“Buy land. They are not making it anymore.”
– Mark Twain, American Writer and Humorist
By Realttorney®
Congress is abuzz. It seems that charter change is on its legislative agenda this year and it looks like it is gaining traction. We have reached a point where the President of the Republic just gave instructions to a co-equal branch of government – the Senate of the Philippines – to take the lead in studying the proposed amendments to the economic provision of the 1987 Constitution.
Since I am a real estate guy, this article will focus on the hot-button topic of allowing foreign ownership of land by foreigners. I will lay out two points that RESPs should consider before joining the debate on whether it is a wise idea to allow foreigners to own lands in the Philippines.
Every licensed real estate broker and accredited real estate salesperson knows that the Philippine Constitution currently restricts foreign ownership of land. Hence, any policy change would require constitutional amendments. Allowing foreigners to own land in the Philippines has both advantages and disadvantages, and the discussion around this topic involves economic, social, and legal considerations.
Point Number One. Allowing foreign ownership of land in the Philippines will attract more foreign direct investment.
This is not necessarily true. The inability to own land is not the main driver of why Foreign Direct Investment (FDI) in the Philippines has not been as robust compared to other members of the Association of Southeast Asian Nations (ASEAN) in the last three (3) decades.
The main reason why the Philippines wants to attract more foreign direct investment is because it leads to increased economic activity, job creation, and infrastructure development. But, the Philippines was not an ideal investment destination from 1986 onwards.
In my opinion and based on the last three decades since 1986, the main reasons for not choosing the Philippines as an investment destination are (1) high cost of power; (2) high labor cost; (3) red tape; (4) corruption; and (5) unfriendly business environment.
The Philippines has the second-highest cost of electricity in the ASEAN Region. Japan is number one. But, when you think that power is about 40 to 60 percent of the cost of production of a manufacturing company, foreign investors will shun away from the Philippines.
We have been suffering from high power costs because of the Power Purchase Agreements (PPAs) that the government entered into during the Ramos administration to provide the solution to the power crisis in the mid-1990s. Those PPAs (with a 25-year term) are thankfully about to end if not already expired.
In conjunction with the ramping up of various renewable energy sources in the country, Filipinos may enjoy the benefits of lower power costs in the next 3 to 5 years. So, there is hope to attract foreign investors in the near to long term.
During the late 1990s up to the late 2000s, the cost of labor in the country was relatively high compared to China and Vietnam. Hence, it makes sense for foreign investors to invest in countries where labor is cheap despite its perceived low quality compared to Filipino laborers during those times.
Let’s discuss red tape, corruption, and unfriendly business environment together because they are interrelated. In the early 2000s, foreign investors would complain that it was just too tedious to set up a business in the Philippines. There was too much regulation and too many people who had to sign permits and everything.
Foreign businesses that wanted to set up shop in the country were faced with an uninspired bureaucracy. This was either because of a lack of effort or just a means to make it harder for businesses to deal with them.
And when foreign business would want to make the process easier or faster a form of consideration became necessary. This rent-seeking system was tolerated for a long time. This was argued by Calixto Chikiamco, President of the Foundation for Economic Freedom.
In fairness, our government has passed the Anti-Red Tape Act of 2007 (Rep. Act No. 9485) and the Ease of Doing Business Act (Rep. Act No. 11032) in response to clamor from foreign business chambers to help attract foreign investments to the Philippines. Arguably, these have helped improve the perception that the Philippines is a better place to invest in.
However, it does not cure what had happened in the past 3 decades prior. But it begs the question, will allowing foreign ownership of land in the Philippines improve our standing as a foreign investment destination? Probably not.
As of 2022, the Philippines attracted the least amount of FDI among ASEAN’s six largest economies, at US$9.2 billion. Singapore was the highest FDI recipient at US$141 billion, followed by Indonesia at US$22 billion, then Vietnam at US$18 billion.
Point Number Two. Allowing foreigners to own land can boost the real estate market, leading to increased property demand and potentially higher property values.
Based on historical trends, the other countries that have allowed foreign ownership of real estate have thrived economically. Yet it is not necessarily true that foreign investment in the real estate sector will automatically lead to increased property demand and higher property values.
There is a myriad of factors that collectively shape the real estate market and the demand for real estate development projects. In my opinion, here are several key factors that impact real estate demand: (1) GDP growth and employment rates; (2) interest rates; (3) demographics – population growth and age distribution; (4) infrastructure development; (5) market sentiments – both consumer and investor confidence; (5) geopolitical risks; and (6) government regulations – housing policies and land use policies.
