RESEARCH

METRO MARKET UPDATE 2H 2016

METRO CEBU REAL ESTATE SECTOR REVIEW CONTINUES TO BE THE LARGEST AND MOST PROGRESSIVE URBAN CENTER OUTSIDE NCR Metro Cebu remains to be one of the most vibrant economic hubs in the . In the National Competitive Council’s 2016 Cities & Municipalities Competitive Index, placed 5th among the country’s highly urbanized cities in terms of economic dynamism. In the same way, the cities of Lapu-Lapu and both made it to the top 30 of the said index. The remarkable economic growth exhibited by the various cities and municipalities of Metropolitan Cebu makes the area an attractive target for diverse real estate investments.

The Philippines is already regarded cheaper yet high value labor. Metro SNAPSHOTS as a location of choice by the global Cebu’s present labor cost is Business Process Outsourcing about 30% lower than NCR rates. (BPO) industry. In the country, Economic Indicators Metro Cebu is considered as the Metro Cebu is home to several 2nd prime BPO destination next to highly regarded universities and Metro given its dynamic educational institutions such as compatibility with the western , University 6.8% culture and fluency in the English of San Jose-Recoletos, University of GDP language. In Cebu, while Filipino is the Philippines Cebu and . These renowned 2016 commonly understood and spoken, English is the language that is schools produce graduates with widely used in business more complex work skills and transactions and education. create a competent workforce 3.3% desired and sought after by the Latest reports show that Cebu had continuously flourishing Business Inflation Rate at least 200 BPO companies with Process Outsourcing industry. December 2016 about 120 thousand employees in the end of 2015. Given the 18% In 2015, a total of 48,730 students annual growth forecasted by graduated from the State industry experts, at least 20,000 Universities and Colleges, Local 5.1% new jobs would have been Universities and Colleges, Other OFW Remittances generated in 2016. Government Schools and Private 2016 Universities and Colleges in the In the recent years, BPO companies Central Region. In 2016, started shifting requirements from the Commission on Higher call center jobs to functions Education (CHED) estimated 5.7% demanding skills in finance and 56,740 fresh graduates from the accounting, health management, same region. At the current rate, Ave. Bank Lending network services and infrastructure there will be around 66,000 Region December 2016 services and other roles including 7 graduates this 2017. Cebu but not limited to customer service, represents approximately ¾ of the medical transcription, shared graduates in Region 7. Therefore, 1.6% financial services, offshore legal there will be around 50,000 new transcriptions, software animation graduates from Cebu seeking 91-Day T-Bill and development. As a result, the employment in 2017. December 2016 need for registered nurses, foreign language speakers, information With the Philippine BPO sector technology experts and digital growing at an average of 46% per 49.11 managers has intensified. The annum, the Metro Cebu office sizable talent pool in Metro Cebu market remains robust and shows Ave. PHP-USD services the growing demand for potential of further growth that is Q4 2016

2 parallel to the overall performance Improved employment conditions of the BPO industry in the country. resulting from increasing BPO career opportunities is perceived as Driven by the strong local BPO the major factor strengthening industry, the continuous boom of growth in household consumption. the Cebu office sector triggers the upsurge of demand for decent The industrial and hospitality residential properties. This resulted sectors similarly experienced to the fast appreciation of property growth together with the other real values in the area. estate sectors due to Metro Cebu’s overall desirability emerging from its As Metro Cebu draws more and culture of professionalism and more tourist, investors and craftsmanship, vast highly skilled migrators, consumer spending manpower resource, fair weather, correspondingly increases relative peace and business-friendly benefiting the retail sector. Tourist atmosphere. arrivals in Cebu reached 3.22 million in the first 10 months of 2016. Metro Cebu’s city attractions, Cebu City Skyline culture and heritage nominate it as a top tourist go to place in the country.

