Today we are talking to Morgan McGilvray of Santos Knight Frank. Santos Knight Frank is a well known international property firm and Morgan heads the office leasing department of the Manila, Philippines branch of Santos Knight Frank.
We get a lot of really valuable insight and great conversation from Morgan into the commercial office space situation, specifically referring to the outsourcing industry. Don’t worry if you’re not into real estate so much, there’s a lot about outsourcing in this conversation. I really enjoyed it and certainly learned a lot.
Santos Knight Frank
Their head office in the Philippines is located at Makati City, they focus on residential and commercial real estate as well as offering facilities and property management services. With the tremendous growth that the business process outsourcing industry brought to the Philippines, many of the properties that Santos Knight Frank manages have been occupied by various outsourcing companies.
BPO offices and properties
Derek Gallimore: Welcome to the Outsource Accelerator podcast. This is a short format podcast where we explore business and outsourcing mastery. My name is Derek Gallimore and I am really excited to bring you the leading podcast in outsourcing. Hi and welcome back. This is episode 250. Today we are talking to Morgan McGilvray of Santos Knight Frank. Knight Frank is a well known international property firm and Morgan heads the office leasing department of the Manila, Philippines branch of Santos Knight Frank.
We get a lot of really valuable insight and great conversation from Morgan into the commercial office space situation, specifically referring to the outsourcing industry. Don’t worry if you’re not into property so much, there’s a lot about outsourcing in this conversation. I really enjoyed it and certainly learned a lot about the current economic situation of the Philippines, Manila and as well the situation with outsourcing and its future potential. So I am sure you will enjoy this. If you want any of the show notes or any more information about this, you can go to outsourceaccelerator.com/250 enjoy.
You are the director of office leasing at Santos Knight Frank, you are from the U.S I want to get a little bit of background as to how you found yourself here in Manila, in the Philippines. And of course, you know, I’ve got you on the podcast because property is an absolutely inseparable part of outsourcing. It’s one of the major components to obviously a successful outsourcing operation and the Philippines has going, has gone through incredible growth over the last you know, 15 years. And one of the manifestations of that is an incredible growth in terms of the office space, the buildings that are popping up everywhere and the sophistication of the buildings.
We see that in Manila, but also we’re seeing that in the provinces as well. So I’m super excited to have you on the show. Thanks for, thanks for joining us. So I suppose Morgan you know, you can always introduce yourself better than I, would you, would you just want to give us a brief overview of Santos Knight Frank and its role in the kind of commercial real estate market here and what you do there.
Morgan McGilvray: Sure. So I’ll start with Santos Knight Frank, the firm I worked for, we’d been in the Philippines since the mid nineties and we spent over 20 years actually being known as CBRE Philippines. So we were their affiliate here in the Philippines for a long time. But as of 2017, we switched our affiliation to Newmark Knight Frank. I know that Knight Frank is a pretty popular brand in Australia, a little bit in New Zealand.
Newmark is quite a popular brand in the U.S Nowadays, and we have become their Philippine partner. So as a firm we provide real estate services. And what that means is it’s certainly a lot of office brokerage, so leasing, sales, et cetera. but we also do work in the residential sphere. We value properties, we do consultancy, we manage buildings and we even manage BPO or call center facilities, janitorial, technical services, anything that needs a surface for real estate, we’re generally doing it here in Manila,
Derek Gallimore: Right. So the full range of services. Which I think the relevance rule, you know, it’s interesting as we discussed that maybe later on in the conversation because large part of outsourcing is really the facilities management, making sure that staff have a good place to sit. so yeah, it’s certainly excited to, to discuss all of that. And your journey, Morgan, you’re from the U.S and you know, maybe if people sitting here in Manila it, it’s not unusual to come across an expense, but people in the west, they might think, how on earth do people find themselves in Manila. so what’s your personal journey?
Morgan McGilvray: Yeah, the true story is probably too long for even a podcast, but the short version is I am from California. and my first job out of university was in Santa Monica working for a logistics startup. And that startup was already outsourcing to the Philippines. And this was back in 2003, kind of when call centers were still on their infancy here, infancy here. And so I started working with the team of Filipinos. They were helping support the accounts I was running. And by 2005 I was sent here to one of those working vacations that I know a lot of us do. While on that working vacation, I was first introduced to my wife, my now wife who was at the call center but I hadn’t met before. and yeah, so that’s how I started to really come across the Philippines at all.
I left that job a few years later, did some Grad school work and then found myself unemployed in kind of the global financial crisis. 2008, 2009 was taking more frequent visits to Manila to see my then-girlfriend. And then one day I said, you know, there’s a lot going on in the Philippines. Why am I not looking for work here? I would be quite happy, I think. And so I shacked up here, lived with her up in Caloocan for a year or so and then was fortunate enough to meet Rick Santos the founder of our company and my boss and he extended me a job in 2010 and I’ve been working for him ever since.
