Philippines: Overview

RENTAL YIELDS

Prime units have high yields at 10%

Luxury condominiums in prime areas have high yields of 10.65%. Medium-sized units with 90 square metres (sq. m) have the highest yields at 11.57%, and are most expensive per sq. m at US$2,019. Yields decline as size increases beyond 90 sq. m.

Condominium prices do not go beyond US$2,000 per sq. m, except for 90-sq. m units, and are at an average of US$1,831. Prices per sq. m do not vary much in US dollars ranging from US$1,738 to US$2,019.

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TAXES AND COSTS

Double high tax whammy

Effective Tax Rate on Rental Income
Monthly Income	US$1,500	US$6,000	US$12,000
Tax Rate	25%	25%	25%
Click here to see a worked example
Source: Disclaimer

Rental Income: Gross rental income of of foreigners is taxed at a flat rate of 25%. There is also a Value Added Tax (VAT) on rents above PHP10,000 (US$232) per month at 12% of gross rent.

Capital Gains: Nonresident foreigners not engaged in trade or business in the country are subject to income tax on the gains they realize when selling properties, which is 25% without any deductions.

Inheritance: Nonresident aliens pay estate (inheritance) tax only on property located in the Philippines, at rates from 5% to 20%.

Residents: Residents are taxed on Philippine-sourced income based on the country’s progressive tax rates, from 5% to 32%.

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BUYING GUIDE

Transaction costs are very high in the Philippines

The total roundtrip cost of property purchase is around 16.23% to 23.75% of the property value, inclusive of Capital Gains Tax (6%) and Real Estate Agent's Fee (3% to 5%). It takes about 33 days to go through the eight procedures needed to register a property in the Philippines. Pre-selling, or the selling of units during construction, is the fashion nowadays. The buyer should be careful when buying unfinished buildings or condominiums.

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LANDLORD AND TENANT

Rents are paid one year in advance in Manila

The luxury rental market is generally pro-landlord. However, for the rest of the market the balance of power between landlord and tenant in the Philippines is neutral.

Rents: The parties can freely determine the amount or rent and rent increases. At the upper end of the market, the landlord receives one year’s rent in advance in post-dated cheques.

Legal System: The legal system is cumbersome. Tenant eviction can go through a long and expensive trial. In practice, the landlord’s success in evicting a tenant may depend on his influence in influencing the police (or local gang members) to apply pressure.

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ECONOMIC GROWTH

Strong growth in the Philippines despite unstable politics

The Philippines is an archipelago of 7,107 islands sitting off the coast of Southeast Asia. Most of the 83 million people live on the 11 biggest islands. Spanish, American, and Chinese influences can be seen around the country. White, sandy beaches (Boracay is the most popular one), century-old churches, and other natural and man-made wonders await tourists. Most people can speak English.

After the long kleptocracy of President Marcos (1965-87), the Philippines recovered slowly under Presidents Aquino and Ramos. In the late 1990s it began to attract substantial foreign direct investment (FDI) and portfolio investment.

The country emerged relatively unscathed from the Asian crisis, helped by good Central Bank supervision of the banking system, and by its late start in the 1990’s boom, so that the real estate market was less overbuilt than regional peers. But the Estrada (1998-2001) administration’s florid corruption precipitated a crisis of confidence.

Amidst political scandals, coup d’ etat rumors and massive protests, the Philippines has posted a strong GDP growth rate of 5% to 6% since 2004. Reforms such as the passage of the Expanded Value-added Tax Law and Dual Citizenship Law helped stabilize the economy. Capital inflows and OFW remittances led to continued appreciation of the peso. The stock market is also back to its pre-Asian crisis level.

As the government aims to achieve GDP growth rate of 7% in 2007, 8% in 2008 and 9% in 2009, the property sector is expected to continue its recovery.