Cebu City a Hub for Business Continuity

COLLIERS ANNUAL OFFICE | CEBU | RESEARCH | Q1 2020 | 25 JUNE 2020

CEBU CITY A HUB FOR BUSINESS CONTINUITY Joey Roi Bondoc Developers respond to office demand recovery as occupants decentralize and firm up business continuity plans Senior Manager | Research | Philippines +63 2 8858 9057 [email protected]

Insights & 2020–22 Recommendations H1 2020 Full Year 2020 Annual Average While we see a slower pace of > Colliers sees softer absorption in 2020 as leasing across the country in companies wait-and see due to the pandemic and lockdown. Colliers and the 2020, Colliers believes that Metro 2 Demand government project a recovery once market 26,900 sqm 55,000 sq m 119,300 sq m Cebu will likely be among the first conditions improve starting Q1 2021. locations to recover as it remains a preferred destination outside Metro Manila. > Completions in 2020 will likely slow due to construction delays. We see delivery picking Colliers recommends that up from 2021 to 2022 as developers respond developers tap our and Supply to a rebound in take-up and space delayed in 0 sqm 68,300 sq m 133,500 sq m government-projected recovery 2020 is completed during the period. in 2021 by: > Highlighting the availability of Annual Average HOH/ YOY / 1 Growth 2019–22 / PEZA and healthy spaces End H1 End 2020 End 2022 > Stressing property > In 2020, Colliers sees rents declining due to -0.4% -8.0% -0.7% management capabilities softer demand. We see rents recovering in amid the pandemic 2021 as leasing activity picks up and occupiers Meanwhile, occupants should: Rent respond to national and global recovery. PHP631 PHP583 PHP619 > Explore available space within integrated communities > We see vacancy rising in 2020 but this should -2.3pp +0.4pp -0.1pp > Consider Metro Cebu’s be tempered by muted office completions. advantages over other sites The recovery in absorption starting 2021 including global Vacancy should result in lower vacancy. 9.3% 12.0% 11.3%

competitiveness, availability Source: Colliers International. Note: 1 sq m = 10.76 sq ft. USD1 to PHP51 as of the end of Q1 2020. 1Philippine Economic Zone Authority (PEZA) proclaimed spaces of manpower, and access. where locators enjoy tax and non-tax incentives. 2Economic recovery to start in 4th quarter, Diokno says. Traditional includes companies in various sectors such as legal, engineering and construction, government agencies and flexible workspace operators. COLLIERS ANNUAL OFFICE | CEBU | RESEARCH | Q1 2020 | 25 JUNE 2020