Derek Gallimore: Wow. Fantastic. And so you, you started with outsourcing and then, you know, sort of through a circuitous route and I suppose you’re back into the outsourcing industry. how have you seen it evolve over the last whatever that is, 15 years that you’ve been involved in traveling to Manila?
Morgan McGilvray: Yeah, well, I came and it was coincidental, but I came at the perfect time. So when I started in about mid-2010 the market here was just recovering from the global financial crisis and it was actually starting to boom. So Manila picked up a lot quicker than the rest of the world. I think there’s a lot of western U.S companies started to send more and more work over here just to help them hedge against another crisis or whatnot, or looking for, you know, ways to cut costs or they have their various reasons.
I’ve been in kind of a bull market here for almost nine years now. and so that’s been good. So, you know, the obvious is well a ton new development, right? So many, many buildings each year, millions of square meters of new stock. and that becomes quite obvious when there used to be nothing and then all of a sudden you drive by and there’s a series of new buildings.
We’re always noticing that. And I’d say BGC is of course probably the prime example. But the other change I’ve kind of noticed is that the sophistication of the market here and even what the, our clients who could be the BPOs or the call centers or the fortune 100 companies running a captive here. The sophistication of their needs has changed a lot. So maybe they used to come here because it was cheap or well, mostly the rationale could have been because it was inexpensive compared to other markets. and it was so cheap in fact that, you know, they didn’t have particularly high standards.
They were just so thrilled with the value they were getting. And so it was a little bit easygoing. Nowadays I think everyone’s taking a more serious look at the Philippines and the expectations are higher. This is now a notable market. they’re looking at it the way they might look at other top cities in Southeast Asia. And so, you know, we’ve had to step up our game as well to make sure that we’re kind of competing at a world-class level rather than just kind of being the cheap outsourcing destination that might’ve been more popular 10 years ago.
Derek Gallimore: And I think initially, you know, the mentality was that you outsource your problems, you outsource the staffing and it was no longer your concern. You know, these were just these auxiliary teams to the core business. Whereas now I think the outsource teams are becoming more of the core part of the business, the identity of the business and still and part of the business culture. So, so there’s no more sort of a first-grade office versus third-grade office. You know, it’s just about getting the best facilities, the best culture and everything wrapped up wherever people are sitting here. I think it’s kind of the globalization of the workforce as opposed to people just thinking that it’s a purely outsourced responsibility.
Morgan McGilvray: I think that’s exactly it. the change in the scope of the nature of jobs has also been impressive. So it’s not the, the workforce is not just call center agents anymore. It is architects and nurses and attorneys and whatnot who are doing yeah, extension work for maybe an office in another country. But you’re right, it’s certainly not feeling outsourced anymore. They are, are an employee of their company. They just happen to be offshore. And that’s a big change.
Derek Gallimore: I think it’s difficult to get the for people that are overseas and maybe likely never to come over to the Philippines is difficult to sort of give them firsthand experience of exactly what it’s like over here. Now there is, you know, it is an emerging economy. There’s 18 million people that kind of live almost hand to mouth. but then there’s an incredible sophisticated market here, which is outsourcing, dealing in, dealing with working from A-grade office facilities, very sophisticated operations, sophisticated highly qualified people.
As you say BGC which is one of the central business districts. really encapsulates that I think. And you know, I do a number of BPO tours and office tours and you are seeing incredible facilities here, which equal those of the sort of the Google’s of the world, you know, where there’s incredible facilities, gymnasiums, health facilities, big canteens, free food you know, and just incredible sort of environments for these young kids to work in and, and to aspire to and to build their career ladder. So, you know, it really is I think the antithesis of what a lot of people think they’re going to find when they come over to this emerging economy in inverted commerce here.
Morgan McGilvray: Yeah. That’s my experience too. Almost everyone who comes over here is so pleasantly surprised by what they see. It’s almost never the reverse. Right. and that’s good. Then they go back and tell people about it. And that’s a finally some good news for the Philippines. Cause if they’re only reading the newspapers, they don’t always get that.
Derek Gallimore: Yeah. And unfortunately there is a bit of overshadowing from the political kind of side and, and I think unfortunately the, the upsides of the Philippines or the economic upsides are really overlooked, which is, which is a bit sad. And also I think the sophistication of the industry then is sort of overshadowed by the overall political instability, which I think is also a bit unfortunate. But you know, so as mentioned to give people if they’re completely unaware of Manila, or the Philippines, but Manila has three or four main central business districts now.
The newer ones almost supersede the older ones. BGC (Bonifacio Global City) is one of well, I mean, literally, it didn’t exist 20 years ago. There were only two or three substantial buildings there 15 years ago. And now, you know, it is a, it is a city center on par with any first-world city really. do you have any concept Morgan of, I don’t know that the population of BGC or the number of buildings or square meterage?
