(First of two parts)
Developers should continue to adapt to the evolving preferences of investors and tenants to survive in a property market that has been redefined by the pandemic.
In our opinion, developers should continue converting and repurposing assets to take advantage of opportunities brought about by a lockdown economy—especially amid expectations of an economic rebound in 2021.
Infrastructure projects are likely to play an important role in dictating the development strategies of property firms.
ECONOMIC GROWTH TO BENEFIT PH PROPERTY
The Philippine economy contracted by 11.5 percent in third quarter, and 10 percent in the first nine months of 2020. Despite this, Finance Secretary Carlos G. Dominguez III is optimistic of a faster economic rebound in 2021, with the prospect of an effective vaccine against COVID-19 being rolled out in the second and third quarters of 2021.
Colliers Philippines believes that a major plank of economic growth beyond 2021 will likely be the implementation of crucial infrastructure projects within and outside Metro Manila.
Previously, we emphasized that the completion and upgrading of railways, toll roads and airports should contribute to higher land and property values. In our view, these projects are likely to play an important role in dictating the development strategies of property firms beyond the pandemic.
For 2021, the government has set aside P109 billion for the transportation department and about P667 billion ($13.9 billion) for the Department of Public Works and Highways. In our view, these allocations will likely support the construction of infrastructure across the country beyond the current administration’s term. These public projects should also stoke demand for integrated communities outside of Metro Manila beyond 2022.
As such, the timely approval and implementation of the 2021 national budget is seen as crucial in supporting a possible economic growth in 2021.
To take advantage of this government-projected recovery, property developers and landlords should be more strategic with their landbanking and development strategies so they can capture pent-up demand once the economy rebounds in 2021. This pace of recovery should have a positive impact on Philippine property.
Office landlords should be more proactive in offering alternative leasing strategies to tenants and assist those planning to occupy vacated Philippine Economic Zone Authority (Peza) accredited spaces.
Condominium developers that held off new launches in 2020 but are planning to capture pent-up demand in 2021 should look at attractive price segments and locations for pre-selling condominium amid the pandemic and lockdown.
ADJUSTING TO A CHALLENGING OFFICE LEASING MARKET IN 2021
We continue to see a challenging office leasing market.
Philippine offshore gaming operators (Pogos) have been vacating space while some traditional and outsourcing firms have either closed shop or are rationalizing office footprint.
As of the first nine months, net take-up of office space has turned negative. Colliers has recorded a net take-up of –113,000 sqm, from the 605,600 sqm absorbed a year ago.
Hence, Colliers sees office vacancy in Metro Manila reaching 9.1 percent at the end of 2020 from 4.3 percent in 2019. For 2021, we project net take-up to reach 250,000 sqm, with vacancy rising further to 11.6 percent.
New supply in Metro Manila is likely to be affected by the pandemic. Colliers sees office completion in 2021 reaching 632,600 sqm down 35 percent from our initial projection of 969,900 sqm.
Colliers believes that office leasing recovery will primarily hinge on recovery of general business sentiment which should entice local businesses to re-open; and recovery of global economies that outsource services from the Philippines.
In our opinion, key segments such as telecommunications, medical coding, health information management and e-commerce should help lift leasing and hence, rental growth recovery in second half of 2021.
While most leasing is momentarily paused, some occupiers are actively looking for office space, especially those that plan to implement alternative schemes such as a hub and spoke model.
Colliers also encourages landlords to expand their options by offering available office space in non-core locations where tenants can avail of rents about 30 percent to 50 percent cheaper than major business districts. This is important especially for companies planning to implement a hub and spoke model wherein occupiers reduce the reliance on a single headquarters location for a more dispersed occupancy strategy.
In our view, tenants continue to take a wait-and-see stance and look for opportunities to reduce costs and align their leasing strategies with their long-term business plans while being mindful of the uncertainties in the business environment.
Colliers believes that landlords should focus lease negotiations on strategies that support tenants and are responsive to their needs. We see tenants exploring short term lease renewals during this period of uncertainty, complementing traditional offices with remote work models. The few companies that are still expanding are likely to secure long term leases and are taking advantage of opportunity to negotiate cheaper rates.
