RESEARCH

METRO MARKET UPDATE 1H 2017

METRO CEBU REAL ESTATE SECTOR REVIEW SUSTAINED CONFIDENCE IN AS REAL ESTATE INVESTMENT DESTINATION OF CHOICE

Although facing various risks and threats, investor confidence in Metro Cebu remains unshaken. Across all sectors, the Metro Cebu numbers and indicators continue to improve showing no signs of slowing down.

Office Market Co-working Space Metro Cebu remains as an attractive inbound investment destination, especially for BPO companies which are eager to capitalize on the Cebu’s favorable demographics, competitive labor cost and continuous infrastructure development. has moved out of the top 10 Super Cities of the recently released Tholons Services Globalization Index 2017. Nevertheless, low vacancy, high absorption and increasing lease rates indicate sustained BPO demand. The visualized impact of the Tax Reform Bill has been causing worries and concerns to individuals and businesses. The removal of BPO incentives is being Source: Santos Knight Frank Research considered as a major threat to the competitiveness of Cebu as a co-working spaces already entered the founder of Performance 360 destination of choice for Metro Cebu, offering alternatives to Call Center and BPO Services: outsourcing companies. However, traditional office spaces. Some of “Demand for outsourcing jobs is the working population’s high the more popular co-working continuously increasing, however levels of English proficiency and spaces are A SPACE Cebu, the problem of most outsourcing the labor force’s flexibility to Regus, In.dus.tri.Room, Workplace firms is manpower and availability shifting work hours are perceived Café and iioffice Cebu. Further to of ready-made facility.” This is as the more critical measures used this, the Cebu Chamber of particularly true in the country side. by BPO companies to determine Commerce and Industry (CCCI) where to capitalize, invest and recently announced its desire to operate. Moreover, revenue and push for the establishment of more Residential Market income potential of investing in co-working spaces, regarding Cebu remain strong, backed by the Cebu as the home of great minds The commanding residential country’s sound macroeconomic in the creative industry. demand in Cebu further supports fundamentals. the attractiveness of investing and iCafe is another new concept in locating in the area. A local In addition, the Cebu office sector Cebu. Internet cafes are converted Cebuano developer, Sterlingland continues to display robustness to call centers. Owners are being Residences and Development Inc., with the introduction of innovative enticed to offer their facilities for concepts. Similar to Metro Manila, rent by outsourcing firms. Quoting Continued on Page 9…

SNAPSHOTS | Economic Indicators

6.5% y-o-y 2.8% (Jul 2017) 4.7% (Jan-Jun 2017) 5.6% (Jun 2017) 2.15% (Jul 2017) 49.86 (Q2 2017) Q2 2017 GDP Inflation Rate OFW Remittances Avg. Bank Lending 91-day T-Bill Avg. PHP-USD

2 ROBUSTNESS MARKED BY LOWERING VACANCY AND RISING RENTAL RATES Office | Crossing out alarm and anxiety

The Metro Cebu Office market The recorded Weighted Average TABLE 1 continues to perform remarkably Lease in the first half of 2017 was with vacancy decreasing to pegged at PHP530 per square 1H 2017 Office Data 10.33% in the first half of 2017 meter per month. Lease Rates at Weighted Avg. Vacancy from 16.36% in the same period the range Lease Rate Rate last year. The vacancy rate from PHP450 per square meter per (PHP/sqm/mo.) likewise dropped from the 12.86% month to PHP800 per square Cebu Business 550.57 5.12% recorded at the end of 2016. meter per month. In Cebu IT Park, Park lease rates are from PHP475 per Cebu I.T. Park 542.40 1.75% Presently, Cebu IT Park has only square meter per month to Fringe Areas 496.18 22.10% 3,580 square meters of office PHP800 per square meter per space available for occupancy. In month. Moreover, rates in the Source: Santos Knight Frank Research close proximity to Cebu IT Park is fringes of the two areas fall the Filinvest Cyberzone Cebu between PHP350 per square buildings. The first tower has an FIGURE 1 meter per month to PHP825 per Weighted Avg. Lease Rates additional office supply of about square meter per month. 2,000 square meters of vacant (PHP) vs. Rental Growth Rate space that can be leased out at a Around 295,000 square meters of (%) rate of PHP590 per square meter office stock are to be added to the 540 10% per month. present Cebu office market from 520 8% 2017 to 2022. 140,000 square 500 6% In the first half of 2017, about meters of this number are 3,656 square meters of new supply 480 4% expected to be completed and 460 2% was added to the Metro Cebu made available for lease this year 440 0% inventory. The additional leasable alone. Some of the upcoming 420 -2% area was supplied entirely by supply in the development pipeline 400 -4% Buildcomm Center of Buildcomm are Philam Life Center Cebu, Horizon Holdings, Inc. The Filinvest Cyberzone Cebu - Tower