In addition, the population of Cebu rises by approximately 60,000 every year. Hence, it is reasonable to anticipate additional money to be circulating within the Metro Cebu area in the coming periods. Moreover, Household Final Consumption Expenditure growth was recorded at 7.3% in the first 3 quarters of the year compared to 6.1% in the same period last year. Source: Philippine Daily Inquirer

FIGURE 1 Highly Urbanized Cities Ranking in Terms of Economic Dynamism

25

20

15 Score

10

Makati

Pasig

Manila

Cebu Quezon CityQuezon

5 Davao

Santos

General

Paranaque

Caloocan Mandaluyong

0 1 2 3 4 5 6 7 8 9 10

Rank

Source: National Competitiveness Council Philippines

3 ENTRY OF GLOBAL BRANDS RESHAPING THE CEBU OFFICE MARKET Office | Office supply coping-up with demand

feature office, retail, and residential Park (CITP) is now at PhP 135,000 towers. The construction of the to PhP 145,000 per square meter. office building is set to start after the completion of the first 4 Cebu Exchange is currently residential towers. marketing its units with a typical cut of 95 to 1,100 square meters. Inc. is presently Supply of offices in fringe area is constructing its Base Line Center also growing and sale of office units project which has 4 towers. Tower is an observable trend. Office units one is already under construction. It are currently selling in the Fringe Philam Life Corporate Center will feature commercial spaces on areas at an average selling price of the ground and 2nd floors while PhP 104,000 to PhP 112,000 per Source: Santos Knight Frank Cebu Office office spaces will be located on the square meter. 3rd to 8th floors. The office spaces Another remarkable indicator of The Cebu office sector is further will cater to small, medium, and growth in the Cebu office market is expanding as global brands large scale businesses and will have the vacancy rate of offices. Metro continue to inject multi-billion peso over 4,800 square meters of gross leasable area. Moreover, Citadines Cebu’s overall vacancy improved worth of investments in the real Cebu City which will be managed with a decline of 5% from 16.36% estate market of the city. The year by The Ascott Limited as a condotel of the previous half of the year. concluded with new partnerships will be situated on the 9th to 21st (CBP) from local developers and floors. significantly affected the downward international companies sealing pull in the overall vacancy as it deals to better transform the fertile With new developments in the city, declined to 7.01%, which is half of land of Cebu to a world-class city the procurement of marketable the first six months of 2016. The office spaces in Metro Cebu has fast take-up of BPO offices landscape. been evident as sound business contributed to the drop in the Four Cebu-based developers sentiments continue to drive in vacancy of CBP as it slid to 9.49% ventured into agreement with more investment prospects. from the 20.14% of the first half of international firms developing office Average selling price in Cebu IT the year. (ACC) spaces and residential towers. Taft Property Ventures Development FIGURE 2 Corporation and Cebu Landmasters Development Pipeline (sq. m) Inc. are two of the local developers in Metro Cebu who are expanding 180,000 their office portfolio in the area. The 160,000 said developers have secured their partnership with Hong Kong Land, 140,000 Inc. for Taft Properties, and The 120,000 Ascott Limited, for Cebu 100,000 Landmaster Inc. In addition, Arthaland Corporation has awarded 80,000 the construction of its newly 60,000 launched office building, Cebu Exchange, in Cebu IT Park to China 40,000 Railway Dongfang Group and 20,000 Knusford Berhard of . 0 Taft Properties and Hong Kong 2017 2018 2019 2020 Land will be developing 25 towers Cebu Business Park Cebu IT Park Fringe Area in its township project named Mandani Bay. The said project will Source: Santos Knight Frank Research

4 Tower contributed the most in the Tower B and Filinvest Cyberzone lowering of vacancy rate in Metro Tower 2 are the latest buildings that FIGURE 3 Cebu as its vacancy dipped from are expected to be available in Weighted Ave. Lease Rate vs 44.05% of 1H 2016 to 14.99% of 2017 catering to tenants who wish Rental Growth Rate (in PhP) 2H 2016. to locate in Cebu IT Park. 550 30% Other BPO offices in CBP that also Additionally, 9 office developments showed a decline in vacancy outside the major CBDs are 510 22% include Cebu IT Tower 1, Cebu IT expected to open in the market, 470 14% Tower 2, and FLB Corporate giving potential investors more Center. Lowering of asking rates choices for office spaces with 430 6% directly affected the vacancy drop bigger cuts, cheaper prices yet of 390 -2% as developers offered discounts to good quality. As of the 2nd half of call centers and business process 2016, only Kings Properties’ new 350 -10%

