Office property developers to be more selective- KMC Savills

Property developers are seen to turn more selective in building new office space this year as prices of construction materials like cement and steel creep up alongside rising cost of financing, property consulting firm KMC Savills said.

In a press briefing on Tuesday, top officials of KMC Savills said 2018 could be another “challenging” year for Metro Manila’s office sector as record supply of office space would be delivered equivalent to around 805,000 square meters of gross leasable area (GLA).

Demand is still seen to be intact, given a more diversified pool of tenants but overall vacancy rate would likely rise – and peak at around 10 percent in 2019 from 4.5 percent last year – as two million square meters of new GLA supply come to the market in the next two years.

Moving forward, rising construction and financing costs are seen making office property developers more cautious. With the weakening peso, imports have become more expensive while globally, energy prices have also risen.

“We don’t have local steel industry so typically, we do import steel and although we produce cement locally cement is also energy-intensive sector and energy prices are increasing,” KMC Savills research manager Fred Rara sai, noting that cement and steel typically comprised the bulk of construction inputs.

For Rara, it’s too early to say whether the recently-implemented local tax reform package was to blame for rising inflation but he noted that with the Bangko Sentral ng Pilipinas even cutting the reserve requirement on banks, additional liquidity would be released, contributing to inflationary pressures.

“We’re gonna see a lot of projects probably rethought out now that construction costs are up a little bit and financing cost are increasing. They are going to be more selective of which projects they’ll end up building,” said Michael McCullough, managing director at KMC Savills.

At the end of the day, he said the basis for selection would be hitting internal rates of return. This may involve building in the provinces where there’s less competition, he said.

This year, McCullough said the business process outsourcing (BPO) sectors seemed to be back in the game while the online gaming sector – which saved the office market from being stuck with excess supply last year – would likely still be around in the next five to eight years.

McCullough sees Clark and Iloilo as two of the hottest new hubs for the BPOs.

But while online gaming – also referred to as POGOs or Pagcor (Philippine Amusement & Gaming Corp.) -accredited offshore gaming operators – would still contribute to office demand, McCullough said it would still likely to be a challenging year for the office sector in general.

“Not every single developer wants them in their portfolio. There’s a lot of conservative landlords out there (even as) there’s also a lot of greedy landlords,” McCullough said.

“The other difficulty is many of those POGOs choose to locate in the Bay area. They didn’t choose to locate in the other sub-district. They are not in Quezon City, for instance,” he said.

POGOs need to secure licenses from host local government units (LGUs) and some of these LGUs, like some conservative office property developers, are still skeptical about hosting these POGOs.

Last year, about 761,000 sqms of GLA were added to the office market but vacancy was kept at 4.5 percent after an impressive net take-up of 629,500 sqms, a big portion of which came from POGOs which were willing to pay higher rental rates and willing to locate even in developments which did not enjoy Philippine Economic Zone Authority accreditation.