Morgan McGilvray: The square meterage for office is approaching 1.5 million which makes it the biggest business district in the Philippines. the, I don’t know the population, I mean it’s, it’s probably 90% commuters, right? proportionally small amount of people actually live in BGC, but we certainly have over 40 office buildings and probably certainly more than that, residential, a couple of new hotels, which is nice. and it’s not a huge amount of area. It’s just really developed and it’s dense and all the land is accounted for and everyone’s doing something with it because it is really become under the crown jewel of Manila.
Derek Gallimore: And all of this, I mean, a lot of this is fuelled by the outsourcing industry. obviously, outsourcing is very heavy on staffing. Everyone needs a place to sit. It’s pretty much single-handedly fuelled this incredible growth in office space and, and all the kind of amenities around it. there’s a lot of pressure on the builds. I mean it’s building at an incredible pace, but generally, occupancy rates are at record highs. Is that right? And, and people are struggling to find the facilities they need.
Morgan McGilvray: Yeah, that’s correct. And Really, since about 2011 vacancy rates across Metro Manila have been incredibly low. We’re talking about under 5%. So there’s been a lot more demand than there has been supply for seven or eight years now. And so it has made it tricky for some firms who want to be in BGC to be able to find the space they want. and so what they end up often doing is pre-committing to building still under construction cause it’s just hard to go out and find existing space in the size that a lot of these companies want. So it’s led to a lot of pre-commitments as well, which has continued to keep the vacancy rate quite low. And you can say that’s the same for all the other districts do. Albeit at a smaller scale.
Derek Gallimore: Right, right. And of course the main, I suppose you would, you would, you would call it still is Makati the main business district which has been going strong since about the 1950s, 1967 I assume. and that you know, has a lot of the big brands and a lot of the big labels there still. But so, you know, we have a very varied outsourcing audience here.
There’s a lot of people overseas that, that don’t always understand the relationship between outsourcing and needing to use a BPO facility versus coming over here and leasing their own facility. Do you get a lot of inquiries as well as from early-stage inquiries thinking that they want to outsource and thinking that it has to undergo leasing property, can you give a general orientation to that and, and maybe insight into conversations that you have with early-stage inquiries?
BPO facility leasing
Morgan McGilvray: Yeah, sure. So we do get early-stage inquiries. A lot of them come from the U.S or Australia, although that’s starting to expand to Europe and a few other places as well. And these are usually firms SMEs that have heard good things about the Philippines but haven’t done a ton of due diligence yet. So they want to fly over and have a look and they usually have a rough idea of about how many seats or how many agents they might want. And it could be as few as five or maybe up to 50 in those early stages.
They come over and take a look and they need to look at the different entry strategies they’ve got. and so I’ll often show them the property market for leasing their own space. Cause that’s what I tend to do. but I can also show them, well, you know, there are hosted facilities, in which case they, the hosted facility can lease you the seat, but they’ll also help to find employees for you and do some of the management and take care of a lot of the other expenses and whatnot.
Morgan McGilvray: All for let’s say a fixed per seat per month rate. And so I’ll give them both options. and then usually they have to decide, you know, do they want to manage their own facilities, in which case they might look at leasing a small office on their own, which means they’d have to do their own hiring and get their own management, et cetera. Or would they be better off starting with the hosted facility, which is probably a lot of the clients that you work with, Derek in which case they’re leasing almost literally leasing employees in the sense that the host of facilities, providing them with employees ready to go in seats on some kind of a, yeah. Again, a contractual per seat per month basis. and that’s also quite popular, especially at the beginning when the firm, the client doesn’t exactly know what they’re doing.
Then I guess there’s a merge of a bit of an in-between, which is kind of the incubation facility in which case the firm has their own agents, but they’re in a hosted facility where they can just lease desks by the month. They can expand up, they can extend down and they can keep their commitment kind of short term and without the capital infrastructure that they might need for having their own office. And that proves popular for firms who just don’t know what their growth is going to be. You don’t know if they’ll like the Philippines shorten the risk. And the commitment by being in an incubator for the first year or a year and a half.
Derek Gallimore: Yeah, absolutely. And I mean, you’re probably seeing a lot of fracturing in terms of the available models. am I correct in assuming 10 years ago the market was pretty inflexible, but now pretty much anything goes well maybe not because there’s a lot of competition on space. Yeah. but you know, there’s obviously a huge trend now globally, not just in the Philippines but with co-working spaces.
I think it sort of hit a heady kind of mix in the Philippines because you already have this concept of outsourcing staff leasing, seat leasing facilities leasing, and then there’s the co-working space, which is an even more flexible model overlay. plus you, of course, have the traditional leasing route. and you know, it’s kind of hitting a fever pitch in terms of just the optionality of people to, to look at and explore, have, have used, have you seen that affect the market in terms of range of options and also, I suppose, competition for the same space?
Morgan McGilvray: Well. Yeah, you’re absolutely right. the entrance of co-working providers in the last few years has really been kind of shocking. I mean, I can’t even keep track of all the new entrants providing co-working services, you know, similar to WeWork with brands from different countries. and you know, that you might say that WeWork model has been popular in the Philippines as well and that tends to cater to kind of individuals or small companies who normally wouldn’t want their own office space yet cause they’re just too small or they don’t have the money or whatnot.