outsourcing (BPO) companies. mixed use building, Avenir, started

2016 2010 2011 2012 2013 2014 2015 Lease rates in CBP decreased to its operation. The city is also looking 2009 PhP 546.18 per square meter from forward to the construction of the Lease Rates the PhP 550.87 per square meter of newly launched Gatewalk Central Rental Growth Rate the first semester. Traditional office by Ayala Land Inc. which is in rates remained flat. This, however, partnership with AboitizLand and Source: Santos Knight Frank Research could not offset the slight drop in located in Mandaue City. The rental fee attributed to BPO offices. project is a mixed-use development stretching at about 17.5 hectares More than 42,000 square meter of with an investment cost amounting FIGURE 4 gross leasable area is expected to to 10 billion pesos. It will house a Philippine GDP Growth Rate add to the CBP supply in 2017. shopping center, office buildings 8.0 One of the upcoming office projects and residential towers. The office to look forward to is Philam Life

building will add a supply of 20,000 6.0

7.1

7.0 6.9

Corporate Center, which will throw 6.7 6.6

square meter of gross leasable area 6.6

6.3

6.0 5.8

in more than 18,000 of additional st 5.6 4.0 5.5

by the 1 quarter of 2020. 5.2 gross leasable area to CBP. It is located along Cardinal Rosales Amidst challenges, Metro Cebu will 2.0 Avenue and is right across ACC. remain to be the gateway of local This twin tower project is scheduled and international companies in 0.0 to be turned over in the second search for leasable office spaces

quarter of the year and will feature a outside . The area is

Q1 2014 Q1 Q3 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 fuse of modernized office building still a great choice for investors 2014 Q2 facilities. Philam Life Corporate given its competitiveness in terms Source: Philippine Statistics Authority Center is LEED Silver Core and Shell pre-certified and now at the final stage of receiving LEED Gold Continued on Page 10… certification.

In Cebu IT Park (CITP), minimal change in vacancy was recorded as it decreased to 3.40% of 2nd half of 2016 from 4.00% of 1st half of 2016. Interestingly, CITP has the largest growth rate in rental fee for the last half of the year with 6.18% compared to CBP and fringe areas with -0.85% and 4.86%, respectively. Growth in asking rates was caused by the tight supply in the market and continuous strengthening of demand. There was no new office development that was turned over in the last six months of the year, although Gatewalk Central Concept massive construction of offices was on-going. Skyrise Building 4 Source: Ayala Land Inc.

