The Philippines has emerged as one of the fastest-growing countries in Asia. Foreign investments in its Information Technology and Business Process Management (IT-BPM) sector is one of the main driver.
Not only Metro Manila grows fast, but there are dozens of cities located outside of the capital and categorized as so-called next-wave-cities and upcoming emerging markets.
If you look for investment opportunities in the Philippines, you have plenty of options. Don’t only look for condo units in Manila.
In this article, we review the following:
- Can foreigners buy commercial property in the Philippines?
- The Commercial Property Market in the Philippines
- Best Cities to Buy Commercial Property in the Philippines
- Commercial Property Taxes
Can foreigners buy commercial property in the Philippines?
Philippines has reasonable foreign ownership regulations by Southeast Asian standards.
Here, foreigners can buy strata-title units such as condos on a freehold basis. The only thing you need to pay attention to is the foreign ownership quota which is set to 40%.
You can also own the physical structures built upon land, like bungalows and villas.
Buying commercial property, on the other hand, is a completely different undertaking and more regulated. Whether you can get access to commercial property or not depends on if you buy as an individual investor or through a local company.
Foreign individuals have few options when investing in commercial property. Strata-titled office space is the only commercial property type you can legally own as an individual investor.
This is something I’ve explained in my article about investing in commercial property in Thailand, where regulations are similar.
Truth be told, most countries in Southeast Asia don’t allow foreigners to legally own commercial real estate.
If you open a company, on the other hand, you have significantly more options, even if this involves more work and sometimes risk.
If you truly want to own commercial real estate in the Philippines, you should consider opening a local company.
The same as it goes with condo ownership quotas, corporations need to have a maximum of 40% foreign equity and where a majority of the shareholders must be Filipino citizens.
Yet, there are ways to bypass this through contractual which gives you full protection.
Domestic Corporations (DC) is the most popular option for overseas investors when incorporating in the Philippines. These are more flexible in terms of foreign ownership and also administratively feasible.
The basic requirement when opening a DC is to have five incorporators who hold at least one share. A majority of the incorporators must be Philippine residents, but not necessarily citizens.
If you plan to open a company to buy property, be sure to find a reputable lawyer earliest possible to minimize risks.
The Commercial Property Market in the Philippines
Below you can read more about the different commercial property markets in the Philippines and where future supply will be allocated.
Hotels & Resorts
Philippines continues to be an attractive tourist destination that receives increasingly more visitors. According to JLL, the amount of inbound tourists rose to 7.1 million in 2018, which equals an increase of 7.7%.
Plenty of new hotels will be built until 2021 that will boost the market outlook. New hotel rooms will be allocated as follows to various districts in Manila:
- Makati City: 2,100 rooms
- Pasay City: 1,200 rooms
- Paranaque: 3,000 rooms
- Taguig City: 1,600 rooms
- Quezon City: 1,000 rooms
Major brands such as Movenpick Hotel & Residences, Mandarin Oriental, Hilton, and Ritz-Carlton are just a few examples of brands that will contribute to the added supply.
We’ve seen a strong drive due to the great influx of Korean and mainland Chinese tourists in the past years. With increased disposable incomes and a growing middle-class, the demand for hotel-nights also increases among domestic Filipino travelers.
The demand for retail property remains high in Manila mainly due to business outsourcing and offshoring. China is one of the country’s biggest investor, primarily in the gaming industry.
Foreign companies see the Philippines as a lucrative investment destination to set up operations, thanks to its talent pool, which highly consists of young and English speaking persons.
According to JLL, 673,500 square meters of retail property will be added until 2022. Paranaque City will absorb 29% of this supply due to the upcoming Ayala Malls Bay Area (192,000 square meters).
We don’t only see this growth in Manila, but upcoming cities such as Davao and Cebu are also promising.
Looking at market shares for various districts within Metro Manila, Quezon City saw the fastest expansion in the second half of 2019, accounting for 27%.
Manila City snapped a second spot with a market share of 13%, followed by Pasay City with 11%.
The office space market is one of the fastest-growing in the Philippines and demand has grown by 39% year-on-year. The growth is mainly a result of foreign investment from IT and business process management firms (IT-BPM), accounting for 36% of the demand.
Traditional firms also have a great impact with 35% of the total demand for office space.
There’s one company that truly stands apart from others, namely POGO (Pogo.com). It’s a free online gaming website owned by EA-games that has expanded rapidly in the Philippines recently.
POGO is in great need of new office space in Manila, a reason why they have started to explore areas such as Paranaque, Pasig, and Quezon City.
The flexible workspace sector is set to grow significantly in the coming decade as well. As mentioned in many other articles, it’s said that 30% of all commercial office space will be flexible workspace until 2030.
Industrial Real Estate and Warehouses
The great increase of Chinese investors in the Philippines property market has affected the industrial sector positively.
As a result, companies have been forced to build more logistic facilities such as warehouses. Along with this, we have also seen the development of the first Philippine-Sino industrial park.
To meet the growing demand of industrial property, leading firms like Collier’s recommend developers to:
- Improve and modernize warehouses
- Build industrial space within new townships
- Align industrial developments with the nation’s infrastructure plans
The eCommerce industry is on the rise and here to stay as well. As such, we’ll see a greater demand for modern and semi-automatized facilities within a closer distance to urban areas.