We’re seeing in these buildings that are coming up around Metro Manila, we are seeing a lot of the tenants happen to be co-working providers. So the providers are leasing floors and then opening up their doors. Where the lines kind of blur though is that a lot of these providers will do a co-working aspect like WeWork, but then they’ll also have dedicated rooms for leasing out to BPO.
They might set aside a large room of 50 desks and a BPO can lease those 50 desks. You know, for six months and they might share common area with the co-working, but they’re not there. Their employees aren’t intermixed with other people from other companies for data privacy and a lot of other reasons. And so we’re getting coworkers that are providing the kind of BPO, seat incubation, but also providing the co-working which is just giving tenants, you know, a ton of options in terms of how they want to come into this market. And it’s really increased flexibility. I’d say that’s probably the most important point is you just have so much choice now and you don’t have to commit yourself for long periods of time or spend a lot on your capital expenditures because there’s so many flexible solutions nowadays.
Commercial real estate outsourcing
Derek Gallimore: You’ve also seen, you know, some of the big companies, land holders ,developers, landlords, they’re also getting into the game instead of obviously building and leasing it out. They’re also providing more of a broader range of services. So they might also get into co-working themselves are seeing everyone sort of trying to monetize and value add in this space
Morgan McGilvray: We’re seeing a lot. I haven’t seen any major developer come out with its own co-working yet. but for example, Ayala land, which is a very large developer in the Philippines, every new building of theirs will have a, what’s called a clock in which is their co-working brand. So it kind of comes free installed almost in Robinson’s land, another big developer doing the same thing with workable. and so yeah, I would expect that trend to continue because the developers, you know, they can probably turn a pretty profitable co-working if they’re not paying so much rent cause it’s their own building. and they know the demand is there. So I would continue to expect to see that. Yeah.
Derek Gallimore: Yeah. It’s an amazing trend. And then, so something that’s been very unique to the outsourcing industry is PEZA which is, if I can get this right, Philippine Economic Zone Authority which was a sort of top-down government support in terms of taxation, in terms of trying to avoid bureaucracy in terms of trying to support the outsourcing industry largely. and this also had an effect in terms of the commercial space because if, if people were to be a PEZA company, they had to work from a PEZA space which required licensing. now could you give an overview of PEZA as you see it from, you know, the commercial property point of view? the implications of that and then also the recent changes because PEZA, how long has it been going? 15-20 years. And I believe the future of personnel is slightly in question.
Morgan McGilvray: Yeah, it is. so PEZA goes a lot farther back than people think. It was originally a program for Philippine textile manufacturers to help make their exports competitive worldwide. That was a long time ago and it’s more current form that really traces back to the mid-1990s when through a bit of a service creep of mission the Philippine government decided, well, call centers are an export of services, so, therefore, they should fall under this PEZA program too.
We started to see accreditation for BPO providers. And what the program is, export service providers such as call centers, contact centers, they registered with this PEZA program. and then one of the conditions of registration is that they have to locate in a PEZA accredited office building as well. And there are many throughout the Philippines, but most of them are here in Metro Manila. And if a company is accredited by PEZA and if they’re in a PEZA accredited building as well, then they get a lot of benefits, which are really helpful. They help the industry grow for the past 20 years, let’s say.
Derek Gallimore: It really has been a support for an industry that the outsourcing industry has pushed this economy you know ahead light-years and has generated immense wealth for and even created a middle class in the Philippines where there previously wasn’t one. but now there’s a, a sort of general consensus that outsourcing is becoming a sunset industry, that it’s now a bit of a mature old dog.
One of those reactions to that is, and by the way, I don’t believe and don’t agree with that consensus necessarily, but that’s another story that one of the reactions to that is that the government is beginning to provide less support for the outsourcing industry because it’s effectively saying the outsourcing industry is very strong. It’s doing well all by itself. we shouldn’t necessarily you know, carry favor for the strongest industry when there are all these other sectors that need our help. So they’re starting to pull away the tax incentives for outsourcing is, is that correct?
Morgan McGilvray: So, yeah, it’s funny you mentioned that it’s quite timely because just last week, something called the administrative order 18 came out from the office of President Duterte and that order says that buildings in new buildings in Metro Manila will no longer be PEZA accredited. and so that means that if a company wants to take a new building in Metro Manila in the coming years they won’t be able to benefit from the, the offerings of PEZA because they will be in a non PEZA accredited building and that will have some effect, but I think the government activity out of Metro Manila and into the provinces so they will continue to accredit building new buildings and the provinces.
But not so much in Metro Manila with the idea that a lot of the call centers, BPOs and captives here, we’ll take a more serious look at doing second, third, fourth sites out in the provinces rather in the metro. And it’s part of probably an overall kind of decongestant of Metro Manila and building up the economies of other cities throughout the Philippines. So that order just came out last week and we’re still making sense of it, but it looks like in the short term buildings that have already applied for PEZA and are 90% of the way there are going to be approved. So it won’t be a shock to the real estate market here in Metro Manila in the short term, but it will have longer-term implications for companies for sure.