5 BULLISH MARKET SENTIMENT DRIVES RESIDENTIAL DEMAND Residential | Affordable and high-end projects enjoys fast take-up

The demand for vertical residential the growing local workforce, to the other classifications. Having developments has reached new particularly in the business process been able to increase by 2 units heights as various stakeholders outsourcing (BPO) sector. from the same period last year, monthly take-up stands at 7 units became rather more bullish about Condominiums targeting the upper Metro Cebu’s local condominium per month originating from the brisk middle to high income market sales of pre-selling projects which, if sales market. The country’s likewise recorded a 5-unit increase compared to ready for occupancy sustained growth momentum and from the previous half. At present, (RFO) ones, offers relatively favorable demand-driving high-end projects are selling at 9 innovated concepts. This justifies indicators, which lingered over the units per month which stems from the slow take-up for RFO units last 6 months of the year, has foreign and local retirees as well as reflecting the changing appetite of continued to fuel the interests of affluent individuals looking for the middle-income market, residential units infused with a market players to partake in the particularly new home owners. lifestyle-focused living concept. province’s growing investment pie. Some developers have already The upswing in monthly take-up A major acceleration in monthly started incorporating such concept rates provide enough attestation of take-up rates across all residential in their projects including Vista a healthy residential market in Metro Land’s first undertaking in the Cebu which further validates the classifications was evident in the province, Vista Suarez Cebu in current selling prices and flexible last semester of 2016. Affordable Cebu City, and the world class payment schemes. Condominium condominiums, with a monthly development by Hongkong Land units in Cebu City, which are take-up rate that increased by 5 and Taft Properties in Mandaue, complemented by their proximity to units from the same period last Mandani Bay Suites. In less than a major office and commercial areas, year, currently commands the year, both projects have already still rank the most expensive with an highest with 11 units being sold per sold 73% and 93% of their average price of approximately month. Demand was mostly pulled respective inventories. PhP106,300 per square meter. This is followed by resort and leisure- by pre-selling projects that were The performance of mid-end well-received by both foreign and themed units in Lapu-Lapu City condominiums, on the other hand, selling at an average of PhP105,700 local investors taking advantage of was a tad slower compared to the per square meter, while typical condominiums in Mandaue starts at FIGURE 5 FIGURE 6 an average of PhP88,000 per Allocation of Residential Monthly Take-Up Rates of square meter. Condominiums Per Condominiums Per Classification The growth in demand and Classification residential prices has allowed 12.0 property developers to ramp up the 10.6 construction of their respective 10% 10.0 projects to meet turnover 8.7 schedules. During the period, 9 projects, equivalent to 1,815 units, 32% 8.0 6.9 opened their doors to the market, specifically in the 4th quarter, in time 6.0 for the holiday season. Majority of the projects are situated in Cebu 4.0 58% City such as Azalea Place by Robinsons Land, Avenir by King 2.0 Properties, 32 Sanson’s Raffia and Gmelina buildings by Rockwell, 0.0 High-end Mid-end Affordable High-end Mid-end Affordable

Source: Santos Knight Frank Research Source: Santos Knight Frank Research Continued on Page 10…

6 INCREASING RETAIL OPPORTUNITIES SEEN IN CEBU MARKET FIGURE 7 Retail | Metro Cebu retail sector displays positive outlook 2H 2016 Cebu Retail Openings By Sector

The Cebu retail landscape Retail expansions in Robinsons continues to grow but at a relatively Galleria Cebu is likewise evident, *Others slower pace. The retail market with Luminox, G2000, Levi’s, Vans, Food and 18% Beverage further benefits from the various Hap Chan, Daiso and Samsung infrastructure projects and the influx 27% of real estate developments varying scheduled to open their respective from mixed-use, residential and stores soon. Retail openings in office developments. Increasing clothing apparel garnered 55% of Clothing and consumer spending is observed in the total retail openings, followed by Apparel Metro Cebu which resulted to the food and beverages with 27% and 55% upward movement of local other retail sectors, such as statistics. The inflation rate, one of homeware and other consumer the significant indicators of goods with 18%. economic growth, was recorded at *Consumer Electronics and Homeware 3% in December 2016. This is a Future retail expansions of brands Source: Santos Knight Frank Research 0.4% increase from January of the such as French Baker, Tim Ho same year. Pink Heaven, Zawadi coffee and Wan, Ichiban, Kyochon, Best gelato, and other food tenants Positive business outlook in the Ramen Sachi, Yoshinoya, Phat Pho, promoting their products and area prevails amidst uncertainties. Baskin Robbins, Seattle’s Best, different cuisines joined in the Cebu City remains one of Metro Parfois, Yves Rocher, Mango and celebration of the mall’s first Cebu’s growth drivers due to the other local brands are still anniversary. large number of existing anticipated. Overall retail vacancy developments and new projects in rate in Metro Cebu is projected at Clothing bazaar, food bazaar and the pipeline. Cebu City’s high 6% and is expected to increase as pop-up stores are some of the retail density is extremely favorable to neighboring cities and more developments currently in the trends used by shopping mall municipalities. Developments are pipeline are slowly unveiled and owners and operators to generate now directed towards areas outside completed in the coming years. revenues from vacant spaces. of Metro Cebu allowing more investors to penetrate into In maintaining a mall’s commercial Competition in the market is very untapped market. Maturing market distinction, developers thrive to stiff making developers aggressive in highly urbanized areas like Lapu innovate and follow through ideas in securing market shares. Lapu and Mandaue City indicates and concepts that are timely and Upcoming mixed-use developments that other locations are becoming suitable. The Ayala Mall in Cebu are much awaited considering that more conducive to business Business Park still have a number of majority of these projects come with prospects. vacant spaces that led to the a retail component mostly catering Local spending, backed by introduction of the Lifestyle Fair and to the local employees and increasing tourist arrivals in Metro Gienda Mayor concept where residents of the area. Cebu, projects a sound retail various booths sell local delicacies Supermarkets, coffee shops, market which boosts local and and crafts. Spaces occupied by the convenient stores and other food international retail brand entry. SM fair is estimated at 100 sq. m. fitting chains are expected to occupy the Malls, Metro Retail Stores Group, in 18-20 retailers with retail rents future retail spaces. Ayala Malls and Robinsons Malls ranging from Php29,000 to 40,000 remain dominant in the Cebu retail per month. The event is scheduled With the provincial governments market with generous amount of now exerting efforts in developing retail spaces available to to run from November 2016 to March 2017. other areas outside of Cebu City accommodate incoming retail and as local demographics continue brands. Brands such as Yakimix, A number of restaurants also Chat Time, and Mizuno have to improve, doing business in Metro opened in SM Seaside together participated in the SM food carnival Cebu becomes more enticing to with other local retail brands. held in December. SOI, The Pitstop both local and foreign investors.

