RESEARCH

METRO MANILA MARKET UPDATE Q1 2018

METRO MANILA REAL ESTATE SECTOR REVIEW RISE OF THE ULTRA-WEALTHY FORTIFIES ROBUST METRO MANILA PROPERTY SECTOR

Metro Manila was identified as one of the world’s hottest cities in The Wealth Report 2018. The Philippine’s significant economic momentum and positive property dynamics were recognized as factors creating sizeable investor interest around the world. With various infrastructure projects planned, Metro Manila is growing into an impressive regional hub and a destination for global real estate investment.

The Metro Manila property sector (worth US$50M+) passed the 300 further advances as an effect of the mark as of the year 2017. This SNAPSHOTS rise in the number of ultra-wealthy 2017 number is a 3% increase from in the country. The ultra-wealthy the previous year and 20% from 5 Economic Indicators aims to further diversify their years ago. By 2022, the number is existing portfolios by investing in the projected to reach 570, which is local office, residential, retail, 84% higher than the latest recorded hospitality and logistic sectors. figure.

The number of wealthy and ultra- An attitude survey was likewise 6.8% wealthy individuals in the Philippines conducted using responses from GDP continues to increase according to private bankers and wealth advisers Q1 2018 the wealth report. The report is who represent wealthy individuals. based on a study carried out by The survey identified that Filipino Wealth-X, a leading global wealth Ultra High Net Worth Individuals and insight business that partners (UHNWI) actively collect with prestige brands across investments of passion such as art, 4.3% financial services, luxury, not-for- wine, jewelry, watches and luxury Inflation Rate profit and higher education cars. UHNWIs are defined as March 2018 industries. It estimates total private USD30 million or more (excluding wealth and population size by level primary residence). Capital of wealth and investable assets. appreciation and joy of ownership The potential market for luxury are the top two factors Filipino 0.8% products is to a great degree UHNWIs consider in buying such OFW Remittances represented by the numbers stated investments of passion. in the report. Q1 2018 According to the same report, the Continued on Page 8… number of ultra-wealthy Filipinos

5.8% TABLE 1 Avg. Bank Lending Population Size of UHNWI in the Philippines March 2018

POPULATION SIZE % INCREASE

NETWORTH 2012 2016 2017 3.01% 2012 2016 2017 2022 to to to 91-Day T-Bill 2016 2017 2022 March 2018 US$5M+ 4,500 5,420 5,680 10,390 20% 5% 83%

51.45 US$50M+ 250 300 310 570 20% 3% 84% Avg. PHP-USD Q1 2018 US$500M+ 20 20 20 50 0% 0% 150%

Source: The Wealth Report 2018

2 OFFICE MARKET IN DEVELOPMENT BOOM OFFICE | Sustained Upsurge in Rents

Following a record-high net absorption in the last quarter of 2017, the office sector remains vigorous in the first quarter of 2018, supported by rising rents and a continuing boom in construction activities all over Metro Manila. An estimated 1.3 million square meters (sq.m.) of new office supply is expected to add into the total office stock within the next three quarters of the year. Furthermore, a big portion of the upcoming office supply is already pre-committed, signifying that the market is ready to pounce on the additional spaces for hand over.

Existing Supply and Building Completions The Podium West Tower and BDO Tower A total of 92,273 sq.m. of fresh office gross leasable area went Source: Keppel Land online in Metro Manila’s central business districts in the first quarter Designed by SOM New York and a is performing exceptionally well at a of 2018. Fort Bonifacio welcomed LEED gold and BERDE-awardee, low vacancy of 2%. two notable prime-grade building The Arthaland Century Pacific Notable building completions in the openings: Arthaland Century Pacific Tower has attracted multinational fringe areas include Circuit Tower (31,045 sq.m. in GLA) and and traditional companies. The Corporate Center 1 (47,104 sq.m. The Philippine Stock Exchange Philippine Stock Exchange, Inc., in GLA) and Circuit Corporate Tower (30,000 sq.m. in GLA). meanwhile, has moved from its previous separate trading floors in Center 2 (25,604 sq.m. in GLA) in Tower One and Exchange Plaza in Circuit and the Greenfield Makati and PSE Tektite Ortigas, Tower (43,697.57 sq,m. in GLA) in merging in Fort Bonifacio and Greenfield District Mandaluyong. occupying about 23,000 sq.m. of the newly-opened The Philippine Upcoming Supply And Stock Exchange Tower. Bulk of the Development Pipeline supply from these newly-completed Bay Area accounts for more than a prime buildings have been pre- fourth of the total Metro Manila committed prior to or at completion, upcoming supply, with Three E- both presently at less than 5% Com Center Bayshore Tower vacancy. (79,000 sq.m. in GLA) as the Alveo Land’s strata-titled High biggest contributor. Other Street South Corporate Plaza noteworthy upcoming office Tower 1 in Fort Bonifacio (38,192 developments for the year include sq.m. in GLA) also opened this prime-grade Nex Tower in Makati, quarter. In addition, Ri Rance Jollibee Tower in Ortigas, Araneta Philippine Stock Corporate Center 1 in Bay Area is Cyberpark Tower Two in Quezon Exchange Tower now operational, bringing Bay City, and Asian Century Center, Area’s total office inventory closer Ecoprime, and The Finance Centre in Fort Bonifacio. Source: Santos Knight Frank Research to 550,000 sq.m. The new building

