How Will the POGO Pull Out Affect the Residential Real Estate Market

By: Martin Luigi Lagustan

Your rental RFO house and lot near business districts in Metro Manila might take a huge hit from this looming event in our country. More than a hundred POGO firms may be leaving the country soon, together with thousands of Chinese tenants leaving the country. Should you be worried? Let’s find out.

Philippines to Close 175 POGO Companies

Last September 27, 2022, news broke when a justice ministry official announced that the Philippines would stop the operations of 175 offshore gambling companies which would consequently deport about 40,000 Chinese employees. This was due to a crackdown on the lack of transparency in the online gaming industry.

The online gaming sector emerged in the Philippines in 2016 and grew quickly as operators from around the world capitalized on our country’s liberal gaming laws to target customers in countries where gambling is banned. At the peak of offshore gambling operators, they managed to employ more than 300,000 Chinese workers. However, when the pandemic hit and higher taxes were implemented, a lot of these companies chose to operate somewhere else.

According to the justice ministry spokesperson, Jose Dominic F. Clavano IV, they initiated a crackdown because of the multiple reports of kidnapping, murder, and other crimes committed by Chinese nationals against their fellowmen.

The POGOs that were targeted for closure either had expired licenses or their licenses were revoked due to violations including non-payment of government fees. According to Clavano, the deportation of the POGO Chinese workers can be expected to start next month (October 2022).

It is, however, undeniable that the Philippine government got something good out of the industry. In 2020, our government generated over 7.2 billion pesos in POGO fees alone. These fees included taxes, spending of the Chinese workers in the Philippine market, and office rentals.

Understandably, the Chinese embassy in Manila would make a statement. Although, it is not what you might expect. They said that Beijing supports the crackdowns on POGO-related crimes and the deportation of the Chinese workers who committed crimes. Additionally, the Chinese government said that they firmly oppose gambling and they take “tough measures to combat gambling.”

What Does the Philippine Offshore Gaming Operators (POGO) Pull-Out Mean for the Real Estate Industry?

The most widely reported take on the effects of the POGO pull-out on the real estate industry is by Leechiu Property Consultants. It is a private professional real estate brokerage company and is one of the Philippines’ top real estate advisers.

According to Leechiu Property Consultants, the exit of many POGO companies at once will significantly impact the real estate industry, as these POGO firms are currently occupying about 1 million square meters of office space.

To be specific, the POGO exit will cause office real estate to rise to 29 percent from 18 percent and will cause rents to crash by 20 to 50 percent in the Bay Area, Alabang, Makati, and Ortigas or Mandaluyong. These Central Business District areas are the key POGO hubs in Metro Manila. 

As soon as these POGO firms exit the country, it will result in an 18.9-billion-peso loss in annual rental real estate revenues, 5.8 billion pesos of estimated loss in annual taxes, 9.5 billion pesos worth of loss in annual electricity cost, and 952 million pesos loss from daily spending of Chinese workers. Of course, commercial real estate and residential real estate go hand-in-hand, which means it will also suffer an estimated 28.6 billion pesos of loss in annual housing rent.

Moreover, Leechiu Property Consultants also estimates that the total exit of the POGO firms would vacate 1.05 million square meters of office space. Since the industry employs more than 200,000 Chinese nationals and over 100,000 Filipinos, this is an additional 190 billion pesos worth of losses in both the property and retail sectors.

According to COL Financial, an online stock brokerage firm in the Philippines, the abrupt exit of all remaining POGO firms will have a negative effect on the entire office rental industry. However, they also believe that the impact of this exit will vary on how office landlords will strategize their losses.

The government’s recent decision to completely allow the work-from-home or hybrid work schedule arrangement for the Information Technology and Business Process Management (IT-BPM) industry will have an effect on the future expansion plans of the Business Process Outsourcing (BPO) industry.

The Fiscal Incentives Review Board (FIRB) extended the WFH arrangement for IT-BPM companies as long as they are registered with the Philippine Economic Zone Authority (PEZA). PEZA registry gives companies the liberty to do business freely, all while enjoying exceptions to agency permits and even Local Government Unit (LGU) permits. 

Now, this registry will also give them the option to work from home until December 2022. Should IT-BPM companies choose to freely apply the work-from-home setting beyond that, the FIRB recommended that they should move their registry from PEZA to the Board of Investments (BOI). This will allow them to enjoy the same tax benefits (not permit exceptions) from a PEZA registry but with the added benefits of applying the work-from-home arrangement 100 percent.

With these business arrangements on top of the POGO pullout, we can expect the office rental real estate industry to suffer quite a lot. Additionally, although indirectly, the residential real estate in the leading business districts can also suffer, as fewer and fewer people will have to rent near their offices for convenience. You can finally buy that RFO house and lot outside of the noise of the big city!

Although COL Financial still believes that even if the companies in the IT-BPM industry move to BOI and cut down their office spaces, they will still need room for their operations that need high-security protocols. However, the demand for expansions may be reduced.