Buildcomm Center is a 14-storey 2, BPI Corporate Center, Pacific

H1 2014 H1 H1 H1 2012 H2 2012 H1 2013 H2 2013 H2 2014 H1 2015 H2 2015 H1 2016 H2 2016 H1 2017 high building in Cebu Business World Tower, Oakridge Building 2, Park with 6 floors dedicated for Weighted Average Lease Rate office use. The building was Continued on Page 9… Growth Rate launched in the first quarter of Source: Santos Knight Frank Research 2017 and has a building footprint of around 600 square meters. The asking monthly rental rate for FIGURE 2 space in the building is currently at Net Absorption (sqm) vs. Vacancy Rate (%) PHP550 per square meter per month. 120,000 18% 16% 100,000 The Weighted Average Lease 14% rates in Metro Cebu have been 80,000 12% constantly growing annually at a 10% 60,000 rate of 2% to 3%, creating 8% optimism and confidence that 40,000 6% 4% ventures in office leasing will be 20,000 profitable. Additionally, this upward 2% trend signifies that demand is high 0 0% and increasing rates will not H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 negatively influence existing and potential occupiers and lessees. Net Absorption Vacancy Rate Source: Santos Knight Frank Research

3 CONFIDENCE IN RETAIL INDUSTRY REINFORCED Retail | Smaller retail formats dominate the market

The Metro Cebu retail market branch in the . This Cebu City, City and remains upbeat, backed by well-known cosmetics distributor Lapu-Lapu City remain as the positive economic outlook and brand in Singapore offers various major growth drivers for the sound macroeconomic beauty, body and skin care industry but with presumption of fundamentals. At the start of 2017, inflation rate in the region was products. spill over to other areas outside urban hubs. Infrastructure projects pegged at 2.6% with the gradual Retail openings of brands under decrease in consumption are likewise being ramped up to the food and beverages industry expenditure following massive address increasing vehicle traffic. consumer spending during the accounted for about 43% of the Expressways, railway project and latter part of 2016. Moreover, total Metro Cebu retail openings in cable car systems are being household consumption continued the first half of 2017. Brands under proposed together with other to rise as tourist arrivals and OFW clothing apparel and other property developments in various remittances increased over the industries such as consumer areas within Metro Cebu. Investors holidays. electronics, cosmetics and and developers are eagerly Retail expansions in neighborhood homeware and department stores anticipating completion of these malls, district malls and retail strips formed the remaining percentages projects in 2022. dominated the market as of the total retail openings. conducive business environment in Approximately 200,000 square the area further boosted business FIGURE 3 confidence in the local market. meters of additional shopping mall Growth in the industry was also gross leasable area is expected 1H 2017 Cebu Retail complemented by the sustained until 2019. Retail developers have Openings by Sector momentum in the BPO industry been optimistic of the retail and increasing investor interests. industry in Metro Cebu backed by Vacancy rates in super regional strong market trends. Retail giant, and regional malls were recorded Metro Gaisano, recently opened its at around 5% while malls in 51st mall in Mandaue City. It *Others smaller formats are at full wishes to further expand coverage 29% Food and occupancy, if not, having very few by strengthening ties with Ayala Beverage 43% available spaces left. With minimal Land and other major developers. increases in rental rates due to aggressive retail expansion, retail Upcoming retail establishments in rental rates of super regional and Metro Cebu include Il Corso by Clothing regional malls ranged from PHP Apparel Filinvest, which will add a Gross 28% 800 to PHP1,200 per square meter Leasable Area (GLA) of 36,000 per month. Rental rates in square meters to the total retail neighborhood malls, district malls supply. Central Bloc Mall, with a and retail strips, on the other hand, *Cosmetics, Consumer Electronics and ranged from PHP 350 to PHP900 GLA of 43,000 square meters is Homeware and Department Stores per square meter per month. another district mall that will cater Source: Santos Knight Frank Research to the future retail expansions in Expansion of brands such as New Cebu. Il Corso and Central Bloc Era, Parfois, Yves Rocher, Salad Mall are scheduled to be delivered Stop, Best Ramen Sach and Tim in 2018. Ho Wan was noted in the Metro Cebu retail portfolio. In addition, Smaller retail formats likewise retail stores carrying brands such dominated the Cebu retail market. as Oppo, Red Lizard and Cold Accessibility is the main value Stone are still anticipated to be unveiled in the coming quarters. supporting marketability and competitiveness of such formats. Perfect Secret, one of the newer Usual tenants are under food and entrants, was recently opened and beverages, health and wellness launched in SM Seaside, its first and consumer services.