3 A number of strata-titled office such as Alabang and Quezon City TABLE 2 buildings are also earmarked for to meet their office space Q1 2018 Office Data completion this year, including High requirements. Weighted Avg. Street South Corporate Plaza - Vacancy Dsitrict Lease Rate Makati and Fort Bonifacio both Rate Tower 2, Capital House, and Park (PHP/sqm/mo.) Triangle Corporate Plaza North registered vacancies below 4%. Grade A buildings predominantly Makati 1,308.44 3.48% Tower in Fort Bonifacio and Parkway Corporate Center in led market activity in both districts. Fort The Curve in Fort Bonifacio 1,082.15 3.97% Alabang. Bonifacio recorded an absorption of about Alabang 741.08 2.13% In the next two years, much of the 13,500 sq.m. in office space since upcoming office supply will come its opening last quarter. Current Quezon City 843.90 9.90% from Ortigas with the completion of vacancies in Fort Bonifacio’s prime SM-KL Tower (89,000 sq.m. in and Grade A buildings were at Ortigas 675.11 6.70% GLA) and SM Mega Tower (96,000 5.55% and 3.13%, respectively. sq.m. in GLA) in 2019 and Makati’s prime and grade A Bay Area 761.73 2.21% Corporate Finance Plaza, a 61- buildings, on the other hand, stood Source: Santos Knight Frank Research storey skyscraper slated to supply at 5.24% and 2.11%, respectively. an estimated 120,000 sq.m. of Further north, Ortigas and Quezon FIGURE 1 office space in 2020. City started 2018 with vacancies of YoY New Supply (sq.m.), Net 6.70% and 9.90%, respectively. Absorption (sq.m.), and Vacancy Net Absorption and Vacancy Rates Rating The Metro Manila office market Average Monthly Rents 250 6% jumpstarts 2018 with a net absorption of 72,220 sq.m. of office Metro Manila’s weighted average 200 5% space following the six-digit record- lease rate got a boost of 9.11% 4% breaking take-up in the last quarter. year-on-year (YoY) rising to

Thousands 150 PHP984.93 per sq.m. in the first 3% Among the central business quarter of the year. 100 2% districts (CBD), Fort Bonifacio and Bay Area exhibited the most leasing Makati CBD still commanded the 50 1% activity in the first quarter of the highest lease rate among the Metro 0 0% year, with a net absorption of Manila CBDs at PHP1,308.44 per Q1 Q1 Q1 Q1 Q1 66,801.94 sq.m. and 24,859.15 sq.m., up 3.85% from the same 2014 2015 2016 2017 2018 sq.m., respectively. Both CBDs had period in the previous year. New Supply Net Absorption significant increases in their net Fort Bonifacio stood out in the first Vacancy Rating take-up numbers compared to the quarter for registering the highest Source: Santos Knight Frank Research same period last year. YoY rental growth of 13.86%. The Overall Metro Manila vacancy addition of two prime-grade buildings has significantly pulled up FIGURE 2 increased to 4.89% in the first quarter, with occupied space now the weighted average rent in the Weighted Average Lease Rate district to PHP1,082 per sq.m., (PHP/sq.m.) vs Growth Rate standing at over 4.67 million sq.m. coming from 4.60 million in the last following Makati in the lease rate quarter of 2017. By building grade, rankings. ₱1,100 4% vacancy for Prime buildings is at A minimal movement in average 5.38% and 4.47% for Grade A ₱1,000 rents was noted in the Ortigas CBD. 3% buildings. Rents for Grade A space remained ₱900 2% Alabang registered the lowest between PHP500 to PHP900 per ₱800 vacancy in the first quarter at sq.m. 1% ₱700 2.13%, largely attributed to a rise in Rising rents were likewise evident in gaming locators. With the dwindling ₱600 0% the other Metro Manila business Q1 Q1 Q1 Q1 Q1 supply of workspace in the usual Average rents in the business 2014 2015 2016 2017 2018 districts of choice, gaming firms districts of Quezon City increased have been looking into more Weighted Average Rent (PHP) by an aggregate of 11.39% YoY non-traditional areas to PHP843.90 per sq.m. while Rental Growth Rate (%) Source: Santos Knight Frank Research