Discussing each of them will make this article longer than it already is. So that will be a topic for another article in the future. Now what about the issue of higher property values? Will allowing foreigners to own land in the Philippines lead to higher land values?
In my opinion, the answer is a resounding No.
In case you missed it, the TRAIN Law (Rep. Act No. 10963) amended Section 6(E) of Rep. Act No 8424 which mandates the Commission on Internal Revenue (CIR) to determine the fair market value of real properties located in each zone or area, subject to automatic adjustment once every three (3) years.
This is the main reason why property valuation has been increasing in the past 5 years and, in my opinion, opening up the ownership of land to foreign investors will have little effect in increasing the property values in the country.
But what about the argument that “allowing foreign ownership may lead to land speculation and price inflation, making it more challenging for local residents to afford properties.” I think this argument has no leg to stand on.
Why? Land banking is a practice where real estate investors (or real estate developers) aggregate or consolidate the purchase of parcels of land that they do not need at the present time but may do so at some future time to take advantage of the price arbitrage.
Can you imagine foreign investors sinking their money into the Philippine market by land banking? I don’t see it. Yet any land speculation will be done by local investors who will be in the best position to take advantage of the price difference when they sell the parcels of land to foreign real estate investors.
It is the local real estate investors who will cause the prices of real estate to rise not the foreign investors. The best way foreign capital will enter the Philippine real estate sector is by partnering with major or publicly listed real estate developers. An example of this is the partnership of Nomura Real Estate Development Co., Ltd. with Federal Land.
So now what?
The proposal for allowing foreign ownership of land has two options. First, switching the current 60:40 ownership ratio in favor of foreigners and setting that as the limit. Second, allowing 100% foreign ownership of land to foreigners – whether juridical or natural persons. And the type of foreign investment we need at this time and in the future should determine what option is best.
I would argue that the type of foreign investment needed in the Philippines should be in the manufacturing sector and tourism development. And, if our legislators are hell-bent on changing the economic provisions of our Constitution then Congress should immediately enact the National Land Use Act as a complimentary piece of legislation.
The Philippines has a low manufacturing base. Our economy has been driven by personal consumption and government spending in the last 2 decades. That is the reason why our GDP can never reach double-digit growth.
Can we manufacture electric jeepneys to support our transport sector? Can we process and manufacture EV batteries for electric vehicles? We should emphasize that the Philippines’ nickel production level is second only to those of Indonesia, and the latter has plans to produce 30 million battery cells, which can be used to manufacture approximately 180,000 electric cars.
We hope that this will be considered by the current Administration.
Allowing foreign ownership of land (via any of the 2 options mentioned above) may encourage foreigners to invest in tourism-related ventures, contributing to the development of the tourism sector. Massive capital is needed to develop integrated tourism sites. Foreign capital may be the best way to ramp up tourism development in all areas of the Philippines.
Finally, why do I advocate the immediate passage of the National Land Use Act in conjunction with allowing foreign ownership of land in the Philippines? Here are several reasons.
- The Act will ensure the proper use of land for the protection and rehabilitation of life-support systems, food security, safe settlements, and more efficient infrastructure systems.
- The Act is designed to ensure just, holistic, and ethical planning consistent with the principle of sustainable development.
- The proper implementation of the National Land Use Act could minimize, if not totally avoid, the harmful consequences of natural calamities, and mitigate or alleviate the effects of climate change on the lives and properties of Filipinos.
When a National Land Use Act (NLUA) is enacted, foreign investors will be able to know where to invest and how to deploy their resources in what industry gives them the highest return on their capital. The NLUA gives foreign investors a set of rules where they will have to operate.
In conclusion, the decision to allow foreigners to own land in the Philippines involves a careful balancing act between economic benefits and potential drawbacks. Policymakers must carefully consider the long-term implications, consult with experts, and implement safeguards to ensure that any changes align with the country’s overall development goals.
What is your position on this issue? I would like to read them in the comments section. Have a great weekend.
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Atty. Jojo is a real estate attorney, an estate planning attorney, a licensed real estate broker, and a PRC-accredited Lecturer/ Speaker for Training Programs in Real Estate. He is committed to helping new and veteran real estate service practitioners be well-informed of the latest laws, rules, regulations, and information relevant to the real estate service sector.
Realttorney® 