Logistics and Real Estate

If there is one thing to be learned from studying the history of the Philippine real estate market, it is the fact that the growth of the market is driven by major themes and trends. In the past ten to fifteen years, it was the rapid growth of the Information Technology Business Process Outsourcing (IT BPO) industry which drove the demand for office space in the country (SEE: Strong BPO industry continues to drive PH office building market). Today — and perhaps for the next three to five years, it is the advent of Philippine Offshore Gaming Operators (POGOs) which are driving up property values in the Metro (SEE: POGO: A Major Driver of the PH Real Estate Market, PropertyAccess). For savvy investors looking to catch the next wave before it starts, there is one lingering question: What is the next big thing?

The boom of e-commerce in the country has led to an increased demand for warehouse spaces. Scarce and expensive land in the National Capital Region (NCR), however, has forced real estate developers to look outside of the Metro and build these warehouses in the nearby provinces. The use of these provincial storage hubs, in turn, has created the need for an effective and efficient logistics industry to aid in the fast delivery of goods. Currently, the major conglomerates — such as Ayala, SM, GT Capital, JG Summit, etc. — are all scrambling to fill this need. This insight is based on a report by Santos Knight Frank (a renowned global property consultancy firm) entitled “The Future of Logistics: A Real Estate Perspective” (SEE: Why logistics is the next big thing for Philippine real estate sector?, Business World).

The Rise of e-Commerce in the Philippines
The e-commerce industry in the Philippines is estimated to have generated over $840 million in revenue from more than 37 million users in 2018 (₱44 billion), according to a recent report published by Statista. This figure represents a 22% jump compared to the $688 million (₱36 billion) posted in the past year. Despite these impressive numbers, online shopping revenue only accounts for 2% of the total retail market in the country (SEE: PH e-commerce industry sees more growth in 2019).

The co-founder and Chief Executive Officer (CEO) of Lazada Philippines Paulo Campos III is confident that the e-commerce industry in the country will sustain its rapid growth in the coming years. There are two main factors which will drive this growth. First is the rising levels of disposable income as Philippine GDP doubles within the next seven years (SEE: GDP seen doubling by 2026 as Philippines “set for dynamic growth”, The Philippine Star). Second is the rising popularity of online stores such as Lazada and Shopee. Through these drivers, revenue for the industry is expected to reach $2 billion by 2021.

The Need for Physical Warehouses
Currently, Lazada occupies a 54,000 square meter (sq m) warehouse in Cabuyao, Laguna, which has a total capacity of five million items (SEE: Lazada invests ‘massively’ on logistics to enhance customer experience, ABS CBN News). Shopee, on the other hand has a similarly sized warehouse in Dasmariñas, Cavite. As the number of goods being sold through digital platforms increases in the coming years, the need for physical warehouses will also rise. Thus, new warehouses would have to be built in the coming years in order to keep up with the demand.

Preferably, these new warehouses would be constructed in the National Capital Region (NCR), since this place is where most of the customers are located. However, Metro Manila is already congested — making it difficult to find available spaces. On top of this scarcity, land in the area is extremely expensive. For example, industrial land in Mandaluyong and Makati costs as much as ₱250,000 per square meter (sq m) to buy and ₱650 per square meter (sq m) to rent. Meaning, a piece of land similar in size to that of Lazada and Shopee would cost ₱13.5 billion to buy or ₱35.1 million to rent per year. The combination of the scarcity of available land and the high costs in Metro Manila means that developers would have to look elsewhere.

As a result, real estate developers are looking to create industrial parks and storage hubs in the provinces around Metro Manila, such as Clark and Laguna (SEE: Clark: The Next Metro, PropertyAccess). In these provinces, there are a lot of idle pieces of land which can be bought at a reasonable price.

The Role of Logistics
Building storage hubs in the far away provinces, however, comes with one major problem: logistics. For example, Clark Pampanga is roughly 100 kilometers away from Metro Manila. Meaning, goods bought from NCR would spend more than two hours on the road. What more if the warehouse is located in a province which is farther away or if the buyer is located in Visayas or Mindanao?

In response to this problem, the major real estate developers in the country are investing heavily in the logistics industry — in hopes of finding a more effective and efficient way of moving goods. Some of these investments include the following:

1.Ayala Land Inc. (ALI), through its subsidiary Ayala Land Logistics Holding Corp. (formerly known as Prime Orion Philippines Inc.) recently broke ground for the Laguindingan Technopark in Cagayan de Oro, which is worth ₱172 billion (SEE: ALI logistics unit hikes stake in LTI, The Philippine Star).

2. SM Investments Corp. (SMIC) bought a stake in 2GO back in 2017.

3. Metro Pacific Investments Corp. (MPIC) bought a 12% stake in Air 21 back in 2016.

4. JG Summit’s (JGS) Cebu Pacific is investing in two additional cargo planes.

5. Filinivest Land Inc. (FLI) is investing in industrial parks in New Clark, Pampanga.

Through all of these investments, the country’s logistics industry should improve in the coming years. This improvement will connect Metro Manila to the rural areas in the Philippines, which — in turn — will allow for more growth and development in the provinces.