RECOMMENDATIONS Highlight property management … Similar to what we see in Metro Manila, occupiers are now placing a Cebu as part of outsourcing firms’ business continuity plans (BCP) premium on the safety and quality of office spaces. The need to provide more office space per employee is likely to party drive demand over the next Colliers sees Metro Manila-based outsourcing companies aggressively 12 months. But aside from allocating larger spaces, Colliers believes that looking at diversifying their office footprint and establishing operations occupants are likely to prioritize sanitation, emergency preparedness, and outside Metro Manila. In our opinion, landlords in Cebu should design considerations (e.g. air circulation and glass ratio for natural sunlight). comprehensively assess the space requirements of outsourcing occupants planning to open shop or expand in Cebu city. In our opinion, spaces within …and safety of office space the Cebu IT and Business Park as well as their fringes are among the more attractive options due to availability of PEZA space. Colliers believes that the pandemic has only raised occupants’ demand for green and health office spaces. Firms need to look after the safety of Highlight availability of PEZA space employees and should consider allotting more space per employee and providing increased natural light. In our opinion, now is an opportune time One major reason why outsourcing firms continue to keep Cebu in their for developers to highlight their green5 and LEED-certified6 office spaces. investment radars is the availability of PEZA-proclaimed3 office space in Metro Cebu. About 111,000 sqmetres (1.2 million sqfeet) of new space due Occupy space within integrated communities from 2020 to 2022 is PEZA-proclaimed. Colliers sees the granting of PEZA proclamation to Abiathar Commercial Complex in Cebu, which covers One Colliers sees the demand for office space within business parks and their Montage building, further raising PEZA availability within Cebu Business Park peripheral areas rising especially when we believe market sentiment starts fringe in the next few years, which should benefit outsourcing occupiers. recovering in early 2021. Colliers expects Cebu IT Park and Cebu Business Park and their fringes to account for 77% of new supply from 2020 to 2022. Highlight Cebu’s advantage over other locations Cebu office supply, demand and vacancy, 2016-2022F Colliers believes that Cebu remains a preferred business destination outside Metro Manila due to its competitiveness in terms of manpower, Supply Net Take Up Vacancy Rate infrastructure, and cost of doing business. In Tholons’ 2019 survey of the 100 most attractive outsourcing sites in the world, Cebu ranked 12 4. Among 200,000 14.0% 12.3% 12.0% 12.0% Tholons’ criteria are talent, infrastructure, and innovation. 11.4% 11.6% 11.7% 11.3% 150,000 10.0% Assess ESLs’ office space requirements 8.0% 100,000 Colliers sees demand from online English as a Second Language (ESL) 6.7% 6.0% companies growing as a result of the COVID-19 pandemic. With global travel 4.0% restrictions, students from China, Japan and South Korea are likely to shift to 50,000 2.0% online education instead of undergoing an intensive physical classroom education in Cebu. We see this potentially increasing the office space - 0.0% requirements of ESL centres operating within Cebu IT and Cebu Business 2016 2017 2018 2019 2020F 2021F 2022F Parks. Colliers encourages developers to assess the office space Source: Colliers International. Note: 3Philippine Economic Zone Authority (PEZA) proclaimed spaces where requirements of these firms and be more proactive in responding to their locators enjoy tax and non-tax incentives. 4Tholons, Tholons Services Globalization Index, 2019. 5According to the World Green Building Council, a Green building reduces or eliminates negative impacts on our climate and office requirements. natural environment. 6LEED = Leadership in Energy and Environmental Design.

2 COLLIERS ANNUAL OFFICE | CEBU | RESEARCH | Q1 2020 | 25 JUNE 2020

Among the major outsourcing deals recorded in 2019 are Tech Mahindra, NEW SUPPLY TO DROP BY 50% Accenture, 24/7 In Touch and Google. In 2019, Metro Cebu’s office stock reached 1.17 million sq metres (12.5 Previously, the Department of Labor and Employment noted that the million sq feet), from 1.04 million sq metres (11.1 million sq feet) in 2018. A outsourcing sector keeps providing jobs amid the pandemic. The agency said combined 43% of the new supply in 2019 was completed in the Cebu IT and that new outsourcing jobs are likely to go to Cebu, among other locations8. Business Parks. These expansions should temper Cebu’s office vacancy, which we see Due to construction delays brought about by the pandemic and lockdown, dropping to 11.7% in 2021 from 12% in 2020. Colliers sees traditional and Colliers sees muted office completion in 2020. From our original projection outsourcing firms dominating office space take-up in 2020. of 129,000 sq metres (1.4 million sq feet), we see completion plummeting to Breakdown of Cebu office transactions, Q1 2020 only 68,300 sq metres (734,900 sq feet). New supply (sq m) and % of total new supply, 2020 to 2021 9% 26K | 10% 70K | 27% Orion Corporate Center Traditional Central Bloc 2 Skyrise 3B BPO Mabuhay Tower 2 22K | 9% 28% Mandaue Faustina Center 30K | 12% KPO Filinvest Cebu Cyberzone Cebu IT Park 62% F. Cabahug 49K | 19% Tower 3 CITP Fringe 1 Nito Tower Cebu Exchange (Phase 1) CBP Fringe JEG Tower 36K | 14% Cebu Business Park Johndorf Tower 24K | 9% Reclamation Area Grand Tower Cebu Latitude Corporate Center Condo Office Source: Colliers International Source: Colliers International. Scale: 1cm = 1km. RENTS TO RECOVER IN 2021 VACANCY TO DROP IN 2021 Colliers sees office lease rates in Cebu declining by 8% in 2020 before posting a 3% annual growth in 2021. In our opinion, the slowdown in office In 2019, prior to the COVID-19 pandemic, the IT and Business Process leasing is affecting not just Metro Manila but also key locations such as Cebu 7 Association of the Philippines (IBPAP) noted that the growth in employment and Davao. in the outsourcing sector was primarily due to more jobs created in outsourcing sites beyond Metro Manila, including Cebu. While investors take Colliers believes that a recovery in 2021 will likely hinge on Metro Manila- a wait-and-see stance and plan to revisit leasing options in the next three to based occupiers’ decisions to diversify locations and lease space in Cebu, six months due to the pandemic, we see the government-projected along with the overall expansion of national and regional economies in 2021 economic recovery in 2021 contributing to greater office space absorption in which should partly encourage traditional occupiers to take up new office Metro Cebu during the period. We see this trend continuing and this should space. raise Cebu’s proportion of Filipino outsourcing employees, which currently Overall, Colliers sees a quicker pace of rental recovery amongst buildings stands at about 10%. located in Cebu IT and Business park and their fringes as new and expanding Note: 7IBPAP is the umbrella association for the Information Technology and Business Process Management (IT- occupiers gravitate towards these locations. BPM) firm of the Philippines. 8Manila Bulletin, DOLE Sees Resurgence of BPO Jobs, 2020 3 Primary Author: For further information, please contact:

Joey Roi Bondoc David A. Young Senior Manager | Research | Philippines Chief Operating Officer | Philippines +63 2 8858 9057 +63 2 8858 9009 [email protected] [email protected]

Contributors: Richard Raymundo Managing Director | Philippines Donica Cuenca +63 2 8858 9028 Research Analyst | Research | Philippines [email protected] +63 2 8858 9068 [email protected]

Martin Aguila Research Analyst | Research | Philippines +63 2 8863 4116 [email protected]

About Colliers International Colliers International (NASDAQ, TSX: CIGI) is a leading real estate professional services and investment management company. With operations in 68 countries, our more than 15,000 enterprising professionals work collaboratively to provide expert advice and services to maximize the value ofproperty for real estate occupiers, owners and investors. For more than 25 years, our experienced leadership, owning approximately 40% of our equity, has delivered compound annual investment returns of almost 20% for shareholders. In 2019, corporate revenues were more than $3.0 billion ($3.5 billion including affiliates), with $33 billion ofassets under management in our investment management segment. Learn more about how we accelerate success at corporate.colliers.com, Twitter or LinkedIn

Copyright © 2020 Colliers International The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made toensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. COLLIERS ANNUAL RESIDENTIAL | CEBU | RESEARCH | Q1 2020 | 25 JUNE 2020 OPPORTUNITIES FOR CEBU RESIDENTIAL

Joey Roi Bondoc DEVELOPERS AND INVESTORS Senior Manager | Research | Philippines Property stakeholders in Metro Cebu line up efforts to recapture demand in 2021 +63 2 8858 9057 [email protected]

