Philippines is one of the fastest-growing countries in ASEAN. Low taxes, generous visa options, real estate prices, and rental yields are the main drivers behind the high score and why many foreigners see the Philippines as a great investment destination.
The office market is predicted to perform well in the Philippines in the coming years as it recovers from the pandemic and we will see increased demand from local and foreign firms.
Being a developing country, investing in office space and buildings can be challenging and involves the risk of coming across costly pitfalls though. In this article, I explain the basics when buying office space in the Philippines.
- Can foreigners buy office space in the Philippines?
- The Office Market in the Philippines
- Major Commercial Cities in the Philippines
- Leasing Office Space
- Investing in REITs
Can foreigners buy office space in the Philippines?
Foreign individuals cannot buy commercial real estate in the Philippines, but generally, only have access to strata-titled condominiums or office units.
With that said, as investors of office space are predominantly companies, we will focus on the regulations when companies acquire office space and buildings in the Philippines. This is the same as for countries like Vietnam and Indonesia.
So-called Domestic Corporations (DC) is a common choice for overseas investors when setting up companies in the Philippines ownership regulations are less strict.
The level of foreign ownership will determine the initial capital requirements needed. Domestic Corporations with more than 40% foreign ownership, or a foreign-owned OPC, have a minimum capital requirement of USD 200,000.
Domestic Corporations with less than 40% foreign ownership, or a locally-owned OPC, have minimum capital requirements of PHP 5,000.
To open a DC, you must have at least five incorporators that own share each.
The basic requirement when opening a DC is to have up to fifteen incorporators who hold at least one share. A majority of the incorporators must be residents in the Philippines, but not necessarily citizens.
The baseline when setting up a company in the Philippines is to work with an experienced and credible partner. Asia Property HQ can facilitate such connections and also help you get in touch with local real estate lawyers.
The Office Market in the Philippines
The office market has grown quickly and where Metro Manila receives most of the attention. Due to increased outsourcing operations, particularly by IT and business process management firms (IT-BPM), the office market has grown 39% year-on-year.
According to Knight Frank, vacancy rates reached a record-high level of 10% in 2020 due to the pandemic. This is predicted to change as the market recovers and we see a higher take-up rate of units.
The following sectors account for the biggest demand for office space in the Philippines. The following industries accumulate most of the office space in Metro Manila, according to recent data released:
- The Gaming Industry: 36% occupation rate
- The Business Process Outsourcing (BPO) Industry: 30% occupation rate
- A variety of other enterprises account for the remaining 34%
Even if the so-called next wave cities become increasingly interesting, Metro Manila, Metro Cebu, Metro Clark, Metro Bacolod, Davao City, and Iloilo City are considered as ‘centers of excellence’. Here, companies see great growth opportunities.
Worth highlighting is the growing demand for flexible workspace (co-working spaces), especially as workers get more accumulated working from home after the pandemic.
There are currently around 1.3 million freelancers, start-up companies, entrepreneurs, digital nomads, and remote teams in the Philippines that drive the demand.
Major Commercial Cities in the Philippines
Philippines contracted by almost -10% throughout 2020 and enjoyed a growth rate of almost 6% the year prior. That said, investing in office space is greatly concentrated in Metro Manila, a reason why we will focus on the area.
Besides, the next Wave Cities mentioned above also become increasingly important. Let’s review the major commercial cities and hubs in the Philippines and where you should plan your office space investments.
Metro Manila is one of the biggest metropolitan areas in the world, comprising 16 cities. The most famous is ‘the city of Manila’, the capital and second-biggest city in terms of population.
Manila is considered the most important city to the economy, being the home to around 60,000 establishments in banking & finance, tourism, retailing, transportation, real estate, and much more.
The city is also famous for its textile production, work in publishing and printing, food and tobacco processing, and chemical processing.
A great majority of the tallest buildings in Manila are located in the renowned business area of Makati, including:
- PBCom Tower: 259 m
- Trump Tower Manila: 251 m
- The Gramercy Residences: 250 m
- Discovery Primea: 250 m
- Shang Salcedo Place: 249.8 m
Taguig is part of Metro Manila and with a population of more than 800,000 people. The city is home to many of the highrise buildings in Metro Manila, including:
- Grand Hyatt Manila: 318 m (tallest in the Philippines)
- Shangri-La at the Fort, Manila: 250 m
- The Suites at One Bonifacio High Street: 227 m
Taguig is one of the fastest-growing cities in the Philippines at the moment and home to 16 universal and commercial banks, 10 rural banks, and 1,126 manufacturing firms.
The city is trying to revitalize its economy, offering preferential tax benefits to foreign investors and local firms. As such, the city is famous for its ease of doing business and low taxes.
Quezon City is the most populous city in the Philippines and considered highly urbanized.
Most of the country’s television broadcasting networks are located here, but also plenty of banks and insurance companies. The main industries according to current employment are:
- Wholesale and Retail Industry: 24.4%
- Manufacturing sector: 10.4%
- Construction Industries: 9.1%
- Administrative and support services: 8.4%
- Accommodation and food services: 8.2%
Having different transportation systems like the LRT (Light Railway Transit System) 1 and the MRT2, the city is considered one of the most important to the country’s future growth.
Leasing Office Space
Investing in office space can be both time-consuming and requires large upfront costs. A common option is also to lease office space.
In major cities like Taguig, Manila, and Quezon City, there are plenty of readily available office spaces that are instantly ready without the need for refurbishment.
Other benefits include:
- Reduced risks
- Significantly lower upfront fees
- Freed up business capital
- You can move to a new office quicker
- Fewer responsibilities such as for maintenance and tax obligations
There are some disadvantages you should beware of:
- You might be forced to leave with short notice
- Annual and steep rental increases
- You cannot enjoy the price appreciation
- Ongoing payments for the lease
For a better understanding and overview, I recommend you discuss with a local partner that can analyze your current business situation and give you the best advice.
Investing in REITs
Real Estate Investment Trusts (REITs) have become increasingly popular in the past years and Philippines has captured many headlines as it launched its first REIT in 2020.
It’s easier to start trading REITs compared to buying a complete unit. The risks are generally lower as well. At the moment, there’s only one REIT available in the Philippines, but more will come shortly, hopefully.
To start trading, you need:
- ACR I-card (Alien Certificate of Registration card)
- Passport (or another photo ID)
- One passport-sized photo
- Proof of your address (e.g. utility bill or rental contract)
Keep in mind that some banks don’t require ACR I-cards, but only passports.
There are plenty of benefits of investing in REITs. It’s more liquid as you can sell your REIT units instantly, the same as for stocks. The REIT is also managed by professionals who select high-performing units that often provide high dividend yields.
Not to forget, no maintenance of the properties is needed as this is managed by the REIT owner. You can start trading with a few hundred US dollars, making the initial capital requirement significantly low by comparison to owning an immovable asset.