If — aside from your RFO house and lot property — you’re also an office real estate investor, these government decisions could mean you would need to look at your current strategies and find out how to make your offerings more attractive to businesses.

Should We Support or Oppose the Pogo Pullout?

With the big losses that we mentioned in the previous section, you might be wondering if it’s really worth it to kick these companies out of the country. After all, you might even be indirectly affected and this could stunt your plans of buying an RFO house and lot. Well, legally, it makes sense because we can’t ignore that, aside from their contributions to the economy, they are contributing to the increasing crime rates in the country.

Additionally, a lot of the POGO companies weren’t even paying taxes, which eventually led to their closure even before this whole mass shutdown fiasco happened.

According to the Inquirer in 2020, Caesar R. Dulay, the Internal Revenue Commissioner, said that almost all of the POGO firms were yet to settle their mandatory tax payments. While the commissioner didn’t have the exact figures at that time, Arnel Guballa, the BIR deputy commissioner at that time, warned that if the POGO companies fail to comply, this will inevitably result in the denial of their BIR clearance for resumption of operations. 

Meanwhile, an opinion paper published in Yahoo! News last October 5, 2022, claimed that the best time to end the POGo industry in the country is now. 

According to the think tank and research group Global Source, they believe that the country should put an end to these firms because they cause our country to suffer economic vulnerability and damage.

We can’t deny that the POGO sector has been helping the country cushion its economy against strong external factors. However, allowing these operations to continue and go back to their pre-pandemic size will only make us even more vulnerable if they decide to do a sudden and massive pullout.

Moreover, the POGO industry isn’t even doing well by itself, as it has shrunk by 20 percent since the pandemic hit the country. On top of that, global financial markets have been easing up on their expenses and figuring out how to manage the outflow of their reserves to stabilize the foreign exchange rates.

Global Source believes that the risk of collapse in the property sector can still be managed since a lot of the country’s firms and banks have been limiting their exposure to the POGO sector. Additionally, the decline in real estate prices can be an advantage, as this can attract the global BPO market.

Meanwhile, in 2020, when the first POGO pullout was suspected to occur, the governor of the Bangko Sentral ng Pilipinas, Benjamin Diokno, downplayed its potential impact on the economy. The governor told GMA News that he was not in favor of the continued operations of the online gambling sector and that its impact on the economy won’t be that huge.

According to the central bank chief, the initial findings of their study about the financial risks of a potential POGO pullout found that the impact would not be as abrupt as real estate companies believe. He said that on the real estate side of things, POGO operators were required to pay a one-year deposit. Hence, if they decide to leave, the real estate industry will have a lot of time to optimize its strategies to adjust to the pullout.

So, what does the current administration think about all of this?

Last September 2022, the President’s lawmaker sister, Senator Imee Marcos, confirmed in an interview that President Ferdinand Marcos Jr. was looking into the possibility of declaring POGO operations illegal. 

According to the senator, if the country can’t regulate the POGO sector, then it would be better to stop them. She also believes that what’s already happening is “sordid and gruesome,” with all the abductions and killings. Moreover, she added that these occurrences are embarrassing in the international community, even if they only involve Chinese nationals because the crimes are happening in our country.

As for the POGO revenues growing smaller by the year, Senator Imee Marcos also mentioned that despite having projected revenues of 50 billion pesos, a huge chunk of this was going to corruption.

What Should the Office Rental Real Estate Sector Do?

If you’re an investor or an owner of an office rental building and your tenants are mostly POGO firms, you may be worried about what to do if they do get kicked out of the country. Luckily, while they may have been the easiest customers to get, they aren’t the only market you can target.

The real estate industry has a long history of being highly volatile, so hits like this aren’t really new and there are some strategies that you can apply. 

Analyze current tenants

You can’t maximize your return on investment if you have tenants coming and leaving your property. At the same time, tenants who have late or missed payments because of business woes can also affect your cash flow. Even if you evict them, this can add even more costs and time looking for a new tenant.

Now, there’s no way you can 100 percent guarantee that a tenant will be perfect. However, you can reduce your risk by being meticulous about choosing your tenants. The best way to do this is to analyze the performance of the tenants you currently have and identify which ones are giving you the best value. After that, you can adjust your marketing strategies and start targeting businesses from the industries or sectors they are in.

This strategy isn’t perfect, but it’s measurable.

Review your leases and space offerings

A solid lease agreement is one of the biggest factors that contribute to a healthy landlord-tenant relationship, as it protects both parties from ambiguity and conflict.

As you adjust to a new market, you have to make sure that your leases match the requirements of the new sector you want to target. 

Before the POGO sector turned up in the Philippines, the dominant office space tenant was the BPO sector. Moreover, the BPO and IT-BPM industries are still major economic drivers with a recorded full-time employee growth of 9.1 percent between 2020 and 2021. 

As these companies are still trying to figure out how much office space they will need for the hybrid work setting, you need to offer space that provides attractive amenities, flexibility, and comfort.

Related Blog: What are the Perks of Investing in Real Estate?

Related Blog