HIGHLIGHTS
- Estimated average office (gross) rental yields in Q1 2024 increased to 6.85% from its Q4 2023 level at 6.80%. Year-on-year (YoY), however, the rental yields declined by about 5 bps from its level in Q1 2023. As global interest rates have not declined as anticipated, C&W Research estimates gross rental yields for the Manila market to continue its upward movement in the near-term.
- The Residential Real Estate Price Index (RREPI) grew modestly at 6.5% YoY in Q4 2023, the slowest quarterly YoY growth for the year and down from a growth of 12.9% YoY in the previous quarter and 7.7% YoY in the same quarter last year. Nonetheless, the full-year overall growth of residential prices in 2023 stood at 10.9%, above the recorded increase of 5.6% in 2022. Aside from duplex property type which declined by 33.5% YoY in Q4 2023, other properties posted growth led by single detached/attached house at 9.5% YoY, townhouse at 4.9% YoY, and condominium unit at 4.1% YoY. On an annual basis, condominium posted the slowest growth in 2023 at 4.6%, while single detached/attached house is at 15.4%, duplex at 12.4%, and townhouse at 7.6%. Residential units located outside the capital region grew faster at 7.8% YoY in Q4 2023, as compared to properties in Metro Manila at 4.3% YoY, whilst slower than a growth of 14.3% YoY in the previous quarter. Meanwhile, prices of condominium units in Metro Manila contracted by 0.3% YoY in Q4 2023, from a growth of 8.6% in Q3 2023 and 15.9% in Q4 2022.
- The Bangko Sentral ng Pilipinas (BSP) kept policy rate unchanged at 6.5% over risks to inflation that remains tilted to the upside; with upward price pressures linked to transport fares, food prices, electricity rates, global oil prices, and the possible second-round effects of the minimum wage adjustments. The headline inflation rate grew faster at 3.8% in April this year, from 3.7% in March and 3.4% in February, whilst still within the BSP’s target band of 2-4%. With the uptrend in inflation rates, possible interest rate cuts were further delayed to 2025.
ECONOMIC OVERVIEW
- Businesses are less optimistic in Q1 2024 with the overall confidence index (CI) declining to 33.1%, from 35.9% last quarter. Clouding the firms’ optimism include the post-holiday decline in demand for goods and services and slowdown in business activities; persisting inflationary pressures; stiff competition; and the El Niño phenomenon affecting the agriculture sector. Meanwhile, consumer sentiment turned less negative from -19% in Q4 2023 to -10.9% in Q1 2024 with a better outlook in terms of family income and employment. Also, the number of surveyed households that plan on acquiring real property within the next 12 months, particularly house and lots, increased to 6.3% in Q1 2024 from 4.8% last quarter.
- Year-to-date (YTD) personal and cash remittances from overseas Filipino workers (OFWs) grew slower in March 2024 to 2.8% YoY and 2.7% YoY, respectively, from 3.0% YoY in the same period last year, to reach USD 9.2 billion and USD 8.2 billion, respectively. While remittances from the Middle East are expected to decline amidst escalating global tensions, the economic recovery of key source markets is seen to sustain the growth of remittances receipts in the medium term.
- Investment pledges in Q4 2023 increased by 127% to PHP 394.45 billion, from only PHP 173.61 billion last year. The full year total approved Foreign Investments (FI) of PHP 889. 07 billion in 2023 is an increase by 268% from a total of PHP 241.89 billion in 2022. The bulk of FI pledges in 2023, or about 82%, are in the electricity, gas, steam, and air conditioning supply industry, followed by the manufacturing sector, which received around 12% of the total approved FI.
MARKET OUTLOOK
- The “higher-for-longer” interest rate regime coupled with sticky inflation effects on property market fundamentals (foremost of which is the office market yields) are going to exert downward push on property values in the short- to medium-term. Rationalization of property values will likely unlock new transactions and will move the stock inventory of strategic assets that are ripe for redevelopment. On the other hand, higher financing costs, as a result, will adversely affect the demand for mid-end products.
- The continued bifurcation between the high-end and mid-end market will continue to grow in the various segments. The mid-end residential condominium market will be adversely affected by the prevailing high borrowing cost prices. In the medium-term, however, the respite from supply growth will facilitate take-up of existing excess inventory. Developers have started to shift their focus on the premium segments, owing to its highly-resilient nature from intermittent economic shocks. The shift towards the high-end property segment will also shift back the investment interest towards the major CBDs and new areas with premium amenities and future-proof development features.
- Nevertheless, the efforts to promote and ensure a competitive investment climate through policy reforms will assist investors in exploring for investment opportunities in the Philippine property market, such as the emerging asset classes – data center, flexible workspace and international-grade logistics/warehousing facilities.
SECTORAL UPDATE
OFFICE Recovery of office space absorption in the office segment hit a snag due to delays in the expansion decisions of major occupier demand groups. Vacancy rates, as a result, will remain at high levels due to lacklustre demand and continuous delivery of fresh new supply of office space.
RETAIL Whilst foot traffic in shopping malls has exceeded pre-pandemic levels, the local and global uncertainties continue to impact retailers' demand for space, leading to an overall high vacancy and tamer rental rate increases. In the medium-term, however, as the market conditions further stabilize, new opportunities for local and global locators are likely to grow. This early, developers have ventured into reinvention plans for existing developments in a bid to foster a more cohesive customer experience once the essential demand conditions fully-recover.
INDUSTRIAL Amidst the prevailing tight financial market conditions, the favorable economic growth prospects should encourage foreign investment inflows in the manufacturing industry, to further buoy activities in the country’s industrial estates and the warehousing segment. However, new stress items on the global supply chain such as the heightened situation in the West Philippine Sea and the South China Sea (across various countries), the recent Red Sea attacks on private shipment companies, the ongoing microchip shortage and concerns on growth of labor sources, may delay the flow of growth opportunities into the sector.
RESIDENTIAL The mid-end residential condominium market will continue to be hampered by the prevailing high borrowing cost prices. In the medium-term, however, the respite from supply growth will facilitate take-up of existing excess inventory. On the other hand, the focus on premium housing developments by major developers will assist in unraveling new areas for development.
HOTEL Fast-tracked recovery of the segment will hinge on the recovery of travel demand from key source markets such as China, although domestic travel demand is seen to continue to drive the travel and accommodations industry.
