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Business As Usual - Market Insight Q4 2016

 

By now, the off-the-cuff talks of President Rodrigo Duterte is seen not to be too different from that of the President-elect Donald Trump of the United States (US). Politicians, businessmen, and the people of both countries are slowly accepting the results of their respective democratic processes, even it may taste bitter to some groups.

It may be a good thing that the national elections of the Philippines coincided with the Presidential elections of the US in this cycle. The expected wait-and-see attitude is steadily giving way to taking advantage of the supply-and-demand gaps in the different sectors of the real estate market. The continued economic growth of the Philippines combined with low-interest regime is compelling enough to trigger additional developments, provided proper market studies are done.

 

MACROECONOMY

The Philippine gross domestic product (GDP) grew by 7.1% during the third quarter, even outpacing the fast growth of 7.0% during the second quarter, and 6.9% during the first quarter. This is a strong signal that the government, businesses, and consumers are now spending more as compared to the relatively lackluster GDP growth rate of 5.8% in 2015, which was a year prior to the national elections.

The Bangko Sentral ng Pilipinas (BSP) latest figures show that the net foreign direct investment (FDI) has been steadily growing in the past five years. The net FDI reached close to US$ 6 billion in 2014 and 2015. For 2016, January to September net FDI already reached US$ 5.88 billion, eclipsing the 2015 foreign direct investments. In all likelihood, the US$ 6 billion-mark will be breached, and perhaps the US$ 7 billion-mark will be reached.

Based on latest BSP statistics, the average bank lending rate from November 28 to December 2, 2016 is still a low 3.435 % as compared to 3.8% by the end of 2015. The average Philippine Peso to US Dollar exchange from January to October 2016 is at Php 47.2813, as compared to the average of Php 45.5082 as of last year. Bank interest rates and foreign exchange are still very stable, albeit the US dollar has been strengthening in recent months.

Overseas Filipino remittances have been steady as well. Total remittances from January to September 2016 reached US$20.025 billion as compared to US$19.103 billion for the same period in 2015, or an increase of 4.8%. All indications show that overseas remittances will breach the US$ 25 billion-mark. Inflation rate for the months of January to November 2016 inched up to 1.6% compared to 1.4% in 2015, and inflation rate for the month of November is seen at 2.5%. Again, this is a sign that the government, businesses and consumers are spending more. The latest unemployment rate is a lower 4.7% as of October of this year as compared to 6.6% by end of 2015. These are positive indicators to manufacturers as well as to real estate developers.

According to the Department of Tourism, the total Visitor Arrivals from January to August 2016 reached 4.04 million, registering an increase of 12.59% for the same period last year. This is at pace to reach the 6-million tourist arrival target. Total earnings generated from January to August 2016 reached Php 164.25 billion, which is 7.92% higher than the earnings for the same period last year. Hotel and leisure developments are targeting this increasing tourist arrivals and earnings.

The macroeconomic indicators presented above show the strong economic footing of the Philippines. The next step is to see if these economic factors positively impact on the real estate market.


OFFICE MARKET

The Information Technology - Business Process Management (IT-BPM) Road Map 2017 to 2022 is reported to forecast the growth of the business process outsourcing (BPO) industry between 12% to 18%, or two to three times the world's average of 6% annual growth. The road map is more diversified where there will be road map for each sectors of the industry: namely, contact centers; healthcare management; information technology (IT); animation and gaming; global in-house center (GIC); and the bigger roadmap for the whole industry.

Real estate developers have not wasted time in recent years, and were basically pacing their developments to satisfy the pent-up demand for office space. All of the major business districts in Metro Manila comprise over seven million square meters of Grade A office building or better (handful of Prime Grade A buildings in Makati CBD). While the office stock of Grade A and Prime Grade A office stock seems high, it is important to note that overall vacancy across these business districts is now below 3%.

The office market is still a landlord's market, and given the very high occupancy, rents have been increasing and albeit slightly in recent months. The initial fear of softening rents has been averted due to brisk demand for office space, plus the unwelcome news of delayed delivery of office buildings due to lack of skilled workers. Rents in Makati Central Business District (CBD) generally held up, where Premium Grade A buildings have a weighted average of Php 1,350 per sqm per month, Grade A buildings have a weighted average is Php 915 per sqm per month, and for Grade B&C Buildings, the weighted average is Php 715 per sqm per month.

Since developers are trying to serve the pent up demand with new stock, overall rents are generally unchanged in the last quarter. The weighted average rent in BGC is Php 905 per sqm per month. The average rent of Grade A office buildings in Ortigas is still at Php 660 per sqm per month since older buildings are weighing down the rents of newer stock. Alabang and Bay Area business districts have a slightly higher weighted average rent of Php 670 per sqm per month, pulled up by newer stock. Likewise, Quezon City office rents have higher weighted average of Php 680 per sqm per month, due to newer buildings.

Selling of office spaces is now a growing trend. The floor area for sale accounts for less than 10% of the total stock of over seven million square meters. This is seen to steadily grow in the coming quarters. Selling prices in Makati and BCG business districts are north of Php 200,000 per square meter.

