VAT ON BPOs THREATENS THE PROPERTY MARKET
FROM ALABANG to Balintawak, from Pasig to Manila Bay, construction cranes dot the skyline in an unprecedented 13-year construction boom. With thousands of new office buildings flooding the market, many wonder — is a real estate glut in Metro Manila upon us?
First, a perspective on the scale of Metro Manila’s construction boom. Between 1960 and 2016, Metro Manila accumulated an inventory of 8.69 million square meters (sq.m.) of office space. Between 2017 and 2022, however, a staggering 4.06 million sq. m. more are either being constructed or set to break ground. In other words, nearly 50% of what was built over 56 years will be constructed in five. The pace and scale of construction is astounding.
Interestingly, the building boom is no longer confined to Makati City, Bonifacio Global City (BGC), and Ortigas as it was a decade ago. Development has now extended outside the traditional central business districts, thanks to the “township” and “business park” phenomenon. Among the new townships rapidly developing are Vertis North and Eton Hub in Quezon City, ASEANA Business Park and the MOA Complex in the Bay Area, Greenfield District in Mandaluyong and Arca South in Taguig City. The only city without a new township and one left by time is the city of Manila, due to its lack of space and aging infrastructure.
Out of the four million sq.m. of new office space under construction, 936,000 sq.m. is being built in BGC, 880,000 sq.m. in Ortigas-Pasig, 801,000 sq.m. in the Bay Area, 636,000 sq.m. in Quezon City, 495,000 sq.m. in Makati City and 315,000 sqm in Alabang- Muntinlupa.
As a side note, analysts foresee Makati City, Ortigas and BGC to be completely built-up by the year 2020. Subsequently, the concentration of development will migrate to the Bay Area , Alabang-Muntinlupa, and Quezon City.
On the demand side, Metro Manila’s overall vacancy rate is still among the lowest in the region at 4.3%. It is almost negligible in Makati City, Ortigas, and BGC at just 2% but higher in Alabang-Muntinlupa at 6% and Quezon City at 13%.
Total take up is seen to reach 700,000 square meters in 2017. It is projected to increase by an average of 9% until 2022 assuming GDP growth of between 6.5% to 7.5% is sustained. All factors being constant, there will be enough demand to absorb incoming supply. Constancy, however, is where the risks lay.
BPO INDUSTRY THREATENED
There is a direct connection between vacancy rates and the BPO industry.
BPO firms are the largest consumers of office spaces taking up 37% of available inventories in Metro Manila. From now until 2022, the industry is seen to expand by 9% a year, and along with it, a corresponding increase in office space take-up is expected.
The recent tax reform proposal of the Department of Finance ( DoF) , however, threatens the prospects of the BPO industry.
See, the DoF, through House Bill 5636, proposes to remove the value-added tax ( VAT) exemption on gross sales presently enjoyed by BPO firms. It is part of the comprehensive tax reforms package submitted to Congress and certified urgent by Malacañang. Should the DoF plan be implemented as proposed, BPO firms will be made to pay 12% VAT with a corresponding entitlement to claim refunds through VAT inputs. The government promises to process such refunds within ninety days.
Technically, the effect on BPO cost structures should be minimal except for the need to beef up working capital to subsidize VAT until the refunds come through. What makes it contentious is that government makes no guarantees that all refund claims will be honored.
As it stands, BPO firms in the Philippines already operate at a 6% cost premium versus those operating in India. This is due to higher wages, power costs, and office rentals. With the additional tax burden coupled by the need for additional working capital, the cost differential between India and the Philippines could widen to 15%, effectively obliterating Philippine competitiveness. Exacerbating the situation is the relative ease to duplicate BPO operations in other locations. With this, we could face the specter for massive closures and outward migration of BPO firms.
To quantify the impact of a BPO exodus, we could lose occupants for 3.2 million sq.m. of existing office space and some 850,000 square meters of take-up over the next three years. This could cause Metro Manila’s vacancy rates to balloon to over 30% by the year 2020 on a worst case scenario. With this, we
can expect the typical symptoms of a glutted market including rental rate roll-backs, stalled equity appreciation, loan defaults and higher interest rates, among others.
To compromise the competitiveness of our BPO industry will have far reaching effects not only on the property market but to the entire economy.
Let us not forget the economic benefits the BPO industry has brought us.
It employs some 1.3 million people most of whom have adopted skill sets that have made them globally competitive. They generate $24 billion in export revenues that help balance our current account. BPOs are present in 26 cities and have proven to be the most potent instrument for community development and inclusive growth. In fact, in just 15 years, it spawned a new middle class whilst igniting the retail, education, transport, and housing sectors in the cities it operate in. All these are put at risk with the DoF proposal.
We have something good in the BPO industry and it will be foolish for government to kill the proverbial goose that lays the golden egg. The first batch of tax reforms have already passed Congress on third reading. It is now in the hands of the Senate. Lets hope our senators vote to keep our BPO industry alive and competitive.