PEZA and outsourcing
Derek Gallimore: Right. And to put a bit of context to that, there was a train bill, so a tax reform bill that went through maybe, I’m guessing 12 months ago now, 18 months. and then there was a proposed second bill, which was even a stronger tax reforms that was going to really look at the outsourcing industry and the tax incentives and the PEZA and things like that, that, and referred to sometimes as the train two bill or the Trabaho Bill. and that has been postponed I think partly because there’s controversy over the severity of the tax reforms.
But also because of the impact and on the outsourcing sector. Now, you know, they’re fairly progressive reforms and, and there’s obviously arguments both sides. The big end of town of outsourcing is really quite concerned because that can marginally tilt everything, all of their costs so that, you know, when you’re big and established and you’re over here, you can have relatively big impact on your cost structure.
Whereas, you know, and the Philippines generally is always very concerned about maintaining its level of competitiveness and price competitiveness of course not only to the origin countries but also to the competing outsourcing countries like India and Vietnam and, and things like that. So, you know, it’s there’s a lot of lobbying by IBPAP, which is the outsourcing association, the national, the national body here trying to prevent this tax reform bill.
Now it’s really relevant in terms and then the PEZA, the licensing of the individual properties is related to that as well. and so this is sort of all of the turbulence, I suppose, that goes on under the water of, of seemingly calm waters. when you’re overseas. And this I think, you know, Morgan I think you might agree or disagree, but it doesn’t really affect the SME outsourcing so much. and if you’re not over here it won’t affect you so much. It’s really business as usual because you’re still able to save the sort of 60-70% headline costs. but it’s just when there’s established businesses over here that everyone is really fighting to maintain the tax allowances and keep outsourcing as competitive as possible.
Morgan McGilvray: I agree with that. So firms who are yet to enter are still considering it, I still think they’ll see the savings, but when they do their financial modelling for coming to the Philippines, maybe they just won’t fly with some of the same incentives that have [inaudible] but this is the firms that are kinda here and operating and have a business model set on a certain tax rate and a certain set of incentives and being in certain areas, they are the ones that’ll get effected. when the, when the rules change on them, kind of in the middle of everything.
A lot of them are going to have to decide, do you know what they want to do going forward? I think most of them stay in the Philippines. Maybe they just look at the provinces a little more intently or maybe some of them decide, well, the PEZA program has been great, but we just love being in Metro Manila so much that we can operate without it. So each firm will have different reasons for what they do. but it is gonna make them start thinking about the future a bit differently. Yeah.
Derek Gallimore: You know, again, talking about the big firms because they are already a kind of exposed. They have a diversified exposure to the entire globe economy don’t they. So they would already have staffing sites across a number of countries you know, especially India. And then it’s about balancing the exposure to the Philippine cost versus India costs.
Balancing that against the efficiencies. and then also, you know, deciding whether they’re going to go more metro city or hop on to the provinces. So again, it’s, it’s just these big companies kind of tweak the dials all the time, don’t they? According to the economic environments and incentives that they’re, that they’re working with. So sorry, go on.
Morgan McGilvray: Oh No, I was, I was also going to agree, and it can be everything from kind of the value of a country’s given currency to tax incentives to where else in the world is emerging. But these big firms do indeed move seats around the world all the time. India back here, depending on all the factors. so I agree with you.
Derek Gallimore: And so there’s a move also to get the economic activity out into the provinces. And you know, everyone knows the Pareto principle of 80-20, but I think it’s more of a 90-10 in this situation with the Philippines in terms of the vast majority of economic activity is created here in Manila. The vast, vast majority, you know, and out in the provinces, there’s actually very little availability of jobs, very little economic activity. and of course it’s, it’s the governance incentive or certainly the government is motivated to get as much activity out there into the provinces. And this, of course, isn’t unique to the Philippines.
I mean, I spent eight years in London and the government there was trying its best to get as many people out of London and you know, doing business in other parts of England. And it’s no different here in Manila and, but you know, it’s, it’s there’s now, you know, maybe you can corroborate this Morgan, but I think quite a quite a movement now out into the provinces. there was the initiative called the next wave cities, which is supported by the government and, you know, just really trying to populate the, I suppose, the rising kind of 10 secondary cities with facilities, with staffing so that, you know, it’s moving the options broader and also balancing the cost base and the employment options as well. Where have you seen the movement out to the provinces?
Morgan McGilvray: For years now we’ve seen third-party call centers that are going out into the provinces. so these are the firms like Convergys and Teletech which are usually medium to large-sized call centers servicing the world. And they’ve been going out to the provinces for a couple of reasons. one is just to keep their costs down because the real estate costs and the wages tend to be a lot lower in the provinces, but also they go out there because they’re looking for access to new labor pools. So if the Metro Manila labor market’s getting a little too competitive, they might go out to somewhere in the Visayas or even Mindanao because they are looking for quality kind of level one agents out there that where their competitors aren’t hiring yet. And so we’ve seen these kinds of these next wave cities, these 10 next wave cities often already have a handful of large call center providers.
