Elections to affect real estate activity; oversupply in vertical residential segment

(First of a series)

AS THE PHILIPPINES “goes bananas” in an election year—in the year of the monkey at that—property experts see a number of challenges, and likely trends, flavoring and coloring the real estate industry in 2016. Here’s their fearless forecast:

1. There will be an oversupply in the mid-market vertical residential segment.

“I expect 2016 to be the most challenging year for the residential property sector. A looming oversupply in the mid-market vertical residential segment in Metro Manila is developing, and developers should expect a slowdown by as much as 10 percent in the average annual take-up rate of 50,000 units. Several developers are already holding back sales of new projects until supply balances out in 2018,” said Enrique M. Soriano III, Ateneo program director for real estate and senior adviser for Wong+Bernstein Business, in an Inquirer Property interview.

Soriano said that with this oversupply scenario, “we will naturally anticipate vacancy rates to go up in 2016 to double digits in the Makati and Ortigas CBD (central business district) area.”

2. The 2016 presidential elections will affect the market. Soriano said the presidential and national elections “is likewise expected to freeze any major real estate activity in the first two quarters of 2016. Naturally, investor sentiment will be on a wait-and-see attitude. This will not bode well for the property sector and the economy as a whole. Hopefully, after the elections, it will be followed by a possible uptick in transaction levels in the last two quarters of 2016,” said Soriano.

3. Business process outsourcing (BPO) growth continues. BPO companies, according to property portal Lamudi Philippines, will continue to buoy Metro Manila’s commercial real estate.

“Experts do not foresee the supply of office space surpassing demand soon, meaning commercial properties (and offices in particular) remain a beneficial investment for 2016,” said Lamudi

Philippines in a statement.

Soriano said that in 2016, Grade-A office rents in prime areas is expected to increase 5 percent, given strong demand for office space and low vacancy rates. Meanwhile, rents in non-CBD areas may slightly drop by 5 percent due to available supply in Makati and Bonifacio Global City.

4. Metro Manila land values will go up. Lamudi Philippines said that despite slower gross domestic product growth in 2015, land values still continue to appreciate, albeit at a slower pace.

Colliers International said that growth rates of land values in Metro Manila accelerated in the second quarter of 2015. In addition, land values in the Makati CBD, growing at only 0.85 percent during the first three months of the year, rebounded in the next three by growing at a rate of 2 percent. This raised the area’s average price to P452,704 per square meter. Values similarly rose in the business districts of Fort Bonifacio and Ortigas Center, increasing at 1.97 and 2.1 percent, respectively.

5. Retail property market will face a slowdown. Soriano said “the challenging retail environment is likely to persist next year due to diminishing inbound tourist arrivals. We expect prime rents outside of the shopping centers to slide by 10 percent in 2016, while shopping mall spaces are expected to escalate.”

“We can also expect a decline in premium retail market rents due to the expected drop in tourist arrivals as a result of the national elections happening in the first half of 2016. The mass retail market is expected to remain resilient as domestic consumption continue to grow, fueled partly by election spending nationwide,” said Soriano.