The Philippine economy has grown by 6 to 7 per cent in the last five years, on the back of policies and incentives that attracted foreign investors and a steady inflow of remittances from overseas Filipino workers. These supported the country’s property market – specifically the office sector in Metro Manila.

Outpacing peers, exceeding expectations

A report by property consultancy firm Knight Frank issued last September based on data between 2010 and 2016 said that by 2020, Manila would record a 19.1 per cent growth in prime office rents, surpassing other top performers like Brisbane (16.5 per cent), Singapore (15.8 per cent), Bangkok (11.4 per cent) and Hong Kong (10 per cent). 

“The (Philippine) office property market is very healthy. There’s less than 5 per cent vacancy rate in (most of Metro Manila’s) central business districts,” said Kash Salvador, associate director for investment properties and capital markets at Santos Knight Frank, the Philippine branch of Knight Frank.

Salvador said Manila had the third lowest vacancy rate of the 20 prime office markets in the region, adding that expanding business process outsourcing (BPO) and online gaming industries were the key demand drivers.

This real estate fund would rather invest in the Philippines than China

Another report released by Santos Knight Frank on February 19 said the office market take-up in Metro Manila picked up with a net absorption rate of 333,413 square metres in the fourth quarter of 2017, not only surpassing the amount of new supply that became available during that period, but also boosting rents. Makati, the country’s premier business and financial district, remains the office market leader with a weighted average lease rate of 1,286 pesos (US$24.68) per sq m.

Stronger 2018 office market?

If the Philippine government’s plans and forecasts are to go by, Santos Knight Frank’s estimates of a stronger office market offing in 2018 may not be too far off. 

Socioeconomic Planning Secretary Ernesto Pernia said in March that the projected public spending on infrastructure between 2017 and 2022 was about 6.79 trillion pesos (US$130 billion). For 2018, the proposed infrastructure outlay is about 5.1 per cent of the country’s total economic activity.

Philippine real estate firm KMC Savills said 2018 would be another “record year”, as 805,000 sq m of office space would be completed, but “occupier demand is still seen to be intact”. 

Metro Manila saw the highest number of completions to date at around 761,100 sq m of gross leasable area in 2017, it said in a February report. Despite the additions, the market exceeded expectations as net absorption surged to 629,500 sq m, bringing  vacancy level to just 4.5 per cent of total stock by the end of the year.

“We’re anticipating a better year for the office property sector,” said Claro Cordero, head of research, consulting and valuation services department at real estate consultancy JLL Philippines. 

Cordero said grade A office stock in Makati and Bonifacio Global City (BGC) now totalled 700,000 sq m, with a pre-sell price of 180,000 pesos to 270,000 pesos per sq m. JLL’s Office Index report for Asia-Pacific showed that Metro Manila’s grade A office rent rose by an annual 3.5 per cent in the fourth quarter of 2017, outpacing Kuala Lumpur, Bangkok and Jakarta.

POGOs and BPOs

According to a report by property services firm Colliers Philippines in February, Metro Manila’s office sector net take-up hit a higher-than-expected 639,500 sq m in 2017, as the year’s supply rose to a record high of 852,000 sq m, putting the current total stock at 9.7 million sq m.

The consultancy attributed the increased demand to the expansion of Philippine offshore gaming operators (POGOs), traditional companies and BPOs.

Last year, POGOs accounted for about 35 per cent of the total 870,000 sq m in transaction volume, or four times more than the 80,000 sq m that they leased in 2016, as a crackdown on offshore gambling entities in other countries pushed operators to look for alternative locations such as the Philippines. Traditional companies like construction and logistics firms took up another 35 per cent of the total and BPOs accounted for the remaining 25 per cent.

Colliers expects demand to increase by about 6 per cent annually over the next three years on robust economic growth.

Despite such upbeat forecast, there are deterrents that can turn off potential investors from venturing in Metro Manila. One is traffic congestion. A Boston Consulting Group study published in November found that next only to Bangkok and Jakarta, Metro Manila had the third worst traffic in Southeast Asia, with motorists and commuters stuck in traffic for an average of 66 minutes daily.

But analysts said the government’s infrastructure programme, popularly known as “Build, Build, Build”, can decongest Metro Manila.

One of the projects is the Mega Manila subway – the country’s first underground railway. 

Another is the New Clark City – a smart city that could be an alternative to Manila – that has attracted investment from Singapore infrastructure consultancy Surbana Jurong and the Japan Overseas Infrastructure Investment Corporation to develop a sprawling 9,450-hectare project in the Clark Special Economic Zone and in Tarlac.

Separately, Malaysia’s sovereign wealth fund Khazanah Nasional Berhad’s 8 per cent stake in 8990 Holdings, a mass housing developer acquired in 2014, could begin to yield returns on the back of the country’s huge unmet housing demand. 

“The government’s push for moving development and progress outside the confines of the traditional urban centres of commerce ... bodes well for (8990’s) business model,” said Justino Calaycay, head of research and engagement at stock brokerage firm Philstocks Financial, Inc.

The total housing need to ease the backlog – already at 5.9 million households in 2015 – is expected to reach 10.5 million households by 2030, according to the Subdivision and Housing Developers Association.

(The full version of this article is published in the April issue of The Peak magazine, available at selected bookstores)