And that’s been great. What I see changing though is that the fortune 500 companies who run what I’ve been referring to as a captive, meaning kind of their own, their own shared services center, we’re starting to see them take serious looks at the provinces as well, whereas in the past we really haven’t had them out there yet. and then sometimes for the same reasons I’m looking to keep costs down, looking for new labor, but also I think they now recognize that the infrastructure and the profile, this isn’t now kind of there. And that can mean, you know, quality grade A office buildings that they need. It could mean reliable power sources without interruption. it can also mean that some of their Manila-based employees actually come from those provinces and would love the opportunity to go back home and work from closer to home.
So sometimes it’s not so much finding new employees, it’s taking ones who want to be back home and letting them go back home. So there’s a variety of reasons. but we’re gonna probably start to see a lot more fortune 100 type brands get out into the provinces for the first time. if you ask me which of the provinces or which areas, I would say Iloilo is becoming very popular. so a small office market there, but certainly growing. I’ve been there recently. The change is pretty dramatic. They’ve got good things ahead of them. Bacolod, Davao, Clark, which isn’t necessarily provincial, but it’s outside of Metro Manila. I’ve seen a lot of activity in Clark and then all the way up to Nueva Ecija some of these other areas. We’re seeing a call center to starting to set up shop there. So That’s interesting. So that could be like a next, next wave city situation.
Derek Gallimore: Right. And it’s incredible, I think sort of upside of, of capitalism really isn’t it? It’s, it’s the sort of inadvertent trickled down effect of, you know, once Manila’s reaching capacity then the second wave cities, the next run really starts to benefit from all this. And you know, I think we’re now going to see the provinces benefiting from more of this economic activity as compared to, you know, previously where it was really pretty much excluded. Would you recommend first timers or you know, people that are just beginning their outsourcing journey or to have their primary office in the provinces? Or would you generally recommend it as a you know, a secondary move?
Morgan McGilvray: Yeah, so it’s interesting. In the past, in my experience, new entrants is sometimes looked at the provinces, but they’ve always seemed to end up in Metro Manila. And I think a lot of times that was just comfort level. The provinces were a little too provincial, a little too remote, and the firms said, you know what, I like Makati or BGC for at least the first office. Let’s go there.
What’s changed of course is again, that you mentioned infrastructure. So now we have these, you know, top Tier Manila developers going into the provinces and putting up quality buildings that are backed up with all the power and everything else you need. And so now new entrants can get out to some of these provincial cities and go, wow, this is a brand new development by reputable developer.
We’re assured we’re going to have all the electricity we need. Here’s the demographics of the Labor. Wow. There’s, you know, tens of thousands of university graduates each year in this area. We feel a lot more comfortable in this provincial location than they might’ve been five or 10 years ago for sure. So nowadays it’s probably worth taking a look at at least one of the next wave cities, which tend to be a little further along in terms of the development. in addition to maybe a Cebu and certainly different places in Metro Manila.
Derek Gallimore: Yeah. Cause there’s so many factors aren’t there? I mean, it’s generally you’re getting good people out in the provinces now. there is some reasonable universities and reasonable education out there. But generally, the labor pool is, it’s, it’s thinner, isn’t it? You know, there’s not as much depth of skill and talent. if you’re having a call center, then you know, you can probably make it work and have incredible savings compared to Metro Manila. But if you’re looking for something a little more high value or more sophisticated roles, then you might run a little dry in terms of the sourcing of candidates. but yeah, there’s, there’s a lot of variables to consider. Yeah,
Morgan McGilvray: There are. but one thing that we’ve noticed that’s interesting is that sometimes these high-quality candidates are living in Cebu or Metro Manila because that’s the only place that they can find jobs that match their skill level. But if you were to open up or make available a job in their home province that was highly skilled there is an eagerness to move back home and take that job. Right.
So it’s kinda been a chicken and egg where you know, oh, there’s no good labor [inaudible] cause there’s no good jobs, but there’s been no good jobs because there’s no good labor. So watching, you know, you got a province opening up 500 positions and seeing all the applicants from Metro Manila apply for jobs in [inaduble]. And that’s because they want to go home and they’re skilled. You might find a [inaudible] I’ve really seen it more recently.
Derek Gallimore: Yeah. Yeah. It’s it’s incredible how things evolve and it, it really does take time doesn’t it? You know, these things don’t happen overnight, but there is a positive movement at least. I suppose, you know, another thing that comes to mind when you talk about the provinces is impact sourcing, which is the sort of ethical side to outsourcing where the argument is you give people a job and you support communities. You, you, you know, are paying people a good wage to do a job.