4 REINFORCING TOURISM GROWTH THROUGH EXTENSIVE PUBLIC-PRIVATE MEASURES Hospitality | Metro Cebu maintains visibility in tourism and investment radar

Dusit Thani Resort Mactan

Source: Santos Knight Frank Research

Metro Cebu’s tourism airlines (Sichuan Airlines, Air competitiveness is set on an China, Xiamen Airlines) created upward trajectory as it continues to additional flights to enable the Toyoko Inn Hotel attract a large number of foreign Chinese market to land directly in and local tourists. According to the Central Philippines. These direct Source: Santos Knight Frank Research Department of Tourism (DoT), international services are expected visitor arrivals to the country grew to boost not only tourism but also from 80% to 95%. by 14% in the first 5 months of the investments in Cebu and in the year from the 2,519,300 tourists rest of the southern region. This is The success of such events documented a year ago. The concurrent with the bolstered Cebu’s conduciveness Mactan-Cebu International Airport administration’s stance of as an ultimate travel and MICE (MCIA) welcomed about 19% of strengthening the Philippines’ (meetings, incentives, the total visitor volume from economic and business ties with its conferences, and exhibits) January to May 2017. This Asian neighbors, particularly destination. This will be further strengthened passenger traffic at China. complemented by the additional the MCIA was brought about by the visitor traffic that is expected to new international and local routes Aside from the new flights that materialize from the modernization to and from Cebu that were made Cebu more accessible to of the MCIA. mounted the previous year. Data tourists, several big-ticket events released by the airport’s operator, were also held in the province Anticipating the additional demand GMR-Megawide Cebu Airport during the period which greatly for accommodation facilities, Corporation, revealed that contributed to the strong influx of several hotels targeting both passenger traffic increased by 16% visitors. The Festival and leisure and business travelers from January to March 2017. the pre-pageant of the Miss opened their doors to the market. Domestic passenger volume went Universe 2016 were conducted at Toyoko Inn Hotel in Mandaue City, th up by 5%, while international the start of the year. After 4 the 266 branch of Japan-based arrivals surged by 42% in the same months, the Association of South Toyoko Inn Corporation, unveiled period. East Asian Nations (ASEAN) 583 new hotel rooms. In Cebu City, conducted its 2017 Summit Mezzo Hotel and Summit Galleria The double-digit growth of Meetings in Cebu in which more Cebu added a total of around 317 international passengers was than 200 delegates were reported rooms to the local hotel supply, backed by new flights launched in to have attended. These events with rooms having average daily the first half of the year. Flag bode well for Cebu’s hospitality rates ranging from PHP3,600 to carrier, Philippine Airlines (PAL), industry as recorded occupancy PHP6,100 per night. along with several Chinese rates of hotels and resorts ranged Continued on Page 9…

5 INVESTOR INTERESTS DIRECTS METRO CEBU INDUSTRIAL SECTOR PERFORMANCE Industrial | Increasing foreign investments signifies sustained market confidence

Metro Cebu Industrial Sector industrial lots in Cebu Light FIGURE 4 continues to display buoyancy in Industrial Park are pegged at Central GRDP the first half of 2017. Investment around PHP6,500 per square Growth Rate outlook stays positive supported by meter per month. In addition, Land the continuous inflow of foreign Lease Prices at West Cebu 14.0 investments. In the first quarter of Industrial Park falls within PHP17.5 12.5 2017, approved foreign to PHP20 per square meter per 12.0 investments for the whole region month. amounted to PHP13.62 billion, Infrastructure development 10.0 9.4 which is significantly higher 8.8 remains vital due to projected compared to last year’s PHP1.77 7.8 logistic savings. Major 8.0 7.4 billion. Majority of the investments 6.8 were in manufacturing and real infrastructure projects in the pipeline are still highly anticipated, 6.0 estate activities. 4.9 especially the Metro Cebu Investor interests on manufacturing Expressway. Easy access to major 4.0 plants and warehouses rose, cities in Cebu, Mandaue, Lapu driving the local government to Lapu and Talisay will drive 2.0 establish new economic zones and development to other rural areas industrial estates in the area. and increase Metro Cebu’s 0.0 Discussions on the revival of the attractiveness to investors.

