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Q4 2021 Philippine Office & Investment MarketBeat Reports

Claro Cordero Jr. • 14/02/2022

The emergence of Omicron variant delayed the return-to-office strategies of companies, upward trend in office vacancy rate to persist in 2022

The 271,000 square meters (sq.m.) of office spaces scheduled to be completed in Q4 2021, only 53% or 158,000 sq.m. were completed, bringing the full-year 2021 completion to 0.64 million sq.m. The estimated total Prime and Grade ‘A’ office supply in Metro Manila now stands at approximately 8.9 million sq.m. and is expected to grow by another 0.79 million sq.m. within 2022.

Annual net absorption settled at -1,300 sq.m. by end-2021, an improvement from the -61,000 sq.m. recorded in 2020. Vacancy rates settled at 14.4% in Q4 2021 despite continued exits (including some Philippine offshore gaming operators [POGO] and related service providers) and space rationalization initiatives. On the other hand, vacancy rates are estimated to swell between 16% and 17% in 2022 due to additional supply amidst slower than expected take-up of new spaces due to the Omicron variant surge in the beginning of the year.

Moderate Rental Softening Hounds the Office Sub-sector

Metro Manila average asking rent settled at PHP 1,042/sq.m./mo. in Q4 2021, 0.5% lower quarter-on-quarter and 3.1% lower year-on-year. As suspended deals are expected to be revitalized by H2 2022 and leasing terms are moving back to pre-pandemic levels, the decline in average rents for Prime and Grade ‘A’ office developments in Metro Manila is expected to slow further. Claro Cordero, Director and Head of Research, Consulting & Advisory Services at Cushman & Wakefield, said, “The recovery in market rents is supported by the anticipated increase in office space demand from IT-BPM firms and emerging industries such as logistics, healthcare and life science companies, and flexible working space solutions establishing their presence in key CBDs and urban developments”.

Tetet Castro, Director and Head of Tenant Advisory Group at Cushman & Wakefield, said, “With the more targeted Alert Level System, we have seen improved economic activity in Q4 2021, which also translated to improved market activity in the real estate sector. A number of companies are eyeing more aggressive return-to- office strategies in 2022, but this has been delayed because of the Omicron variant-driven surge we have experienced after the holidays. But with the continued rollout of vaccines, which now includes children as young as 5 years old, and booster shots for those who have completed their primary series, we are likely to transition into “what’s next”, where we try to get back to our lives before the pandemic, but adopting the learnings we have over the past 2 years likely including changes in workplace strategies and habits.”

Mr. Cordero said, “More office transactions were revived as the country piloted the granular lockdown, focusing on targeted areas of concern, to generally allow more movement and business activities. Nonetheless, the effect on the level of demand may not be immediately seen until mid-2022, which is the target transaction date of the majority of pending deals. Meanwhile, the contraction of POGO activities continues as higher taxes among industry players along with the new stricter requirements on occupational safety and health standards are imposed, leaving some large office spaces vacant.

The other property sub-sectors performed better in the final quarter of 2021. The increased spending habit during the festive season has improved retail sales and footfall in retail establishments whilst the pandemic qualms continue to suppress consumer confidence. Nonetheless, as parent companies are still feeling the impacts of the crisis globally, the flow of new foreign retail enterprises remains hampered although the law that lowered the required minimum investment for foreign retailers is seen to capture more investor interest once the business environment gets better.

The uptick in residential demand in Q4 2021, after it suffered a slowdown during the peak of the pandemic, occurs as the economy gradually bounces back. The supply is also expected to keep up as developers resume their long- stalled development pipeline. Meanwhile, the fast-growing e-commerce and digital economy inspire greater demand for industrial space in warehousing, distribution logistics, and cold-storage segments. The data center continues to capture rising interest among investors, with both local and foreign players scaling up their operations in the country.

Hotel operators have also seen better occupancy rates in as domestic travel activities improved when the borders were reopened and the documentary restrictions were eased. Just as when the tourism industry is beginning to pick up, the emergence of the Omicron variant brings fresh concerns as the changes in travel policies and border restrictions dampen sentiment for the hotel sub-sector.

Environmental, Social, and Governance (ESG) Metrics to Influence Decision on Investment Transactions

Estimated average office (gross) rental yields in Q4 2021 compressed further to 6.27%. Year-on-year (YoY), the rental yields declined by about 43 basis points from its level in Q4 2020. The persistently low policy interest rates set by the Bangko Sentral ng Pilipinas' (BSP) is driving further compression of the average rental yield rates in the market. As the global economy recovers and pressures to hike key policy rates mount, C&W Research estimates rental yields to remain flat in the short- to medium-term.

Mr. Cordero added, “Recently, the Republic Act (RA) 11595, which amends the Retail Trade Liberalization Act (RTLA) of 2000, was signed into law to further ease the entry of foreign investors engaged in retail trade business to the country, while the proposed amendment the Public Services Act (PSA), which will allow full foreign ownership to public utilities such telecommunications, airlines, and domestic shipping, among others, has been passed by the Senate. Along with the acceleration of the vaccination and booster program, these investor-friendly legislations are seen to increase the optimism of foreign investors in the country.

“As the nationwide vaccination rollout goes full steam to effectively manage future spikes in COVID-19 infection and business activities slowly creep to normalcy, C&W Research expects a marked improvement in the investment environment in the medium term. On the other hand, new decision factors on investment transactions are expected to take center stage as the pandemic brought awareness on environmental, social, and governance (ESG) metrics and the need to enhance business strategies due to the increasing digitalization of the new economy”, Mr. Cordero said.


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