Property Trends and Prospects
The property forecast for 2003 and beyond

Looking ahead to 2003 and beyond, FPDSavills Research believes prospects for the Philippine property market will remain muted, a situation attributable to weak demand due to subdued prospects for the economy as a whole, coupled with overbuilding.

Supply side factors in the office and residential sectors as well as the industrial (serviced industrial land) sub-sector will remain critical while demand is forecast to remain weak. The supply situation will be further accentuated by the completion of projects in both existing and emerging urban developments which will keep prices in the main business districts in check and make upward price movement a remote possibility in the near to medium term.

Consolidation is the order of the day as rents and prices continue to soften. Yields are expected to decline or remain flat, which may render investment in most property subsectors unattractive in the short to medium term. On balance, some investors may see current price levels as attractive and expect satisfactory returns after the current slump, specifically those who take a longer view of this market. However, transactions are still hard to come by in view of liquidity and risk factors as well as contentious valuation issues.

Commercial
FPDSavills Research notes that the total stock of office space of all grades increased by 38,000 sq.m. in 2002 due to the completion of Raffles Corporate Center in Ortigas. Completion of other Grade ‘A’ office developments is expected to add about 160,000 sq.m. of office space by 2003. By 2004, office supply in Ortigas Commercial Business District (CBD) will represent 34 percent of the total market up from 25 percent in 2001 while the share of office stock in Makati CBD will decrease to 66 per cent over the same period from 75 per cent in 2001.

Office supply in decentralized districts reached 313,000 sq.m. in 2002 and is expected to grow in the next two years. The growth of office stock in decentralized areas has averaged 82 per cent per annum over the last five years compared with 9 percent consolidated growth per year in the Ortigas and Makati CBDs.

Consolidated vacancy for both Makati and Ortigas CBDs was recorded at 23 percent in 2002 compared with 27 percent in the previous year.

PDSavills Research forecasts that overall office sector vacancy in Makati and Ortigas CBDs will decrease to 21 percent in 2003 and further decrease to 19 percent by 2004.

Rental levels across all grades in both Makati and Ortigas CBDs fell by 46 percent and capital values by 25 percent in 2002 from peak rates in 1996. Over 2003, rental rates are expected to decrease by 15 to 20 per cent. Recovery in prices is projected to come in two to three years time and support for this recovery will come from take-up from backroom / shared serviced offices, business process outsourcing and IT-enabled businesses (contact centers). Office capital values will continue to experience downward pressure in view of substantial amounts of unsold inventory.

Investment yields are expected to remain flat and investment in the office sector will be unattractive in the short-term across all grades.

Retail
As the consistently bright spot of the Philippine property sector, news from the retail sector has remained positive, although not as good as the pre-1997 Asian Financial Crisis period. While most of the sectors are still reeling from the extended cyclical downturn, the retail sector has remained a profitable investment. Over the years, the total number of retail establishments has grown significantly and according to the Philippine Retailers Association, retail establishments now account for more than 50 percent of total business establishments in the country.

The highly resilient and dynamic nature of the retail sector owes much to the growing population levels of the country. With a population of 76.5 million, the Philippines can be considered one of the largest consumer markets in Asia.

The competitive retail environment has drawn new local players, while foreign retailers still shy away. Despite the sector being liberalized and new players being allowed to own 100 percent of their operations in the Philippines, foreign corporations are still reluctant to enter the market because of the high costs of doing business and the highly-bureaucratic nature of the Philippine market.

In 2002, FPDSavills Research notes that total retail space supply in Metro Manila grew by 6 percent to about 2.75 million sq.m. from 2.6 million sq.m. in 2001. Several high-end retail malls were also introduced to the market in 2002, such as the newly redeveloped Greenbelt 2 and 3 retail centers in the Makati CBD and the Podium in Ortigas CBD.

Growth opportunities still abound in the retail trade segment of the economy. Franchising, for instance, provides a rapid and organized means of expanding in the market. Highly-successful foreign franchises which have entered the country include Mini Stop, True Value, Ace Hardware, Popeye’s Fried Chicken, Starbucks, Seattle’s Best, Watson’s Chain and Marks and Spencer.

Successful malls and retailers have remained concentrated in the major CBDs. Malls in these CBDs have the unique advantage of being close to the country’s most luxurious residential subdivisions, which provide a rich weekend market, aside from the traditional working class market present five to six days a week.

But while it is true that malls and retail centers strategically located in the major CBDs have remained profitable, the existing density of retail space is presently sufficient to serve these markets. Any major additions to retail space in the major CBDs may further decrease the narrow profit margins of retailers. With certain areas in Metro Manila already saturated, developers have set their sights and are now establishing a presence in provincial growth areas.

Activity, on the other hand, is increasing in the lower income segment (C-D-E), as new players consider entering these markets. This traditional Philippine retail market, which includes neighborhood “sari-sari” stores, “wet” markets and groceries, is wider and larger in scope than the high-end segment of the industry.

Industrial
As of January 2003, there were 156 proclaimed economic zones accredited by the Philippine Economic Zone Authority (PEZA) with a consolidated supply of about 23,000 hectares of prime industrial land located all over the country. Concentration of these economic zones is in the CALABARZON (Cavite-Laguna-Batangas-Rizal-Quezon) area. Of the 156 economic zones nationwide 23 are located in Metro Manila; 66 in the CALABARZON area; 14 in Central Luzon; 7 in Northern Luzon; 7 in the Bicol region; 11 in Cebu; 11 in the Visayas and 17 in Mindanao.

Recent focus has been on the supply of industrial properties developed as information technology parks in anticipation of demand from foreign companies involved mostly in electronics and information and communication technology.

Supply remains a critical issue coupled with subdued demand putting downward pressure on prices of industrial land, a situation worsened by intensified competition among industrial locations. To date, average industrial land values have declined by 41 percent from their peak in 1997.

Though land prices in first class economic zones this year range from Php3,100 to Php4,000, in the near term, industrial land prices and rents are expected to decline in the order of 10 to 20 percent by 2003 as developers compete to attract the few existing locators and expansion projects. Average industrial land prices of Php2,500 per sq.m. in 2002 are expected to fall by 5 to 10 percent in 2003.

With no major foreign direct investment and manufacturing expansion, with major demand drivers in the industrial land sector remaining lackluster and with the competitive threat from alternative industrial sites in neighboring countries, specifically China, the outlook remains bleak for the country’s property sector. This outlook remains the same despite the interest of some call center / business process outsourcing (BPO) locators to tap development facilities in industrial parks. Most industrial locations have remained unattractive to this type of investor due to lack of supporting facilities and developments as well as relatively untested labor force.