High Yields on Metro Manila Condominiums

Philippines: Rental Yields for:
Makati Central Business District, Ortigas Center, Eastwood City, Global City
Source: Global Property Guide
As of February 27, 2007

Most of the luxury condominiums are located in Makati CBD, Rockwell, Ortigas Center and Fort Bonifacio. Rental yields for these units are high.

The smallest apartments in each segment earn the highest yields. For instance, studio apartments in the prime areas of Metro Manila can earn around 13%-15%. But the highest returns are available on the smallest studios (30 sq. m.), which earn rental returns of an average of 15.1%. Larger studio condos (40 sq. m.) earn slightly lower returns (12.9%).

Philippines: High Yields on Metro Manila Condominiums
by Prince Christian Cruz

The rental returns from letting residential condominiums in central areas of Metro Manila range from 8% to 15% yearly, according to a survey just released by the Global Property Guide.

The same pattern holds in other condominium segments. One to two bedroom units (measuring 50 – 90 sq. m.) earn around 12%-15%, but the highest returns can be earned on the smaller (60 sq. m.) condos, which earn rental returns of 15%. Larger 1 – 2 bedroom condos (80 sq. m.) earn rather lower returns (11.5%).

“The pattern is unusual,” says Matthew Pollock, publisher of the Global Property Guide. “Instead of a smooth progression from high yielding units to low, we have high to low with high-yielding 'ridges' or 'lumps' at particular apartment sizes - which correspond to the smallest case of a particular number of bedrooms.”

Investment plus

Interest rates in the Philippines are at historic lows, making such condominium unit returns highly attractive. At present 364-day T-bills yield less than 3.82%, while interest rates on one-year time deposits are around 1.5% - 2% annually. A five-year time deposit returns only 5% per annum, and a 5-year T-bond earns 5.68%.

Demand for residential condominiums in Metro Manila has been boosted by strong economic growth, particularly by the rapid growth of business process outsourcing firms, including call centers. Call center agents form a new breed of young urban professionals with tremendous purchasing power. Because most call center agents work at night, they need condominium units that are right next to their work place.

“The lesson is clear - to earn good money, buy a small unit in Metro Manila’s business districts, with very small rooms. The returns will be significantly better than in most cities in Asia,” Pollock says.
The growth of the condominium sector has also been helped by the fact that they are free from the title registration and property appraisal problems which commonly hound landed properties in the Philippines.

Foreigners are also allowed to purchase condo units, as long as the foreign component does not exceed 40% of the building. There is no rent control for units with monthly rents above P10,000 (US$208). Under that level, the Rent Control Act limits annual rent increases to 10%.

A significant expansion of the mortgage market has recently occurred in the Philippines. Banks are keen to lend up to 70% of the purchase price. Adjustable rate mortgages are available at interest rates of 9% to 9.99%, with fixed-rate loans of 5+ years costing 1% - 1.5% more.

Excessive taxation

Potential investors, however, should beware of the very high taxes and fees they may have to pay on their condominium units.

For instance, the rental income of foreigners is charged a withholding tax of 25%. A value added tax of 12% is, in addition, imposed on units with monthly rents exceeding P10,000 a month (US$208).

Round trip buy-sell costs for property transactions can reach up to 35% of the selling price because of numerous taxes and fees, such as VAT (12%), capital gains tax (6%), not to mention the very high real estate agents’ fee (5%), and other registration costs.