7 CEBU DELVE INTO DEVELOPABLE ECONOMIC ZONE OUTSIDE URBAN CENTERS Industrial | Increasing demand for economic zones

Improving macroeconomic Industrial Park are still open in the country. With the sustained fundamentals paved way for Metro market, however, investors have industrial activities and vast investor Cebu’s sound local demographics. already looked into these areas and commitments, economic zones in The region continues to be one of are expected to occupy the vacant different areas in the region are the most efficient in terms of Gross spaces in the coming quarters. expected to reach full capacity in Regional Domestic Product (GRDP) Other special economic zones the coming years. in the country following Metro located in Mandaue City, Lapu- Manila, Region IV-A, CALABARZON Lapu City, Naga City, Danao City and Cordillera Administrative and town are being FIGURE 8 Region. The region is projected to endorsed to satisfy the urgent need GRDP Growth experience a 6% to 7% growth rate for industrial spaces. considering all other factors are With the increasing investor interest sustained. 14.0 from other countries, majority of Approved Foreign Investments which are coming from fellow Asian 12.0 reached 13.59 billion pesos which countries, expansions in economic 10.0 12.5 is significantly higher than last zones are imminent. This is in order

year’s 11.69 billion pesos of foreign to cater to the rising demand in the 8.0 9.4 investments. Major growth drivers in market. Philippine demographics is

6.0 7.8 7.4

the industry were manufacturing, ideal for investors and can 6.8

y %Growth y 6.0

trade and real estate including other potentially be an easy access in the - 4.0

o

4.8 -

renting and business activities. ASEAN market for global y 2.0 Investment in manufacturing companies venturing into the remains upbeat registering a 53.2% industry. Opportunities in renewable 0.0

growth rate followed by investment power ventures, agri-business

2010 2012 2013 2014 2015 pledges in electricity, gas, steam opportunities, agricultural 2011 and air conditioning, and technologies and other 2016E administrative and support service manufacturing activities are some of Source: Philippine Statistics Authority activities with a growth rate of the possible investment activities 25.4% and 9.4% respectively. that can be highly favorable to companies wishing to invest in the Investors have expressed their country. interests in the Cebu industrial market as some of the available The country also offers incentives industrial spaces in the market have and perquisites through the already been occupied, varying Philippine Economic Zone Authority from manufacturing spaces to (PEZA) that lure in more investors. warehouses. Very few available Moreover, towns and municipalities spaces are left in the economic in the Central Visayas region are zones, some of which are in currently being assessed and Economic Zones (MEZ) I and II and considered as potential economic Cebu Light Industrial Park. MEZ I zone sites outside of known urban and II have approximately 15,000 centers. Infrastructure sq. m. of available space for developments in these rural areas manufacturing and warehouses are needed in order to be more while Cebu Light Industrial Park has competitive and attractive to foreign 1,700 sq. m. of available space for and local investors alike. manufacturing. The Cebu industrial sector Available lot areas in West Cebu continues to benefit from growth Industrial Park and Naga Valley patterns experienced in the