Cebu Economic Development Moreover, lined-up port

2011 2012 2013 2014 2015 2016 Zone (CEDZ) further strengthened development projects are expected 2010 the growing demand. The CEDZ to further boost trade and Source: Philippine Statistics Authority will cater to Public-Private commerce. Partnership geared towards the development of economic zones in the area. Mandaue City is viewed to be one of the most conducive areas for industrial expansion in Metro Cebu. Bogo, Carmen, Cordova, Lapu Lapu, Minglanilla, Balamban (Cebu City), Talisay and Toledo are other notable areas. Proposed Special Economic Zones comprise of tourism and agri-industrial economic zones, institutional, commercial and industrial zones and medium industrial parks.

A number of manufacturing spaces and warehouses in Mactan Economic Zone and Cebu Light Source: Google Images Industrial Park are still available. Various companies are presently looking for industrial spaces with renewed facilities. This is expected to drive vacancy rates up, although at minimal levels. Selling prices of

6 UNSERVED DEMAND BOOSTS TAKE-UP OF NEWLY LAUNCHED CONDOMINIUMS Residential | Positive spillover effects from sustained market sentiment

Metro Cebu’s real estate industry in Cebu I.T. Park, phase one of 38 Take-up of high-end projects is is showing no signs of dwindling. Park Avenue will include a high- anticipated to further soar in the Market sentiments, particularly on rise residential tower and a retail coming periods as Hongkong Land the residential condominium component while phase two will be and Taft Properties are expected to sector, remained positive following the future site of an office building. launch the second phase of the remarkable recovery of Central For Phase 1, out of the 745 in Mandaue. This Visayas’ Gross Regional Domestic residential units that was floated in project will cater to the Product (GRDP) in 2016, which the market, about 39.7% units are continuously growing interests grew by 8.8% as compared to its sold to date, in which majority are from local and foreign investors 4.9% growth in 2015. studio units. This brisk take-up and end-users. Currently, the first Furthermore, market players went drove the performance of high-end phase is 99.7% sold. The floated on with their activities despite the projects to an average of 13 units inventories were immediately sold geopolitical concerns in the region per month from 6 units per month out within 10 months after the and the poorer ranking of Cebu in in the same period of the previous project’s launch. The remaining Tholons’ recent list of top 100 year. available units are reopened outsourcing destinations. As a inventories. result, take-up for residential units further soared in the first half of … 2017. FIGURE 5 FIGURE 6 Allocation of Condominiums Average Monthly Take-Up Among the residential per Classification Rates Per Classification classifications, affordable ones 40.0 continued to outperform the other 34.5 condominium types with a 11.1% 35.0 recorded average take-up of 35 30.0 units per month from only 8 units 35.6% 25.0 per month in the same period last 20.0 year. This surge in demand was 12.7 due to the launching of Taft 15.0 Properties’ Symfoni at Nichols - 53.3% 10.0 5.8 Bossa Tower in Cebu City, 5.0 designed to cater to the huge 0.0 unserved demand coming from the High-end Mid-end Affordable Affordable Mid-end High-end completely sold first building, Alto Source: Santos Knight Frank Research Source: Santos Knight Frank Research Tower. It was reported that approximately 65.4% of the units in Bossa Tower already received FIGURE 7 Letters of Intent (LOI) from Indicative Average Prices per Classification (PHP/sqm) Chinese investors prior to the tower’s launch. These LOIs were 175,000 158,447 immediately converted into sales 150,000 129,851 upon the project’s official launching last June 2017. 125,000 100,000 82,627 Cebu Landmasters likewise took 97,395 advantage of the opportunity 75,000 83,981 presented by the unserved 50,000 54,383 demand for high-end 25,000 condominiums, particularly those situated within the central business 0 Affordable Mid-end High-end districts (CBDs) of Cebu. Located Source: Santos Knight Frank Research

