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POGOs are in trouble. Should real estate investors be worried?

) Allan Tripon |

The Chinese Foreign Ministry Spokesperson Geng Shuang, last August 21, has officially called on the Philippines to follow the example of Cambodia and outlaw all forms of online gambling in the country — especially those aimed at Chinese nationals (SEE: China wants the Philippines to ban online gambling, Rappler). This strongly worded request from China comes on the heels of the Philippine Amusement and Gaming Amusement Corporation’s (PAGCOR) recent announcement that it would no longer be accepting any new Philippine offshore gaming operator (POGO) license applications until all issues are addressed. When asked for a comment, Malacañang simply said that it is ultimately up to Congress whether or not to heed the call of China and legislate a law to ban online gambling in the country (SEE: Palace: POGO ban up to Congress, The Philippine Star).

The stocks of the major players in the property sector in the country — especially those exposed to the office space segment — have taken a huge hit as a result of the recent government crackdown on online gambling. Among these major players, Andrew Tan’s Megaworld Corporation (MEG) — a company which has positioned itself to ride on the growth of the online gambling industry — was the most heavily hit as the company saw its share price drop by almost 25% in the month of August (from ₱6.30 per share as of the end of July to ₱4.80 per share as of August 23). Other major property developers such as SM Prime Holdings (SMPH) and Ayala Land Inc. (ALI) also saw their stock prices drop by an average of 10% in a single month.

The message that the market is conveying through these figures is clear. Investors think that the online gambling industry is in serious trouble and so is the real estate industry. The question to ask now is this: Is this truly the case or is the market simply overreacting?

A brief history of the rise of the online gambling industry in the Philippines
The history of POGOs can be traced directly to an executive order which President Rodrigo Duterte’s Executive signed in 2016. This document gave the Philippine Amusement and Gaming Corporation (PAGCOR) the authority to regulate the operations of POGOs in the country. These entities are defined by the government as (1) Philippine based companies, (2) which operate online gambling and gaming platforms (3) catering to foreigners.

The rapid rise of Philippine Offshore Gaming Operators (POGOs)
Within just three short years, online gambling has already grown to be a $6 billion (₱300 billion) industry  as of 2018 — making it one of the country’s fastest growing sectors. For comparison, it took almost 20 years for the Information Technology Business Process Outsourcing (IT BPO) industry to become the $30 billion (₱1.5 trillion) sector that it is today.

The rapid growth of POGOs has created a large demand for office spaces within the Metro to house the more than 250,000 employees working for the 57 online gaming operators in the Philippines. In fact, a research conducted by the Lobien Realty Group showed that POGOs account for almost 30% of the demand for new office spaces in the National Capital Region. This figure puts the industry at second place, just behind the IT BPO sector. Moving forward, industry experts predicted that POGOs would eventually catch up with and overtake BPOs to become the largest source of office space demand.

The effect of POGOs are not limited to the office space segment of the real estate market either. In fact, evidence suggests that the impact of the industry also trickles down to the residential markets — leading to higher (1) occupancy rates, (2) rental prices, and (3) asset values in the residential properties within the vicinity of POGO hubs.

(For more information about the effect of POGOs on the Philippine real estate industry, read PropertyAccess’ article entitled POGO: A Major Driver of the PH Real Estate Market)

Essentially, the rapid growth of POGOs served as a catalyst for the Philippine real estate industry. As such, major property developers in the country — such as Megaworld (MEG), SM Prime Holdings (SMPH), and Double Dragon (DD) — have invested large sums in order to ride on the wave. Unfortunately for these countries, it seems like the wave is coming to an abrupt stop.

China’s recent crackdown on online gambling
China does not want its citizens to be involved in gambling. In fact, the country’s government has even gone as far as banning casinos altogether in the mainland. In order to work around this ban, Chinese companies have begun setting up online gaming platforms situated in South East Asian countries such as the Philippines. Through these online platforms, citizens in mainland China would be able to satisfy their desire to gamble without leaving their country.

The Chinese Government is not happy with this setup. As such, it is now asking the countries in the region to put a stop to offshore online gaming platforms.

Should individual real estate investors be worried?
With so much pressure coming from China, it does seem like the writing is on the wall for the Philippine online gambling industry. The question to ask now is this: should individual real estate investors be worried?

On one hand, the pullout of POGOs from the country would surely hurt the real estate industry temporarily through lower occupancy rates, rental prices, and asset values. The operative word, however, is the word “temporary”.

Yes, occupancy rates would decline in the short run. However, the rapidly growing Philippine economy would ensure that any vacancies left behind by POGOs would be filled up by other businesses in the coming years. Yes, asset prices might decline due to weaker demand in the short run. Opportunistic investors, however, can simply view this temporary price correction as an opportunity to acquire more property at a discounted price. Land and property in the Metro is a scarce resource and it will not be long before property prices appreciates along with the growth of the economy in the long run.