Whereas previously they wouldn’t have access to this job. do you come across that much and you know, what’s your opinion on that? Now? Of course, I, you know, everyone wants to do well for each other and I believe outsourcing itself is fantastic for the community, for the economy, for the people within the, the sector. but I think it slightly muddies the waters when you’re, you’re almost mixing up two things. One of them is almost a charitable cause. And then the other thing is getting your operational functions done. you know, it’s almost a kind of, for me making things a little bit more ambiguous and less clear as to what your mission is when you’re outsourcing. have you, have you seen a rise of the concept of impact sourcing?
Morgan McGilvray: I’ve seen it referenced a little bit. it tends to be in the smaller kind of call center operations that do talk about things like living wage and trying to find parity and quality of life between who they’ve got hired in the Philippines and what they might have in the equivalent office in Australia or the U.S and certainly we’re seeing a lot of social impacts programs and whatnot amongst all of the kind of call center BPOs.
But I don’t see a ton of, I know what you’re talking about, but I don’t see a ton of that actually. it’s, you know, there’s other areas of focus for goodwill but not necessarily with almost a charitable impact because well, they, you know, they have a certain moral position that people should be paid this much, even if that’s not what the market’s paying. so I don’t know.
Derek Gallimore: Yeah, I think, you know, and there’s a Wikipedia page on it and, and I think it refers a little bit more to India as well, where, where it is almost, you know, a sort of charitable exercise getting people to do a bit of work for you because then you’re supporting economic activity. And for me, I, I just haven’t sort of quite got my head around the differences or the delineation between the sectors really. Okay. And then one thing I want to touch on as well is there’s been a lot of, obviously, there’s a lot of capacity pressure because outsourcing is just expanding at a breakneck rate and has done for the last decade at least.
The Philippine economy has generally been growing at about a 6% year on year growth rate, which is, you know, super high when that’s cumulative of course, and the property has really generally struggled to keep up. So now there is a more recent advent, which is the online gaming industry, which has kind of recently flooded into the Philippines. And I think, again, there’s a little bit of a varied opinion as to whether online gaming industry is, is a good thing or a bad thing for the Philippine industry. and economy. How do you see it and how have you seen it affect the property market?
Morgan McGilvray: Yeah, so it’s certainly noticeable to anyone who lives in Metro Manila and especially certain cities such as Makati. what people don’t often know is that this online gaming, and a lot of it is from China, but not all. We see gaming firms from Europe and Korea and whatnot as well. But they’ve been in the market for, you know, almost 10 years in some cases. it was just a much smaller percentage of the overall market. And they worked under a different program, which was called SEZA, which it was kinda like online gambling equivalent of PEZA.
What changed was that when President Duterte won election, he came in and he closed down the SEZA program, which had always been kind of a gray area anyway in terms of its legality. And he put all these online gaming firms under PAGCOR, which is the Philippine bureaucracy for, for gambling. And he made sure that all the firms got licensed, but if they were licensed, they were generally going to be allowed to operate into grow here in the Philippines. And once that happened, we really saw a wave of these, what we call POGO operators. And that just means an online gaming operator. and these firms come in and they usually operate a website back to mainland China where the, where Chinese gamblers can kind of go online and gamble.
But because of that kind of operation isn’t really allowed to exist in Mainland, they come to places like the Philippines and run the operation from here. what’s that, what that has meant is that yeah, we’re getting hundreds of thousands of square meters. So I think you know, dozens of full office buildings worth of demand from these operators. And it has affected the market. some in some ways good and in some ways bad.
So I’d say the bad is that it’s put upward pressure on rentals cause these firms generally can pay a lot more in rent than a BPO or a call center would. and so sometimes they’re, you know, taking up space if the call centers might’ve wanted at rents that the call centers can’t afford. And that’s generally not been good at all. it also isn’t great necessarily when we mix these kinds of firms with the more traditional tenants. sometimes they’re, they’re issues with different expectations of being neighborly and whatnot, but I won’t get into that too much.
The good has been that these firms have come in and taken up, you know, just about all the office space they can find, including some projects that might have been empty or not been able to find a tenant because the relocation is too remote or whatnot. otherwise, right. So whereas we expected that we might see a bit more vacancy in the market from 2017, 2018 just to the sheer amount of new supply. those vacancy problems kind of vanished when these Chinese firms, gaming firms came in and took up all this space. So that’s at least kept the market, you know, very tight, very healthy. and back to kind of the, the early days when it was booming again,
Philippine offshore gaming operators
Derek Gallimore: It is on your recent really isn’t it? It’s, it’s kind of a two or three-year trend now where, you know, this, this huge influx in terms of these online gaming companies. And is it, is it true that a, was it 25% of all new leases in Metro Manila last year in 2018 went to the gaming industry? And so is that accurate in any way?
Morgan McGilvray: Yeah, I think that’s fair to say. it’s a subset of the industry that’s admittedly a bit hard to track because usually, the firms don’t make a much of a scene, I mean, they don’t have signage in their new office doors locked, et Cetera. but 25% seems correct if not even a tiny bit low in terms of all the new take-up over the last two years. Yeah.