4 The Glaston Tower

Source: Ortigas & Company the Bay Area’s average asking lease the resale price of the pre-selling Outlook rate was at PHP761.73 per sqm, up prime office building Alveo Financial by 5.71% YoY. Tower range from PHP245,000 to Looking ahead, lease rates are also PHP265,000 per sq.m. forecasted to continue rising driven YoY rental growth rates in Alabang by the strong optimism in the have consistently increased since In the Ortigas CBD, the selling price Philippine property market. Districts Q1 2017. Average lease rate in the of office units in older buildings go targeting and accommodating district increased by 10.66% YoY to as low as PHP80,000 per sq.m. gaming locators are expected to PHP741.08 in the first quarter of However, newer buildings are increase their asking rents for office 2018. commanding higher prices, as units space with the perceived high are quickly taken up. One of the demand. Offices for Sale newest developments in the area, The Glaston Tower of Ortigas and Banking on the country’s young The continuous rise in rents has Co., presently sells at PHP177,000 and skilled population which caused more and more developers per sq.m. continues to attract investors, to consider selling office spaces in outlook on the Metro Manila office various stages (pre-selling, Selling prices of office space in Fort market remains bullish. With much construction and post- Bonifacio range from PHP150,000 supply coming in, areas with development). Demand further to PHP280,000 per sq.m.. Most of weaker demand may experience strengthens as buying instead of the preselling buildings are already softening in rents, although not renting office spaces tends to lower sold out. Units for resale in High foreseen to continue in the long down overall cost implications to Street South Corporate Plaza are run. Rents are still not as the occupiers. priced around PHP 275,000 per negotiable and this position is sq.m. expected to be sustained all The capital values of existing offices throughout the year. A large portion in the Makati CBD are estimated of the upcoming office supply is from PHP120,000 to PHP200,000 already pre-committed, signifying per sq.m. In addition, that the market is ready to pounce on the additional spaces for hand over in the coming periods.

5 DEMAND AND SUPPLY PRESSURES CONTINUE TO PUSH RESIDENTIAL PRICES UPWARDS RESIDENTIAL | Chinese market further boosts investment demand

The sustained momentum of the capacity. Moreover, residential Philippine economy has largely properties in the Philippines are TABLE 3 influenced the performance of the relatively cheaper than properties Q1 2018 Residential local condominium sales market in abroad. USD1 Million can buy 170 Condominium Sales Market the first quarter of 2018. Residential sq.m. of residential condominium Statistics demand is consistently expanding, space in the Philippines compared Avg. justifying regular price increases to just 66 sq.m. in Beijing. Units Area Monthly across residential classifications in Sold (%) the Metro. In addition, prices of residential Take-up properties across the Metro Investor demand became more continue to soar in the first quarter Makati City 94.1% 15.8 evident as a major demand driver of backed by strong demand. the residential condominium sector, However, the supply environment Taguig City 94.7% 10.4 with the massive investment places an upward pressure on the activities pushing the demand for price of condominiums in Metro Quezon City 87.8% 32.2 residential properties at a Manila, which includes the limited significantly faster pace. Overall available inventory, fast progress of monthly take-up in Metro Manila development, and the presence of Ortigas* 85.8% 43.3 during the quarter averaged 27 notable residential brands in the units coming from 22 and 18 units area where a project is located. Alabang 73.7% 10.5 in the previous quarter and year, respectively. In terms of unit Among the central business Bay Area 98.6% 50.0 absorption, approximately 91% of districts (CBDs), Taguig City and METRO the total supply has already been Bay Area recorded the highest 90.7% 26.7 MANILA absorbed by the market in the first year-on-year (y-o-y) increase in property prices with 47% and 30% quarter. This is a notable *Includes parts of Mandaluyong, Pasig, and improvement from the previous San Juan quarter’s record of 89% and last Continued on Page 8… Source: Santos Knight Frank Research year’s figure of 76%. The robust demand is attributed to the rising interests on residential FIGURE 3 properties coming from Chinese Indicative Average Selling Prices per Area (PHP/sq.m.) nationals, which is a product of the rekindled ties between the 600,000 Philippines and China. Developers credited strong sales take-up to the ₱480,000 said foreign market, stemming from 500,000 the expansion of Chinese business ₱418,000 process outsourcing (BPO) firms 400,000 and offshore gaming operators, and underpinned by the booming 300,000 ₱264,000 gaming and entertainment industry in the country. ₱197,000 ₱199,000 200,000 ₱178,000 Aside from business expansions, Chinese nationals are likewise 100,000 ₱137,000 ₱123,000 attracted to the huge projected ₱90,000 ₱82,000 ₱64,000 ₱71,000 returns of condominium investment 0 in the country. The Chinese have a Makati City Taguig City Quezon City Ortigas Alabang Bay Area large buying and investment Source: Santos Knight Frank Research

