT Chelsea Providence, MV Trans-Asia 15, MV Trans-Asia 16, MV Trans-Asia 17, MV Trans-Asia 18, MTug Fortis VIII, MTug Fortis IX, MTug Fortis X and MTug Fortis XI.

Mr. Damuy said the fleet expansion is intended to “boost existing routes and (add) new routes.”

Aside from the ropax ships the company is receiving this year, Chelsea is also modifying some of its older ships to be used for existing routes linking Cebu to Cagayan de Oro (CdO), where the listed firm is leading the market.

“We will also deploy two coming from last year which modifications are just about to be completed… (It will be in) July this year. We will deploy (the modified ships) to increase our presence in Cebu-CdO-Cebu,” Mr. Damuy said.

He noted the demand for the Cebu-CdO-Cebu route is increasing, and Chelsea currently holds around 70% of the market with four players in that segment.

“We wanted to ensure our market dominance in that route… We wanted to further dominate,” Mr. Damuy said.

The listed firm led by Davao-based businessman Dennis A. Uy reported a net income of P139 million in the first quarter, up 21% from the same period last year with a bulk of its revenues coming from its shipping business.

Mr. Damuy earlier said the company is allocating the biggest chunk of its capital expenditures this year to boosting its logistics segment, with a P2.5-P3-billion investment for a new warehouse to be built in Taguig City.

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