Derek Gallimore: Right. Incredible. And where do you see that trend going? Is that, that’s continuing as you see it?
Morgan McGilvray: I don’t think it can continue at the current pace, just a larger numbers situation. but what we will expect to see is different areas of Metro Manila and the Philippines probably start to open their doors a bit more to this gaming. as of now, you mostly see it in Makati the bay area and Pasay and Alabang. but we’ll start to see it more in places like Quezon city. we’ll start to see it more in the provinces and Cebu as these firms continue to come in and they look for available office space, usually in very large chunks to the, to the point of half buildings or whole buildings. And if they can’t get that in the, in the areas that they have been historically setting up, then they’ll, they’ll find new areas to go into.
So we will see it continue to expand and probably find new areas. but there is also is some talk that maybe the political side either from the Philippines or China has kind of told the industry, okay, we need to slow it down a bit as well. there’s been too much growth too quickly. so kinda like the PEZA moratorium on new buildings in Metro Manila, there might be a bit of an online gaming slow down or unofficial moratorium as well. So I’ll be interested to see how the next kind of 12 months play out in that regard.
Derek Gallimore: It’s incredible, isn’t it? It’s just a sort of super hot competitive market from every, every angle that you look at. It really isn’t it. And where do you see is, so the trend then over the next five, 10 years, is, is a Philippine economy keeping on the same trajectory? Do you think more office buildings going up? Is All this carrying on into the foreseeable future?
Morgan McGilvray: Yeah, I think it will. so we’re going to see kind of Metro Manila continue to develop the last available parcels of land of which there aren’t that many. And most of the land that isn’t developed is earmarked for development, let’s say within those next 10 years. And I would expect all that to kind of fill up and be, you know, enjoyed going forward. The probably the bigger differences going to be in those, yeah. Those next wave cities. So not even Cebu necessarily, but kind of the next generation cities like Iloilo, Bacolod and Angeles Clark even Palawan and other places.
Because now a lot of the focus is going to go there and a lot of the new buildings are going to go there and the companies are going to go there and therefore the jobs are going to go there. And those areas have a lot of room for economic growth. Right. and so they’re going to be ripe for it. And that’s where I’d expect to see the notable changes over the next 10 years. A lot more so than what we’ll see here in Metro Manila.
Derek Gallimore: It’s exciting, isn’t it? You know, and I really do believe that the Philippines has a super exciting future ahead of it, with the caveat that it just needs to make sure that the infrastructure is there as it’s needed. the traffic is kept at bay. and of course the bureaucracy and sort of corruption without putting too fine a point on there is also kept at bay. but if those three things are managed, I think then the Philippines could have a rocketing economy for at least, you know, in the next 10, 20 years.
Morgan McGilvray: Yeah, I agree. and I, you know, I point to Iloilo as a specific example. and just because they understand the infrastructure, they understand the traffic and so they’ve overbuilt their roads accordingly. they, they’ve got a, you know, what’s known as a clean government and easy to work with local and then even provincial government and they’ve got a big enough workforce. and so that’s the kind of place that’s a kind of provincial destination that is preparing itself for growth. And they’re gonna make sure that they don’t make the same mistakes that Metro Manila and Cebu might’ve made by not being ready for all the growth that was coming.
Derek Gallimore: Yeah. It’s incredible, isn’t it? You see this a lot in the Philippines where, you know, a business district is built and it’s maybe not as as future-proofed as it as it could have been. And, you know, there’s not so much I suppose planning gone into place that, that potentially could have been. And the newer business parks, business developments that are going up, they are becoming increasingly sophisticated and also with a sort of bigger, better eye for the future demands. and you see that in Clark, you know, the, what is it called, the Clark global city, which is meant to be an incredible future cities, isn’t it? And I, I think on global standards, have you gotten much insight into the Clark global city and, and you know how that’s going in terms of its build-out and uptake?
Morgan McGilvray: Yeah. So you’re right, it’s a futuristic city. they have a lot of lands and a lot of preparing to do and they’re going to do things a bit differently for sure. you know, I, from what I follow, just mostly in the news, although I’ve been up there a couple of times, is yeah, some of the government administration is being moved up to there. We know that they’re preparing sports facilities so that they can host kind of Southeast Asia Games and all these prestigious regional sporting events.
The idea is that they’ll have the driverless cars and everything else by the time it’s finished. So it makes sense. It’s kind of a clean slate area with a lot of expected growth. And so they’re going to kind of use world-class standards to make sure that the areas designed to be world-class. and that’s tough to do if you’re working with kind of existing infrastructure, roads and buildings, but can be done if you’re working with a lot of land and an expectation of people gonna be living there and the next 10 years or so.
Derek Gallimore: Oh yeah. Incredible. It’s an exciting prospect for the Philippines. That was Morgan McGilvray of Santos Knight Frank if you want to get in touch with Morgan or know any more about anything mentioned in this episode, go to our show notes, which is at outsourceaccelerator.com/250 and as always, if you want to ask us anything, just drop us an email to [email protected] See you next time.