6 RETAIL DEVELOPERS FURTHER PROMOTE RETAIL AS AN EXPERIENCE RETAIL | Mall renovations display retail market strength and potential

Metro Manila shopping mall TABLE 4 developers are quick in responding Q1 2018 Retail Data to the increasing demand of mall goers for a different and brand-new Total GLA Available Space Lease Rate Area Vacancy Rate shopping and retail experience. This (sq.m.) (sq.m.) (PHP/sq.m.) is partly due to the imminent threat of e-commerce and online Quezon City 934,451 5,011 1,533 0.54% shopping but mostly because of the evolving lifestyles of the consumer Ortigas 674,073 12,590 1,325 1.87% market.

Robinsons Galleria in Makati 373,071 6,853 1,600 1.84% recently unveiled the renovated and expanded wings, and food court Fort Bonifacio 376,483 3,232 1,508 0.86% area of its more than 20-year-old shopping mall. Both the mall façade and interiors were likewise Bay Area 508,600 3,350 1,300 0.66% upgraded to give the guests a totally different feel. At present, the Alabang 354,527 10,743 1,100 3.03% scenic elevators are being improved to complete the overall mall experience. Moreover, Total/Average 3,221,205 41,779 1,349 1.30% Samgyupsalamat and Cabalen are upcoming restaurants highly Source: Santos Knight Frank Research anticipated by the dining market.

The Shangri-La movie houses (Shang Cineplex) are presently Shangri-La Mall being renovated to boost the fun and entertainment aspect of the mall experience. New restaurants have already been added to increase the dining options available within the mall.

Overall retail space vacancy in the major Metro Manila malls is at an astounding 1.30% as of the first quarter of 2018. Average indicative lease rates range from a low of PHP700 per sq.m. per month to a high of PHP2,000 per sq.m. per month. Makati posted the highest retail rents at an average of PHP1,600 per sq.m. per month. Conversely, Alabang’s average rents were recorded at PHP1,100 per sq.m. per month, the lowest Source: Santos Knight Frank Research average amongst the Metro Manila CBDs.

7 INDUSTRY SECTOR LARGELY CONTRIBUTING TO OVERALL ECONOMIC GROWTH INDUSTRIAL | Continuous Rise in Industrial Property Demand

As in the previous periods, the industry sector recorded the highest Light Industry and Science Park growth rate among the major economic sectors in the first quarter of 2018. Industry growth was faster at 7.9% compared to the 6.5% growth in the same period of last year. The growth of the sector was mainly driven by manufacturing.

The country’s sound macroeconomic fundamentals and favorable demographics continue to attract local and foreign investments resulting to a robust industrial sector. Moreover, as the retail market further expands, logistics, warehousing and manufacturing requirements correspondingly increase. In addition, the emergence of e- commerce has been recognized as a stimulus for higher logistics Source: Santos Knight Frank Research property demand. E-shopping has increased demand for warehousing and storage units, as online retailers In South Luzon, industrial lots are Proximity and availability of require more distribution space than selling from PHP3,300 to 7,000 per transport infrastructures are factors traditional retailers since they need sq.m.. On the other hand, land increasing the attractiveness of an to individually pack items per client. selling prices in North Luzon range area as an industrial site, especially from PHP3,600 to PHP4,500 per with the continuous upsurge in fuel The dwindling supply of sq.m. while land lease prices go prices. Upcoming road networks, warehouses and industrial from PHP20 to PHP45 sq.m. per such as CALAX and Metro Manila properties within Metro Manila still month. Rental rates of factory Skyway 3, are expected to further presents a dilemma to retailers and buildings vary from PHP120 to 280 boost desirability and operations of an opportunity to industrial space per sq.m. per month in Cavite, industrial zones outside Metro developers at the same time. PHP170 to 270 per sq.m. per Manila. Cavite, Laguna and Batangas month in Laguna and PHP170 to (South Luzon), and Pampanga, 300 per sq.m. per month in Tarlac and Bataan (Central Luzon) Batangas. In the Pampanga already enjoy increased interests Economic Zone, 6 factory buildings from investors due to their proximity are available for lease at a rate of to the capital. PHP125 per sq.m. per month.