2020–22 Insights & 2019 Full Year 2020 Annual Average Recommendations > Colliers sees residential demand declining in 2020 as a result of the COVID-19 pandemic. Colliers sees muted residential Economic contraction and lower remittances completion and take-up in Metro Demand from OFWs are likely to soften residential 9,000 units 7,000 units 7,000 units Cebu in 2020 due to the take-up. pandemic. We see economic > The work stoppage across Metro Cebu due recovery in 20211 supporting a to the lockdown has adversely affected rebound in condominium and residential construction. Due to construction house and lot demand. Supply delays, Colliers projects 2020 completion 2,900 units 3,120 units 4,700 units halving to 3,120 from our original forecast. In our opinion, developers should Annual Average position themselves to take YOY / YOY / Growth 2019–22 / End 2019 End 2020 advantage of the recovery by – End 2022 > Tapping rising demand for > Colliers projects a slower 3% growth in 2020 7.7% 3.0% 5.2% residential units located prices as we factor in a slower demand from within integrated Capital end-users and investors. The prices should Values/ communities. grow at a faster pace in 2021 and 2022 on PHP120,100 PHP123,700 PHP136,300 Yields the back of a recovery in residential take-up. > Serving the residential demand of end-users and the Overseas Filipino Worker MID-INCOME SEGMENT TO LEAD COMPLETIONS (OFW) market. The demand for mid-income2 condominium units has been driving launches and take-up in Metro Cebu. The growing > Highlighting property appetite for this segment indicates the rising purchasing power of Cebuano investors and end-users over the past management and sanitation few years. In fact, from 2020 to 2022, we expect the segment to deliver around 45% of the 14,200 new within residential buildings. condominium units scheduled to be completed within the period. While we see a softer demand in 2020, developers have been lining up their mid-income projects to recapture demand in the next 12 to 36 months. > Offering flexible lease terms Source: Colliers International. USD1 to PHP51 as of the end of 2019. to potential buyers. Note: Demand, supply, and capital values represent only the vertical (condominium) residential market. Capital values indicated are average price per sq metre. 1BusinessWorld, DBCC Slashes Proposed Budget for 2021, 2022, (2020). 2Mid-income projects are priced between PHP3.2 million to PHP6.0 million. COLLIERS ANNUAL RESIDENTIAL | CEBU | RESEARCH | Q1 2020 | 25 JUNE 2020

Highlight sanitation and property management RECOMMENDATIONS Colliers sees residential investors and end-users becoming more discerning Tap demand for integrated communities with options in the market. The pandemic has only raised the need to strictly implement physical distancing protocols and property management Similar to other urban areas outside Metro Manila, Colliers believes that the procedures within residential buildings. In our opinion, developers and COVID-19 pandemic has only highlighted both the investors and end-users’ property management firms should highlight sanitation and emergency desire to be in an integrated community. Condominium investors, for preparedness as these are among the major considerations of buyers. instance, have become more aggressive in scouting for properties that are within integrated communities. Colliers believes that in the next 12 to 36 Offer flexible lease terms months, the demand for residential projects, whether house and lot (H&L) While the government-projected economic slowdown is likely to soften or condominium units, will likely hinge on integrated features, i.e. residents residential take-up in key urban areas including Cebu City, our estimated having immediate access to essential goods and services. Colliers pace of recovery in 2021 is likely to revivify demand in the largest residential recommends that developers highlight the integrated features of their market outside Metro Manila. To continue capturing demand, Colliers residential projects. We estimate that 39% of condominium units that are encourages developers with projects in Cebu to offer flexible lease terms to planned to be developed from 2020 and 2022 are within integrated projects. complement the prevailing low mortgage rates in the market. Cebu vertical take-up by segment, 2019 Cebu vertical launches and take-up 2019, (units) Economic, Luxury, 15,000 Launches Take-up 6% 3% 11K Upscale, 9K 13% 10,000 7K 6K 6K 4K 5,000

Mid-Income, - Affordable, 60% 2013 2014 2015 2016 2017 2018 2019 19% Source: Colliers International

Residential price segment, (PHP) Source: Colliers International Segment Average Total Contract Price (TCP) Continue serving the requirements of Cebu’s end-user market Luxury 8 million and above Upscale 6 million to 8 million Colliers believes that H&L projects remain attractive among OFWs. Mid-income 3.2 million to 6 million Anecdotally, the OFW market is a major driver of the Cebu H&L market as Affordable 1.7 million to 3.2 million this buyer segment is also the end-user. This can be attributed to the OFWs’ Economic 580,000 to 1.7 million preference for outdoor lot space. We recommend developers to continue Socialized Below 580,000 catering to this market. Source: Colliers International 2 COLLIERS ANNUAL RESIDENTIAL | CEBU | RESEARCH | Q1 2020 | 25 JUNE 2020