 

RESIDENTIAL MARKET

The Metropolitan Manila Residential Market is dominated by condominium developments in recent years, due to increasing land values. The estimated total number of condominium units will reach over 200,000 by the end of 2016. Based on Pinnacle Research, 44% of the condominium developments are high-end (over Php 7 million), 37% are middle mid-market; and 19% are lower mid-market. With the approval of vertical socialized housing and increase of economic housing price ceiling to Php 1.7 million, the lower mid-market and economic segments are expected to grow in the coming years.

Makati and BGC business districts dominate the high-end residential products due to the concentration of expatriates and local executives. Nowadays, even San Juan City which is one of the most sparsely populated in Metro Manila, is now viewing high-end condominium products in different light. One86 at Wilson is balancing the introduction of condominium development while keeping low density, with its 32-unit, 10-storey development along the popular Wilson St. It is offering only four units per floor, elaborate security features, and will provide services like valet and concierge to assist owners and tenants alike.

To put things in perspective, populous cities like Manila and Quezon Cities are also offering substantial condominium products. Manila City condominium projects that were launched from 2009 to 2015 reached over 20,000 units. Quezon City condominium projects for the same period breached the 40,000 unit-mark. These numbers are staggering at a glance, but they in fact pale in comparison to the projected housing needs in Metro Manila of more than 100,000 housing units per year (National Economic and Development Authority projections). While this total includes the "Can't Afford" category, at least 350,000 of the projected housing needs in Metro Manila per year are coming from households that can afford to buy residential units.


RETAIL MARKET

The commercial retail malls went on with their usual way of generating income. With the "Ber" months and "balikbayan" season, malls will undoubtedly fill up the coffers of the retail property developers. Pinnacle Research monitored that the SM Group has 58 malls and are targeted to reach the 60-mall mark in the very near future, while the Robinsons Group has 42 malls. The Cosco/Puregold Group has 40 big stores. Occupancy of malls has always been healthy, and this "malling" season during the run up to the Christmas holidays, every bit of commercial space will be leased out to take advantage of the shoppers' propensity to spend. Commercial mall rents have been very stable, and this property segment is still a landlord's market.


HOTEL AND GAMING MARKET

Tourist arrivals are at pace to reach the six million-mark by end of the year. This is a very good news to the operators of more than 20,000 deluxe hotel rooms in Metro Manila. SM Group recently opened its five-star Conrad Hotel in the SM Mall of Asia complex as operated by the Hilton Group. This 347-room hotel sits on top of the two-floor high-end S Maison mall.

The Okada Manila was recently launched, which is a 44-hectare hotel-casino complex of the Tiger Resort, Leisure and Entertainment Inc. This luxury hotel will offer a total of 993 rooms to the market, ranging from spacious 60sqm-rooms to luxurious 1,400sqm villas. Even Vista Land Group joined the hotel bandwagon, it intends to open six hotels under the Mella Brand soon. This is a three-four star brand, with an ideal size of 150-room hotel development.

More importantly, the government through the Department of Tourism (DOT) and its attached agency Tourism Infrastructure and Enterprise Zone Authority (TIEZA) has been promoting Philippine tourism and ancillary infrastructures. Recently, BIR Revenue Regulations No. 7-2016 was signed and published, spelling out the fiscal incentives that can be given to firms operating inside tourism enterprise zones (TEZs) under the Tourism Act of 2009. This will further boost the development of tourism infrastructure and facilities around the Philippines.


INDUSTRIAL MARKET

Based on the latest figures of the Philippine Economic Zone Authority (PEZA), it has accredited various economic zones. The operating economic zones are: 72 Manufacturing Economic Zones, 234 Information Technology Parks/Centers, 21 Agro-Industrial Economic Zones, 19 Tourism Economic Zones, and two Medical Tourism Parks/Centers, or a total of 348 economic zones. In addition, there are economic zones being developed: 29 Manufacturing Economic Zones, 104 Information Technology Parks/Centers, 6 Agro-Industrial Economic Zones, and 6 Tourism Economic Zones, or a total of 145 economic zones being developed. Since industrial spaces are typically sprawling, average lease on land of selected zones is only Php 55 per sqm per month, while average lease of selected factory spaces is Php 190 per sqm per month.

 


AS USUAL

The big players will usually go for first mover advantage. With their machines, the Ayala and SM Groups shall continue to pace real estate developments. From real estate business alone, the Ayala Group recorded a net income of Php 15.1 billion for the first nine months of the year. The group will continue to develop townships and will grow its recurring income base. The SM Group, on the other hand, its property business generated a net income of Php 17.5 billion. Likewise, it will continue to expand its recurring income developments, as well as property sales.

The Megaworld Group allocated Php 150 billion for its capital expenditure for the remainder of 2016 and up to 2017. For Filinvest Group, it is devoting Php 5 billion just for housing and condominium developments in the next three years. It is likewise spending more on its Filinvest Corporate City. The Robinsons Group has been busy building condominium projects for sale and expanding its recurring income base (office, malls and hotels). All of the big players are competing for their market share.

The BPOs and traditional companies will continue to look for office spaces; end-users and investors will scout for suitable residences; small retailers shall continue taking advantage of Filipinos affinity to shopping; tourists will continue to fill up hotel rooms, and manufacturers will ceaselessly look for optimum industrial spaces. As usual, savvy real estate developers will continue do their due diligence, and look for the unsatisfied demand, and supply the gap.

 

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