The Philippines has long suffered from congestion issues. This will hopefully be improved gradually through it’s BBB (Build, Build, Build) program, where the government allocates PHP 1.7 billion (USD 33 million) for infrastructure investments.
To cope with the increasing problems of traffic congestions, there are plans to build artificial islands with a size of 90 square kilometers (half the size of Washington DC). Here, developers will build condominium buildings, casinos, commercial zones, and theme parks.
Having said that, investing in car parks is not common for overseas investors in the Philippines. There are plenty of other options that offer great yields and that involve less complexity.
Best Cities to Buy Commercial Property in the Philippines
Manila is drawing the most attention when investors and analysts talk about the commercial real estate investment opportunities in the Philippines. Yet, there are some other promising cities that you should have a look at as well.
Most of the Foreign Direct Investments are allocated to Metro Manila, which consists of different districts and cities. It’s the financial hub of the Philippines, having a population of around 13.7 million people.
Over the years, Manila has become one of the preferred options for companies primarily in the gambling, outsourcing, and IT industry. Only around 40% are traditional foreign companies.
Even if property prices are still comparably low in Makati, we’ll see more growth in cities further away, including Bonifacio Global City, Quezon City, Parañaque, and Taguig.
Cebu Province is significantly smaller than Manila, having a bit more than 3 million people. It has 167 islands and the following cities belong to the area:
- Carcar City
- Cebu City
- Danao City
- Lapu-Lapu City
- Mandaue City
- Naga City
- Talisay City
Cebu is renowned for being developed, but with a more relaxed atmosphere and being generally safer than Manila. Thus, it’s one of the preferred destinations among tourists.
Having said that, Cebu is also a major contributor to the national economy. Manufacturing, shipbuilding, and trading are all big sectors. Foreign companies have invested increasingly more money in Cebu, as they look for diversification and other alternatives than Manila.
Many foreigners have rarely heard of Davao, yet, it’s becoming increasingly more important to the Philippine economy.
In 2018, Davao Region was the second-fastest-growing region in the Philippines. It grew with an impressive rate of 8.6%, only behind Bicol Region that grew with 8.9%.
Between 2017 and 2019, the commercial property market grew by 25% in value in Davao, which speaks for itself.
Davao receives massive amounts of investment in infrastructure, under the 2017 – 2022 Public Investment Program, Davao has 88 infrastructure projects in the pipeline, the second biggest in value.
The Next Wave Cities
There are ten so-called ‘next wave cities’ in the Philippines, emerging cities that will become the next hubs for the Information Technology and Business Process Management (IT-BPM) sector, which contributes heavily to Philippine’s economy.
The cities are currently:
- Baguio City
- Cagayan De Oro City
- Dagupan City
- Dasmarinas City
- Dumaguete City
- Lipa City
- Malolos City
- Naga City
- Sta. Rosa City, Laguna
- Taytay, Rizal
Metro Manila’s rental rates remain as some of the lowest in Asia and around PHP 1,100 (USD 21.56) per square meter and month. That said, Manila is infamous for its traffic congestions and salaries are higher here than in smaller and emerging cities.
In ‘next wave cities’, rents normally range from PHP 350 to PHP 550 per square meter and month, a third or at least half of that in Manila on average.
New Emerging Cities
In addition to the ‘next wave cities’, there are also ten new emerging cities that will become increasingly interesting in the coming decade:
- Balanga City
- Batangas City
- Iriga City
- Laoag City
- Legazpi City
- Puerto Princesa City
- Roxas City
- Tarlac City
- Tuguegarao City
- Zamboanga City
Commercial Property Taxes
Below I’ve listed the property taxes when you buy, hold, and sell commercial property in the Philippines. Keep in mind that tax rates are updated frequently, thus, there might be discrepancies to the actual rates.
Documentary Stamp Tax
A documentary stamp tax of around 1.5% is levied on the selling price or fair market value of the property, whichever higher.
A transfer tax of 0.5% to 0.75% is multiplied by the sales price or the zonal value, whichever is higher. The rates also differ depending on in which municipality the property is located.
Rental Income Tax
Rental incomes are subject to the same tax rates as personal incomes. The rates are as below for residents (valid until 2022):
- PHP 0 – 250,000: 0%
- PHP 250,000 – 400,000: 20% of the excess over PHP 250,000
- PHP 400,000 – 800,000: PHP 30,000 + 25% of the excess over PHP 400,000
- Over PHP 800,000 – 2,000,000: PHP 130,000 + 30% of the excess over PHP 800,000
- Over PHP 2,000,000 – 8,000,000: PHP 490,000 + 32% of the excess over PHP 2,000,000
- Over PHP 8,000,000: PHP 2,410,000 + 35% of the excess over PHP 8,000,000
Non-resident foreigners are taxed at a flat rate of 25%. However, you cannot make deductions as you can for residential property.
Real Property Tax
A real property tax of 1% to 3% is charged, the rate differs depending on the location of the property. For commercial property, the tax rate is multiplied by 50% of the appraised value.
Capital Gains Tax
A capital gains tax of 6% applies and multiplied by the sales value or the zonal value, whichever is higher.