Colliers Bi-Annual CEBU | OFFICE 1Q 2018 9 March 2018 Offshore Forecast at a glance Demand Total office transactions reached nearly gambling rises 107,000 sq m (1.2 million sq ft) in 2017. Offshore gambling is an emerging office Joey Roi Bondoc Research Manager segment and we see greater absorption from this sector over the next two to three years. The continued demand from Offshore gambling is emerging as a critical segment BPO and KPO firms should support at of the Cebu office market as it accounted for almost least a 10% annual growth in 25% of recorded transactions in 2017. Business transactions until 2020. Process Outsourcing(BPO)-Voice companies continue to dominate covering more than a half of Supply transactions while the Knowledge Process We see Cebu's office stock breaching Outsourcing (KPO) firms that provide higher value the 1 million sq m (10.8 million sq ft) services also sustained demand, taking 20% of the mark this year. Between 2018 and 2020, total office leases. Colliers sees the current we expect the completion of close to administration's infrastructure implementation and 400,000 sq m (4.3 million sq ft) of new office space. A combined 60% of the decentralization thrust benefiting Cebu as it is the new supply will be in Cebu Business largest business destination outside Metro Manila. Park (CBP) and Cebu IT Park (CITP). This should entice more offshore gambling, BPO, KPO and traditional firms to set up shop or expand Vacancy rate operations. We encourage both landlords and Overall vacancy in Cebu stood at 9.7% tenants to as of end-2017.This is lower than the 12% recorded at end-2016. We see > explore business opportunities within the Call overall vacancy rising to about 10% to Center City that the local government proposes to 11% annually over the next two to three develop with the private sector; years due to the completion of new space. > build office space that could accommodate non- outsourcing and traditional businesses that require Rent smaller space; We expect Cebu Business Park and IT Park to continue to command the > assess the needs of offshore gambling companies highest lease rates across Metro Cebu. For more information: Contributors: which we see becoming major contributors to office We project average lease rates in these sub-markets to grow between 3% and space absorption; Market Contact Name Market Contact Name Market Contact Name Market Contact Name 5% annually from 2018 to 2020. We still see upward pressure in rent given the > open more flexible workspace for small Title | Market Title | Market Title | Market Title | Market strong demand in these sub-locations. businesses and start-ups; and Lease rates in other districts should +1 00 000 0000 +1 00 000 0000 grow at a slower 2% to 3% per annum > build office towers within integrated communities as some landlords scramble to fill [email protected] [email protected] Market Contact Name Market Contact Name and near key infrastructure projects. available space. Title | Market Title | Market Copyright © 2015 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed Cebu Office Supply Forecast (GLA, sq m) LOCATION AS OF 2017 2018F 2019F 2020F Total Cebu IT Park 299,000 52,200 23,000 143,000 517,200 Cebu Business Park 314,200 15,100 44,700 - 374,000 Mactan Newton 68,300 11,900 - - 80,200 Mactan 4,500 - - - 4,500 Mandaue 84,200 - - - 84,200 Uptown / Downtown 191,000 50,600 55,700 - 297,300 Overall 961,200 129,800 123,400 143,000 1,357,400 Source: Colliers International Philippines Research Some of the buildings due to be completed next year are PNB Tower, Innoland's One Montage, and Cebu Office stock to breach 1-Mn mark Landmasters' Latitude Corporate Centre. Cebu’s office stock reached 960,000 sq m (10.3 million In 2020, new supply will be concentrated in the Cebu IT sq ft) of gross leasable area (GLA) as of end-2017. The Park with the projected delivery of Ayala Land's Central figure is four times larger than Metro Cebu’s stock 10 Bloc BPO 2 and ArthaLand's Cebu Exchange. years ago. Colliers sees Cebu’s total office supply breaching 1 million sq m (10.8 million sq ft) this year. From 960,000 sq m (10.3 million sq ft) in 2017, we see Year-on-year (YoY), office stock rose by 7% from about Cebu's office stock expanding to 1.36 million sq m (14.6 897,000 sq m (9.7 million sq ft) in 2016. million sq ft) by the end of 2020. Some 63,000 sq m (678,100 sq ft) of office space was completed in 2017. This is lower than the 118,000 sq m