In 2020, we project a slowdown in residential demand given the impact of COMPLETION DELAYS IN 2020 the pandemic. From 2020 to 2022, we project take-up in the vertical segment to reach 7,000 units annually, down from 9,000 units in 2019. By the end of 2019, total condominium supply in Metro Cebu reached more than 44,100 units with 76% located in Cebu City. By the end of 2022, we Cebu horizontal take-up by segment, 2019 project total condominium supply in Metro Cebu to grow by 32% to 58,400 0.4% units, or around 4,700 units annually from 2020 to 2022. Of the total during 100% 8% the period, about 52% will likely be in Cebu City. The city remains a favored 2% Luxury 80% 37% location for condominium developments as most businesses continue to 36% Upscale gravitate towards the city’s IT and Business Parks. 60% 1% Mid-Income Pre-pandemic, we initially estimated total supply to reach 62,000 units. 33% 2% 40% Affordable However, our projection had to be revisited due to construction delays all 53% over Metro Cebu. 20% 21% Economic While we see delays in completion for the remainder of 2020, Colliers sees 0% 8% Socialized project completion picking up pace starting in 2021 as developers respond to H&L Lot Only demand picking up on the back of a macroeconomic recovery. Source: Colliers International Cebu vertical residential supply forecast, (units) SLOWER PRICE GROWTH Total As of 2019 2020 2021 2022 End-2022 In 2019, mid-income and affordable H&L projects recorded a strong take-up. Cebu City 33,600 1,800 2,700 2,900 41,000 These are the segments that command an average price of between PHP1.7 million(USD33,300) and PHP6.0 million (USD117,600) per unit. Interestingly, Lapu-Lapu City 7,400 120 2,500 440 10,460 upscale lot-only projects also performed well during the period. These lot-only Mandaue City 2,800 1,200 480 1,900 6,380 projects are priced between PHP1.8 million (USD35,300) and PHP2.4 million Talisay City 390 - - - 390 (USD47,100). In 2019, most of the take-up under this segment was located in Consolacion, located more than 19 km from Cebu City. Anecdotally, the Liloan - - - 170 170 demand for this segment is driven by local investors and OFWs looking for Overall 44,190 3,120 5,680 5,410 58,400 bigger open space for their families. Colliers encourages developers to further Source: Colliers International. Note: estimated distance of areas from Cebu City: Lapu-Lapu 18.7 km, explore the viability of higher-priced lot-only projects covering mid-income Mandaue 7.4 km, Talisay 11.7km, and Liloan 22.8km. and upscale segments. Colliers projects prices of condominium units to record an average increase of DAMPENED DEMAND IN 2020 5.0% per year from 2021 to 2022, faster than our projected 3.0% growth in 2020. We project a faster pace of price increase from 2021 to 2022 to reflect a Total take-up of condominiums and house and lots in 2019 reached a record- stronger residential market during the period. Metro Cebu is likely to be a high 9,000 units and 5,500 units, respectively. Close to 50% of the take-up for major beneficiary of the government-projected recovery starting 2021, being vertical projects in 2019 were located in Cebu City. Bulk of the demand (29%) the largest metropolitan area outside Metro Manila. A pick up in OFW for house and lot projects during the same period also came from the city. remittances during the period should also stoke the H&L market. 3 Primary Author: For further information, please contact:

Joey Roi Bondoc David A. Young Senior Manager | Research | Philippines Chief Operating Officer | Philippines +63 2 8858 9057 +63 2 8858 9009 [email protected] [email protected]

Contributors: Richard Raymundo Managing Director | Philippines Donica Cuenca +63 2 8858 9028 Research Analyst | Research | Philippines [email protected] +63 2 8858 9068 [email protected]

Martin Aguila Research Analyst | Research | Philippines +63 2 8863 4116 [email protected]