The World Health Organization (WHO) earlier reported that the outbreak of COVID-19 has already peaked in China. We see several news articles online highlighting the positive news that the makeshift hospitals in China have been shut down following a significant drop in new COVID-19 cases. Unfortunately, cases continue to rise in other parts of the world. And definitely, there have been disruptions, with COVID-19 affecting major sectors of the economy, including property.
Economic impact
The Philippine economy expanded by 5.9 percent in 2019. While this is the slowest pace recorded in eight years, the country is still one of the fastest-growing economies in the region. In our opinion, the Philippines was initially poised for a faster economic growth in 2020 due to healthy consumer spending; sustained remittances from Filipinos working abroad; low inflation; timely enactment of the 2020 national budget; and ramped up construction of public infrastructure up to 2022. This growth was supposed to trickle down to the property sector. Achieving a faster growth, however, has been threatened by the COVID-19 pandemic.
It’s natural for people to start comparing COVID-19 and the SARS outbreak of 2003. But note that the Chinese economy is much larger at $13.8 trillion in 2018 from only $1.7 trillion in 2003, reflecting more than 700 percent increase. Trade between China and emerging economies such as the Philippines has intensified and investments from China to developing countries have also increased. With higher disposable incomes, China has likewise become a major source of tourists. China is far more interconnected with the rest of the world now than in 2003.
So much is at stake.
Higher vacancies in offices
Initially, we were projecting a take up of more than 300,000 sqm from Philippine offshore gaming operators (Pogos) this year, or about a third of the 900,000 sqm of office space absorption we were estimating for 2020. The expansion of Pogos could be constricted by the travel ban. If office space take up from these firms drops to about a third of our initial projection or about 100,000 sqm, we are likely to see Metro Manila office vacancy rising to 6.8 percent from only 4.3 percent in 2019.
If no additional space is taken up by the Pogo sector this year, vacancy could rise to 7.6 percent. To provide context, office vacancy in Metro Manila reached 8.6 percent in 2009 during the global financial crisis, and somewhere around 12 percent to 19 percent during the late 1990s and the early 2000s during the Asian financial crisis.
The bright spot for the Metro Manila office market is that it does not depend on a single segment for absorption. Aside from Pogos, we also have traditional firms and outsourcing companies that could fill the void in case of a slower take up from these Chinese offshore gaming companies. These two sectors accounted for about 60 percent of total office space transactions in Metro Manila in 2019 and we initially projected this trend being sustained over the next 12 months. Outsourcing firms source their manpower locally while traditional firms continue to expand and take up space due to sustained macroeconomic growth–aside from the need to transfer to newer and more expansive office buildings.
Admittedly, however, the COVID-19 health scare has resulted in slower leasing queries and inspections across all segments. While we have yet to see its full impact on the first quarter of 2020 office space deals, the general decline in business is likely to slow office absorption in the first three months of 2020.
Lower hotel occupancies, rates
The hotel sector is one segment that is badly affected by the global health scare. We see 2020 foreign arrivals unlikely to surpass or even match 2019 figures due to the threat of COVID-19.
Initially, we projected average occupancy rates for the first half of 2020 to decline to between 60 and 65 percent due to the numerous hotel room completions this year as well as the government’s imposition of a travel ban in China, the Philippines’ second largest source of tourists after South Korea. But some hotel operators in Metro Manila are already reporting lower occupancies of between 30 and 40 percent. The daily rates of some hotels declined between 20 and 40 percent as of end-February 2020 compared to rates in December 2019.
Earlier, Colliers Philippines recommended that hotel operators tie up with airlines and other leisure establishments to offer cheaper packages and help stoke the domestic tourism, which should fill the void left by Chinese tourists. But this is now threatened by the “community quarantine” in Metro Manila imposed by the government. This is likely to be exacerbated by village or provincial quarantines that might be implemented by local government officials.
(Next week I will discuss the COVID-19’s impact on other property segments such as residential and retail and how this pandemic has affected other property markets across Asia.)