Voice BPO still dominant (1.3 million sq ft) turned over in 2016 by national Total office transactions reached nearly 107,000 sq m developers such as Megaworld, Robinsons Land, and (1.2 million sq ft) with BPO firms taking up half or about Ayala Land. Cebu Business Park accounted for more 53,000 sq m of office space. than half of the new office space following the delivery of Philamlife Center, BPI Corporate Center, and Buildcomm Among the major transactions recorded last year was Centre. The two other buildings completed last year multinational call centre Sykes Asia’s take up of more were King Properties’ Avenir in the Uptown/Downtown than 4,000 sq m (43,100 sq ft) at Robinsons Galleria district and Oakridge Realty’s Oakridge IT Center 2 in Cebu. The facility is the firm’s second site in Cebu. Mandaue. Concentrix occupied space at 8 Newtown Boulevard Tower 3 in Mactan while RealPage occupied space at As of end-2017, Cebu IT Park (CITP) and Cebu ACC Tower in CBP. Other notable BPO transactions last Business Park (CBP) accounted for more than 60% of year involved Channel Fix and iPloy. Metro Cebu’s office stock. These business hubs remain as the most attractive locations in Cebu due to their Annual Take-up, Supply, and Vacancy proximity to public transportation terminals and the presence of support facilities such as hotels, residential 140,000 14% condominiums, and malls. 120,000 12% 100,000 9.7% 10% Over the next 36 months, Colliers projects the 80,000 77,000 8% 63,700 completion of an average of 132,000 sq m (1.4 million sq 60,000 6% ft) of new office space annually. More than half of the 40,000 4% new supply will be built within CITP and CBP. 20,000 2% Among the new buildings lined up for turnover this year - 0% are Tech Tower by Cebu Holdings; GT Time Square by 2013 2014 2015 2016 2017 GT Land Development; Pacific World Tower by Net Take-up Stock Increase Megaworld; and Cebu Cyberzone Tower 2 by Filinvest. Source: Colliers International Philippines Research 2 Colliers Bi-Annual | 9 March 2018 | CEBU | OFFICE | Colliers International Offshore gambling emerges Overall vacancy in Cebu was at 9.7% as of end- 2017.This is lower than the 12.0% recorded in end-2016. Offshore gambling is emerging as a major plank of the Major business districts such as CBP and CITP recorded Cebu office market. After taking up 25,000 sq m vacancy rates of between 2.0% and 2.2%. This indicates (269,100 sq ft) of office space in 1H2017, another that much of the demand still gravitates towards these offshore gambling company closed nearly 3,700 sq m established hubs. (39,800 sq ft) of office space at Momentum Building. With a more conducive local regulatory environment, we Comparative Office Rental Rates in expect offshore gambling to become a major contributor Cebu (PHP / sq m / month), 4Q 2017 to office space take up in Cebu. LOCATION RENTS Comparative Office Vacancy Rates (percentage) CBP PHP450 - 900 in Cebu IT Park PHP450 - 650 LOCATION 4Q 2017 Mactan PHP450 - 550 CBP 2.2% Mandaue PHP400 - 600 IT Park 2.1% Uptown / Downtown PHP350 - 700 Mactan Newtown 30.7% Source: Colliers International Philippines Research; USD1=PHP50 Mactan 0% The key business districts including CBP and CITP Mandaue 48.5% continue to command the highest lease rates. Rents in Uptown / Downtown 6.5% CITP range between PHP450 and PHP 650 per sq m Overall 9.7% (USD0.84 to USD1.21 per sq ft) per month while buildings in CBP charge between PHP450 (USD 9) and Source: Colliers International Philippines Research PHP900 (USD18) per month. Average lease rates across Cebu's business districts grew by an average of KPOs sustain demand 6% by end-2017.Over the next two to three years we see lease rates growing by an average of 3% to 5% per Knowledge Process Outsourcing (KPO) firms or those annum. We see lease rates in CBP rising faster than that provide higher-value services such as medical CITP as we see more space being completed in the coding, software engineering, and finance and latter. Lease rates in other sub-locations should grow at accounting comprised about a 20% of total transactions a slower pace of 2% to 3% per annum as some or some 20,000 sq m (215,300 sq ft) of office space. landlords scramble to find tenants for their space. New KPO players in Cebu include the shared service We see the current administration's infrastructure unit of global manufacturer Dover and web design and implementation and decentralization thrust benefiting development firm MoPro.