MID-INCOME, LUXURY SEGMENTS DRIVE DEMAND FOR PRE-SELLING CONDOS
Despite the pandemic, projects in the mid-income and luxury segments (P3.2 million and above) showed resilience in the first nine months. The segments accounted for 89 percent of total launches during the period. Mid-income to luxury projects also covered 85 percent of total sales in the pre-selling market, up from 72 percent a year ago.
Over the past two years, these segments accounted for 68 percent of the total pre-selling take up in Metro Manila.
In our view, demand in the residential sector in 2021 will likely be driven by mid-income to luxury projects. As of the third quarter, Colliers Philippines data showed that projects in these segments due to be completed from 2021 to 2022 have sold an estimated 86 percent of their inventory.
To tap pent up demand, developers should continue to offer flexible payment terms and adopt property technology (proptech) platforms.
Due to further construction delays, we project the delivery of 6,000 units in 2020, down 59 percent from our initial projection of 14,720 units. In 2021, we expect the completion of 7,270 new units, up 21 percent YOY.
Around 76 percent of the new supply during the period will likely come from the Bay Area followed by Fort Bonifacio, Alabang, Ortigas Center and Makati central business district.
The government-projected rebound of remittances in 2021, lower mortgage rates, recovery of office leasing and the likely pick-up of take-up from end-users and investors should spill over to the residential sector.
As we expect an increase in demand, we see prices and rents recovering. By end 2021, we project prices and rents to grow by 1.7 percent and 2.1 percent, respectively, a reversal from -13 percent and -7.7 percent in 2020.
Condominium developers planning to tap the pent-up demand in 2021 should consider attractive price segments and locations for pre-selling developments. Around 48 percent of mid-income projects that were sold during the period were located in Parañaque, Pasig and the Alabang-Las Piñas area. During the same period, bulk of upscale to luxury projects sold were in Parañaque, the Bay Area, Ortigas Center and fringe, and the C-5 Pasig corridor.
SUSTAINED DEMAND FOR HORIZONTAL PROJECTS OUTSIDE MM
Colliers has also observed steady demand for horizontal projects in key areas outside of Metro Manila including Pampanga, Cavite, Laguna and Batangas despite the pandemic. Investors are looking for homes offering larger living spaces, open areas and outdoor space.
In our view, developers should continue to highlight both their vertical and horizontal projects outside of the capital region to cash in on the demand.
Developers should also explore alternative sites for their house and lot (H&L) and lot only projects. Those located in the fringes of cities such as Davao and Cebu are likely to continue investing in horizontal projects.
Developers should also be on the lookout for old structures located within or near the cities that can be re-developed into integrated communities. Colliers believes that the pandemic has only highlighted both the investors and end-users’ desire to be in an integrated community.
Demand for residential projects will likely hinge on integrated features such as immediate access to essential goods and services. We encourage developers to highlight these features as this will likely be among the major considerations of home buyers moving forward.
Residential developers planning to capture demand outside Metro Manila should implement strategic landbanking and follow the government’s infrastructure projects. Developers should also be more proactive in touching base with overseas Filipino workers (OFWs) who fuel the demand for residences outside Metro Manila.
OFFLINE-ONLINE STRATEGIES TO PROP UP RETAIL DEMAND
The pandemic caused a significant disruption to the growth of the Philippines’ consumer-driven economy, severely affecting mall operators and retailers. From 2020 to 2022, we see retailers engaged in food and beverage (F&B), medical and essential services driving retail space take-up. We project a muted brick-and-mortar space absorption from non-essential retailers.
Colliers sees the completion of about 449,700 sqm of new retail space in 2021, up from 53,100 sqm in 2020. The pandemic and lockdowns compelled mall operators to implement innovative strategies to adjust to slower consumer traffic.
Starting 2021, Colliers believes that the pace of construction of new malls will likely hinge on the improvement of Filipinos households’ consumer confidence and purchasing power; and retailers’ propensity to continue taking up physical mall space despite the growing popularity of online shopping.
Some have introduced curbside pick-up where customers are offered a contactless option to get their orders. Others have rolled out personal shopper services to reduce the risk of transmitting the COVID-19 and to enable contactless shopping.
(To be continued)