8 Continued from Page 2 Cover Continued from Page 5 Residential

42% of the Filipino attitude survey growth rates, respectively. The respondents cited that their ultra- strong demand and supply high net worth clients’ exposure to pressures in these areas led to property had increased in 2017. further price increases in order to Moreover, 52% disclosed that their be at par with the prices of other UHNWI clients have property developments in the area. In the investments, excluding primary Bay Area, for instance, projects that residence and secondary homes, in were launched at a middle-income the Philippines and 20% outside the price of PHP120,000 per sq.m. for country. Furthermore, 45% revealed a 24 sq.m. unit now sells at a luxury that their Filipino UHNWI clients are price of approximately PHP190,000 thinking of investing in a property, to PHP200,000 per sq.m.. Taguig other than their primary residence City and Bay Area prices now range The Royalton and The or second home, in the Philippines from PHP137,000 to PHP480,000 Imperium and 21% outside the country, over per sq.m. and PHP123,000 to the next few years. PHP264,000 per sq.m.in the said areas, respectively. Source: Santos Knight Frank Research On the average, Filipino UHNWIs own 2 to 3 homes. In addition, 28% Property prices in Makati City the city’s average price growth of of the relationship managers increased by 18% y-o-y, with 15%. The worsening traffic situation surveyed shared that their Filipino present prices ranging from in Metro Manila compelled UHNWI clients are planning to buy PHP90,000 to PHP418,000 per commuters to seek living spaces an additional home within the sq.m.. The growth was mainly due proximate to their workplaces. country and 15% outside the to the escalating prices of luxury country in the next 12 months. condominiums in the area. Makati’s Strong demand for middle-income luxury segment experienced a 36% condominiums in the nearby fringes The market for luxury Philippine growth in prices. In Quezon City, of Alabang and Ortigas pushed properties also includes UHNWI however, it was the affordable property prices in these business from foreign countries. The Wealth condominium segment that districts to grow by 15% and 8% y- Report 2018 reveals that UHNWI contributed largely to the city’s o-y, respectively. People continue from Malaysia, Singapore and price growth. Prices under the to move away for the city cores as South Korea presently own property affordable segment faced a y-o-y the number of affordable options investments in the Philippines, as growth of 23%, which is higher than within the city keep on diminishing. the Philippines ranked 13 out of 176 countries where Asians own property investments. Moreover, affluent individuals from Hong Kong signified intentions of further investing in the Philippines. Furthermore, South Korean UHNWI expressed the high possibility of buying an additional home in the Philippines over the next 12 months.

Data from The Wealth Report 2018 uncovered various opportunities that investors and property developers can capitalize on. The residential sector presents numerous golden prospects. However, the retail, office, logistics & warehousing, infrastructure and healthcare sectors are particularly becoming of more interest to the present and future real estate market players.

9 MANAGEMENT

Rick Santos Chairman and CEO Manila Office +63 917 528 3687 10th Floor, Ayala Tower One & Exchange Plaza [email protected] , Makati City, 1226 OCCUPIER SERVICES AND t: (632) 752-2580 / 848-7388 COMMERCIAL AGENCY f: (632) 752-2571 w: www.santos.knightfrank.ph Joey Radovan Vice Chairman +63 920 906 7517 [email protected] Cebu Office Suite No. 30, Regus Business Center INVESTMENTS AND CAPITAL MARKETS th 11 Floor, AppleOne Equicom Tower Calvin Javiniar Mindanao Avenue corner Biliran Road Senior Director Cebu Business Park, Cebu City 6000 +63 917 574 3058 [email protected] t: (6332) 318-0070 / 236-0462 VALUATIONS

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RESIDENTIAL SERVICES

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ASSET SERVICES GROUP

Nelson Del Mundo Vice President +63 917 574 3046 [email protected]

PROJECT MANAGEMENT

Allan Napoles Executive Director Santos Knight Frank Research provides strategic advice, consultancy services and forecasting to a +63 917 5277638 wide range of clients worldwide including developers, investors, funding organizations, corporate [email protected] institutions and the public sector. All our clients recognize the need for expert independent advice customized to their specific needs. RESEARCH & CONSULTANCY

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Metro Cebu Market Metro Manila The Wealth Report Global Cities Update 2H 2017 Market Update 2018 The Report 2018 Q4 2017

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