7 In the middle-income segment, demand for condominiums offering TABLE 2 cluster-type concepts has been 1H 2017 Property Turnovers constantly growing. Filinvest Land, Inc. took advantage of this by Residential Condominium Developer Location Inventory recently launching Building 9 of the City Soho Gold Peach Properties Cebu City 81 One Oasis project in Cebu City. The Trillium Residences RCAB Properties Cebu City 135 The first four buildings of the Amalfi Oasis - Bldg. 3 Filinvest Land Cebu City 146 project were already sold out. Additionally, since its launch last Mivesa Garden Residences - Bldg. 3 Cebu Landmasters Cebu City 180 January 2017, about 93.1% of Worldwide Central Sundance Residences Cebu City 305 Building 9 was already been taken- Properties up by a mix of investors, end-users Solinea Tower 1 - Cyan Alveo Land Cebu City 591 and overseas Filipino workers Avida Towers Riala - Tower 1 Avida Land Cebu City 621 (OFWs). Avida Towers Riala - Tower 2 Avida Land Cebu City 621 Despite the brisk sales of One Oasis - Building 9, ready-for- Source: Santos Knight Frank Research occupancy (RFO) condominiums, which constitute about 59.7% of The increase in Metro Cebu the total middle-income property prices, backed by real and condominium supply, continued to rising demand, validates the huge weigh down the overall potential for capital appreciation in performance of the middle-income the area. Coupled with the lined-up segment. RFO units had an infrastructure projects that aim to average take-up of 3 units per improve economic and business month, which is significantly lower activities across all industries and compared to pre-selling units that sectors, market players are averaged 10 units per month. As a expected to remain optimistic and reflection of the changing continue to consider Cebu as a top preferences of the middle-income choice, next to Metro Manila, for market, overall monthly take-up for residential investments. the segment grew at a slower pace of 6 units per month from an average of 5 units per month in the first half of 2016. Property prices also continued to rise as a result of the growing demand for residential condominiums. In Cebu City and Mandaue, indicative average selling prices increased modestly by 2.7% and 1.5% year-on-year (year-on-year) from PHP104,092 per square meter and PHP87,345 per square meter, respectively. Indicative average selling prices in Lapu-Lapu City, on the other hand, grew by 5.5% from PHP101,649 per square meter in the same period last year. Condominiums situated in the area are complemented by the city’s urban- resort come-on element calling for Solinea Tower 1 - Cyan Sundance Residences high selling prices. Source: Santos Knight Frank Research Source: Santos Knight Frank Research

8 Continued from Page 2 Cover Continued from Page 3 Office Continued from Page 5 Hospitality recently held a groundbreaking In support of the tourism industry’s event of its 25-hectare integrated backbone, property developers township project, Minglanilla started to integrate other tourist- Highlands. This residential attracting components aside from mountain resort project targets the the usual hotel concept. Robinsons middle-income market as well as Land Corporation (RLC) is set to overseas Filipino workers, bring Thailand-based global executives, and locals who are hospitality group, Dusit married to foreigners and International, to manage its hotel- expatriates. resort project in Mactan Island. By 2019, the beachfront hotel will be High-end and luxury residences equipped with 550 rooms, a luxury are also catching up in Metro spa, a fitness center, an executive Cebu. Premiere lounge, restaurant outlets with al- recognizes the fast-growing market Philam Life Center Cebu fresco and private dining, and a for luxury condominium residences 1,200-sqm infinity pool. as it sets to launch its newest Source: Santos Knight Frank Research luxury development, The Alcoves. Also banking on Mactan Island’s This will result to an inventory of potential, Udenna Development around 850 luxury residential units Tech Tower, Skyrise 4 Tower B, Corporation recently received the in Cebu. Aboitiz Land, Inc. likewise Mabuhay Tower, Grand Tower green light from the Philippine unveiled its 300-hectare mountain Cebu and The Space. Amusement and Gaming town development, The Foressa Corporation (PAGCOR) to develop project, which targets the Cebu Philam Life Center Cebu is one of a USD341-million integrated hotel high-end market. the most anticipated office and casino in a 12.5-hectare prime development in Cebu Business beachfront property at Punta Engaño. Aside from the casino,The Park. It will have a gross leasable Emerald Hotel and Resort Casino Hospitality Market area of around 18,000 square will be comprised of luxury hotels meters. Construction of the and villas, a convention center, a Resorts and hotel developers bank building is currently on-going and retail complex, specialty dining on the growing demand in the is expected to be completed this options, private residences, hospitality sector resulting from the third quarter of 2017. condotels, and a skydiving center. increasing number of local and The project is envisioned to be a international travelers. A Japanese With the continuous construction world-class leisure, residential and hotel chain, Toyoko Inn, recently activities and various project commercial destination in Central added 583 economy hotel rooms in launches, the Metro Cebu office Visayas, and is expected to plot Cebu in the Asian gaming and Mandaue City. The hotel owner market remains as an attractive investment field where the entertainment map. Its target identified Cebu as a promising completion is set 5 five years from potential of revenue and income investment destination attributable now. However, the casino, retail to Cebu’s apparent tourism growth. generation is evidently vast and complex, and hotels are expected The other existing hotels in Cebu unlimited. to open as early as 2019. reported that they are enjoying a relatively high occupancy rate all Bright prospects for the industry are foreseen as integrated year round. Most bookings were hospitality developments are to made by Russians, Chinese, come online in the coming years. Taiwanese, Australians and However, upholding Cebu’s current Americans. position in the playing field has now become a challenge to hospitality players. Tapping Cebu’s gaming and entertainment industry is gradually becoming a possible option for property developers in the hopes of sustaining the robust tourism and investment climate in the province.

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