Manila Offi ceAsian Cities Report – 1H 2020

REPORT

Savills Research

savills.com

Manila Offi ce

The Philippine economy contracted by0.2% in the fi rst quarter of the year

COVID-19 BLIP IN THE RADARThe Philippine economy contracted by 0.2% in the fi rst quarter of the year. This was mainly attributed to multiple shocks to the economy such as the Taal Volcano eruption and the subsequent lockdown of Metro Manila (eventually the entire island of Luzon) due to COVID-19.

While the International Monetary Fund (IMF) projects the global economy to contract by 3% this year, experts believe that the Philippines could be on pace to further contract throughout the year with Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno stating that it could fall further in the second quarter. Meanwhile, Fitch Ratings recently downgraded the country’s credit rating outlook from positive to stable citing the deterioration in the country’s macroeconomic and fi scal outlook due to the lockdown. The agency does note that the country’s BBB rating, above minimum investment grade, will continue to hold due to its lower government debt-to-GDP ratio, net debt position, and strong medium-to-long term growth prospects.

The BSP has thus far initiated cuts to the policy rate and bank reserve requirements of 125 and 200 basis points respectively. However, the BSP still forecasts annual infl ation to average just 2.2% which should give it some headroom to further ease monetary policy.

A slight reprieve might be seen in the Philippine peso. The national currency remains stable, heading in the opposite direction against other emerging market currencies. Even as the global economy has faltered due to the virus, the country’s healthy fi scal and external positions have been helpful to propping up the currency versus the dollar.

Despite the cautious opening of the economy, government policy is expected to remain committed to construction activity due to its massive infrastructure program. As the restrictions on areas are slowly lifted, local government units are slated to enable certain sectors such as manufacturing and construction to resume reduced operations. Likewise, most businesses and sectors could operate albeit with limited operations and capacity.

SLOWDOWN IN OFFICE MARKET AS LOCKDOWNS BITEThe Philippines’ real estate sector has been thriving in the past years buoyed by robust economic expansion and the comprehensive infrastructure program that has provided opportunities beyond Metro Manila and its well-established business districts. Despite the moratorium on new ecozones in Metro Manila and the second tax reform package pending in Congress, the capital managed to settle at a steady pace of 5.4% vacancy rate in 2019.

The off shore and outsourcing (O&O) sector and the Philippine Off shore Gaming Operators (POGO) remain the driving force of offi ce space demand. Net absorption last year registered at around 757,000 sq m, a shy lower than the new supply of 768,000 sq m. The major submarkets spearheaded the continued growth of rents in Metro Manila, which closed the year with a 4.1% YoY increase.

STEADY VACANCY AMID INCREASE IN SUPPLYMetro Manila’s top submarkets concluded 2019 with an additional 557,900 sq m of offi ce space. The Bay Area and Ortigas Center contributed more than half of total new supply. Amid the unmeasurable risks that have impacted the offi ce segment, overall vacancies remained stable.

The upheaval brought by COVID-19 across the globe continues to test the strength of the real estate sector. Since the implementation of the Enhanced Community Quarantine (ECQ) in mid-March, the immediate market consequences have been nothing but short of dramatic. While the long-term eff ects remain uncertain, the industry is beginning to embrace the new status quo. The O&O sector may still come on top while cost-savings will become key business priorities.

GRAPH 1: GDP Growth, 2000 to 2019

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Household Consumption Government ExpenditureCapital Formation Net TradeGDP Growth

Source Savills Research & Consultancy

GRAPH 2: Share Of GDP And Infra Spending, 2008 to 2020F

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Infrastructure Spending (LHS) Share of GDP (RHS)

Source Savills Research & Consultancy

GRAPH 3: Exchange Rate, November 2019 to May 2020

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Source Savills Research & Consultancy

Information provided by

Manila Offi ce

Supply in Metro Manila slated to open this year has been aff ected by the COVID-19 crisis. Areas in the country that were aff ected by the lockdown have experienced work stoppages in construction. In the capital, this resulted to muted new supply of only 36,500 sq m in Q1/2020. As such, this pushed the completion of several buildings, and with the ongoing crisis, we do not foresee it being fast tracked.

RISING OFFICE VACANCIES IN THE HORIZONOrganizations are reevaluating workforce needs considering the evolving situation. Although the pandemic is bringing massive threats across all types of businesses, unexpected opportunities might come about for fl exible offi ce solutions as part of companies’ business continuity plans (BCP). While this could stimulate leasing activity, it may not be enough to off set the adverse impact on the offi ce market. Conditions in Makati CBD and BGC are expected to remain stable but rental growth could stagnate in the coming quarters.

The major disruption brought by the pandemic is expected to alter market fundamentals in favor of tenants. Landlords are likely to be more aggressive in retaining key and quality occupants. Meanwhile, due to the current fl exible work arrangements, some occupiers are evaluating subleasing their offi ce space – an existing trend which is being accelerated.

In the wake of this crisis, we expect offi ce demand to slump in the near term as companies try to accommodate a more mobile workforce and further evaluate their businesses. This may raise overall vacancies as we expect the steady stream of new supply to resume once the ECQ has been lifted and allow construction activity to carry forward. Lastly, we still have a positive outlook on the O&O sector post-COVID as the world tries to recover from its eff ects.

Government policy is expected to remain committed to construction activity due to its

extensive infrastructure program.

GRAPH 4: Metro Manila CBD Grade A Offi ce Supply And Take-up, 2010 to 2021F

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Source Savills Research & Consultancyy

GRAPH 5: Manila CBD Grade A Offi ce Stock And Vacancy Rates, 2010 to 2021F

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Grade A Office Stock (LHS) Grade A Office Vacancy Rate (RHS)

Source Savills Research & Consultancy

KMC MAG Group11/F Sun Life Centre5th Avenue corner Rizal DriveBonifacio Global City 1634Philippines+632 2 403 5519