Property Trends and Prospects

The rising demand for quality property

The real estate sector shows signs of selective recovery as demand, particularly for prime and quality Grade ‘A’ office space, continues to recover, albeit slowly.

In general, rents and prices are seen to stabilize but at significantly lower levels than in the pre-1997 Asian financial crisis, causing yields to remain flat in the short- to medium term. The relatively flat return on investment coupled with intermittent economic and political shocks may trigger a "wait-and-see" outlook among investors.

The improving market sentiment may be picked up by some developers as a signal to complete developments in the past that were abruptly shut. This may further add to the supply of new developments. On the other hand, the market scenario is still vulnerable to various shocks which may be able to impact or slow improving market conditions.

Commercial

L&A Research notes that the total stock of office space of all grades within Makati and Ortigas Central Business Districts (CBDs) increased to approximately 3.8 million sq.m. Consolidated vacancy for both Makati and Ortigas CBDs was estimated at 28 per cent in 2004. L&A Research forecasts that overall office sector vacancy in Makati and Ortigas CBDs will continue to improve to 25 per cent by end-2005, triggered by the moderate take-up of office spaces, especially in the Grade ‘A’ developments in both Makati and Ortigas CBDs.

The unprecedented demand for quality office space from the outsourced services industry has improved general market sentiment towards the recovery of the whole office property sub-sector. As newer office developments in Makati and Ortigas are nearing full-occupancy levels, landlords are slowly becoming selective of the incentives that can be given to prospective tenants.

On the other hand, the unmoved stock of older buildings belonging to the Grade ‘B/C’ markets, is still a major concern, as the call center/business processing industry (BPO) are likely to prefer moving outside the city center due to labor pooling concerns. There are still plenty of space vacant in Grade ‘B/C’ buildings, which may not sustain the anticipated growth of the whole property sub-sector.

L&A Research estimates achievable gross rental levels for Grade ‘A’ facilities in Makati (which continue to enjoy a premium in the overall market) will average at a range of P400.00 to P550.00 per sq.m. in 2005. Recent transacted levels in Grade ‘B/C’ buildings in Makati ranges from P200.00 to P300.00 per sq.m. and is expected to remain in that range over 2005. In a similar manner, rents in Grade ‘A’ office buildings in Ortigas CBD are forecast to average P300.00 per sq.m. while Grade ‘B/C’ buildings expected at a range of P200.00 to P250.00 per sq.m. over 2005.

Residential Condominium Sector

The total supply of high-rise residential condominiums in both Makati and Ortigas CBDs for 2004 posted a two per cent increase from its 2003 levels to 15,547 units. Supply is expected to increase in the next two to three years with the completion of The Columns, Greenbelt Parkplace, One Legazpi Park, The Shang Grand Tower, Four Seasons and Residences at Greenbelt.

Changing Metro Manila’s landscape is the rise of residential condominiums with affordable financing schemes catering to low- to middle-income families, young professionals and the growing number of upgraders – clients or employees of businesses that have significantly grown during the past three to five years who live in non-traditional locations and upgrading to superior residential accommodations in a better environment. As of end-2004, there are approximately 4,446 units being constructed under the Medium- to High-Rise Building Development Program of the Home Development Mutual Fund.

As the sub-sector slowly recovers, the new supply to flood the market is estimated to keep rents and prices at bay in the next two to three years. However, pre-commitment for future developments has been remarkable as the market has responded favorably to the marketing and pricing strategies of developers, most notable of which are the overseas Filipino workers.

Rents are expected to remain at its current levels for the rest of 2005. Average rental rate (2-BR) on a Makati CBD residential condominium in 2004 is estimated to be at a level of P300.00 to P400.00 per sq.m. per month while in Ortigas the level would be at P220.00 to P250.00 per sq.m. per month. Movements in capital values are expected to range from P45,000 to P55,000 per sq.m. in Makati and P30,000 to P35,000 per sq.m. in Ortigas.

Hotels and Serviced Apartments

Average occupancy rates across all hotel types improved to 67.72 per cent for the period January to October 2004 from 58.55 per cent during similar period in 2003. Among deluxe, first class, standard, and economy hotels, deluxe ranked highest with an average occupancy rate of 73.72 per cent, followed by first class hotels (65.16 per cent), standard hotels (64.83 per cent), and economy hotels (52.42 per cent).

In the serviced apartments sub-sector, average occupancy rates in 2004 were recorded at slightly higher levels compared to 2003. Serviced apartments in Makati CBD posted a 72.13 per cent occupancy rate slightly higher than the 69 per cent occupancy rate observed in 2003, while serviced apartments in the Ortigas CBD are estimated to register occupancy rate of 75 per cent.

The serviced apartments sub-sector is at pace with the occupancy rates of the hotel sector. Both sectors enjoyed relatively higher levels of occupancy primarily due to limited supply of accommodation rooms and the higher number of tourist arrivals during the past year. The number of tourist arrivals reached 2,052,903, a 23 per cent increase in the total number in 2003 as reported by the Department of Tourism (DOT).

Retail

Gross leaseable space in Metro Manila, as of end 2004, amounted to approximately 3 million sq.m.

L&A Research notes that mall developers have started to recognize the need to diversify in terms of location to the peripheries of Metro Manila – where there is a critical level of housing population with high propensity to spend and whose retail needs are still under-served. Mall developers tend to attribute this trend as the "provincial retail play" or the small mall strategy. This strategy is innovating the growth of retail developments in the highly-urbanizing cities, where community centers–retail establishments offering the same merchandise as the large malls in the major CBDs in Metro Manila–are being built.
However, it is important to note that few retail spaces, especially in areas outside Metro Manila, have also been converted and being offered for office/commercial uses, mainly for call center/BPO firms. Another emerging trend is the proliferation of convenience stores especially within the established CBDs, mainly driven by the need of the growing number of call center employees. Convenience store chains occupying ground levels of various buildings is slowly changing the landscape of retail development especially in Makati CBD, where retail activities had been strictly prohibited in the last few years.

Industrial

The global economy is seen to be recovering from the recession experienced just a few years ago that bright spots are foretold for the manufacturing and construction sectors. However, the ability of the Philippines to attract foreign investors, with its array of tax incentives and tax holidays, to improve the subdued demand in recent years will still be in fierce competition with the emergence of the China market. In the local front, the low demand in industrial parks leads to an oversupply of industrial lots that further dampens the already low levels of prices of industrial lots.

Over the years, the emergence of segmentation between "successful" and "unsuccessful" industrial developments is becoming more imminent. Successful industrial developments are those that are masterfully-planned, well-located, highly-accessible, equipped with world-class facilities and utilities, readily available and dependable labor force and well-supported by local government units. Successful industrial developments have taken advantage of these factors and have remained competitive in terms of land prices and are still contemplating on expansion plans riding on pre-commitment agreements with its existing tenants. On the other hand, unsuccessful industrial developments are contributing to the oversupply scenario of the industrial sub-sector.

As of end-2004, average industrial land values have declined by 58 per cent from their peak in 1997. Though land prices in first class economic zones last year range from P3,100 to P4,000, average industrial land prices and rents still fell by 10 to 20 per cent from the 2003 figures. L&A Research believes that the downward trend in prices and rents will still persist. It is expected that the average industrial land price will fall to P1,700 per square meter in 2005 from P1,800 in 2004.