Boom on Hold
Property services firm Leechiu & Associates sees
selective recovery in the medium term
By Claro dG. Cordero Jr.
The selective recovery trend of the real estate sector will continue in the next two to three years, until supply-side concerns in the key property subsectors are properly addressed.
While the recovery has been in progress since the latter part of 2003, this trend is not likely to reach the level of rents and capital values prior to the 1997 Asian financial crisis.
The market’s improving situation is still vulnerable to economic and political shocks. Positive signs of growth will likely be challenged by persistent local, as well as global, economic scenarios.
Commercial
With the completion of the PeopleSupport Center in Makati, the total stock of office space of all grades within the Makati and Ortigas commercial business districts increased minimally to 3.82 million square meters by end-2005. Office space in emerging urban districts, on the other hand, reached 500,000 square meters.
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| COMMERCIAL: Full recovery may take a while until demand for Grade “B/C” office developments catches up with supply |
Consolidated vacancy for both the Makati and Ortigas CBDs was estimated at approximately 22% in 2005 and forecasted to improve to below 20% by end-2006. However, the availability of newer developments and the emerging trend of custom-built facilities in the emerging urban districts are likely to temper the improvement of office space take-up. While the perceived upward trend in demand may support rentals and capital values escalation in the medium term, it is also likely that the full recovery of the subsector may still take a while, until demand for Grade “B/C” office developments catches up with supply.
Moreover, the improving market sentiment may be picked up by some developers as a signal to complete the developments that were abruptly shut due to the turn of economic and, mostly, political events, which may further add to the supply of new developments. Along with such external elements as the impending fiscal and power crisis, all these factors may be able to neutralize the improving market conditions.
Retail
Gross leasable space in Metro Manila as of end-2005 amounted to approximately 3.3 million square meters. The highest concentration of retail space is in the central part of Metro Manila, which includes the Makati and Ortigas CBDs.
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| RETAIL: The combined size of existing malls and retail operations in Metro Manila can be hostile to new market players in areas where these established malls already have a strong presence |
Metro Manila is perceived to be already saturated with malls, hence retail developments are swelling over to the fringes of the country’s urban centers and on to nearby growth centers. Mall developers have started to recognize the need to diversify locations to the peripheries of Metro Manila. In these areas, they have discovered a critical level of population with a high propensity to spend and whose retail needs are still underserved. Mall developers refer to this trend as the “provincial retail play” or the small mall strategy.
The oversaturation reading of malls within some parts of Metro Manila is further strengthened by the fact that a number of malls are now being converted for office/commercial use, mainly for call center or business process outsourcing firms. Mall developers are converting the retail spaces of underperforming tenants to maximize their mall’s potential.
One of the concerns among mall retailers is the increasing rental levels. As rents continue to increase, mall tenants, especially the small ones, are having to contend with narrowing profit margins. Thus, mall owners have kept rental increases to an estimated 2%–5% in order to keep tenants.
The retail property sub-market is not too optimistic at present, particularly in Metro Manila. The combined size of existing malls and retail operations in Metro Manila can be hostile to new market players in areas where these established malls already have a strong presence.
Industrial
The emergence of cheaper markets abroad for both labor and the overall cost of doing business is greatly affecting the recovery of the local industrial property subsector. As more businesses close down their industrial plants and move on to locations outside the country, the amount of available industrial facilities is expected to swell. Further, the old facilities that were foreclosed by banks and now being flagged into the market are also adding to the supply overhang.
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| INDUSTRIAL: As more businesses close down their industrial plants and move on to locations outside the country, the amount of available industrial facilities is expected to swell |
The 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, backed by a 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. On the other hand, unsuccessful industrial developments are contributing to the oversupply scenario of the industrial subsector. This is the first of a two-part feature. In our next issue, we will feature an assessment of the residential and hotel and serviced apartments sectors.
Claro Cordero is senior manager for consultancy services of Leechiu & Associates Inc., a member of Savills International, which has been active in the Philippines since 1988 and has become the Philippine’s leading foreign name in property services
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