8 STAKEHOLDERS TEAM UP TO BOOST CEBU’S TOURISM ACTIVITIES Hospitality | Reaping gains from the regionalization of growth

Cebu maintains its position as one Capiz and Samar. Japanese airline, Investment Group, and Macau of the top tourist destinations for Vanilla Air, will also begin offering Resources Group. This joint venture foreign and domestic travelers. direct flights between Narita in project rests on the idea of Data from the Department of Japan and Cebu by the end of integrating other tourist-attracting Tourism (DoT) reveal that visitor 2016. components to the traditional hotel arrivals in the 2nd half of 2016 concept. Expected to be registered a 9% increase from The new and additional flights are operational by 2020, it will be 2,741,057 foreign tourists recorded basically an indication of increasing comprised of 3 hotels, a casino and in the previous year. In terms of passenger traffic originating from entertainment complex, visitor entrants via air, Cebu foreign and domestic tourist travels. commercial, retail, conference remains on the second spot, However, the healthy inflow of facilities, and a yacht club. following Metro Manila, as it visitors during the period was welcomed approximately 16% to largely due to business activities as Moving forward, Cebu’s hospitality 20% of the total visitor volume well as meetings, incentives, industry will continue to thrive in the during the period. conventions and exhibits (MICE short-term as several big-ticket activities). Several hotels credited events are expected to boost visitor The robust influx of tourists in Cebu the considerable occupancy levels arrivals as well as hotel can be partly attributed to airline to MICE activities amidst the lean occupancies, alongside the carriers that have secured a go- season in the 3rd quarter of the government and private sector’s signal from the DoT to launch new year. Reported hotel and resort combined marketing efforts. In the and additional routes. AirAisa occupancy rates ranged from 70% long-term, the current recently added direct international to 80%. administration’s stance of flights from Cebu to Taipei and expanding business and economic Cebu to . At the same In terms of accommodation activities in the countryside, time, since Cebu acts as a gateway services, Cebu is equipped with particularly thru aggressive to the Southern part of the country, 8,916 fully-operational hotel rooms infrastructure developments, are added daily domestic based on latest DoT statistics. 78% anticipated to unlock more business routes to cater to the increasing of the total supply are situated in and tourism opportunities in the inter-island travel demand in the Cebu City as it caters to individuals province. Visayas region particularly in Leyte, or groups either on leisure, business or MICE purposes. Lapu-Lapu City and Mandue follow with 14% and FIGURE 9 5%, respectively. The supply is Allocation of Hotel Rooms Per expected to breach the 10,000 Area mark as hotels scheduled to open in the next six months are estimated to add around 1,251 rooms. This 2% includes Toyoko Inn and Bai Hotel in Mandaue. 5% 14% International and local hotel players are likely to ramp up their portfolios to provide more accommodation in 78% Cebu. Mactan Leisure City is one of the newest hospitality developments in the pipeline to watch out for. It will occupy 14- hectares of land in Mactan Island Cebu City Lapu-Lapu City and is a collaboration between Mandaue City Other Areas Calata Corp, Sino-America Gaming

Source: Department of Tourism-Region 7

9 Continued from Page 5 Office Continued from Page 6 Residential

of cheap labor, richness in skilled East Tower B of Grand Residences supply in Metro Cebu to a total of workers, presence of cost efficient Cebu by Grand Land, and Tower 2 32,277 units as of 2016. facilities and availability of of Bamboo Bay Community by infrastructures. Cebu City will Contempo Properties Holdings Inc. The positive momentum of Metro continue to hold its title as the In other areas, the North Tower of Cebu’s residential market is likely to business capital of the Visayas Amaia Steps Mandaue was also persist in the coming periods. The region and is projected to attract delivered. heightened demand is expected to more investors in the coming years. be sustained provided that interest New project launches, on the rates remain at favorable levels, The location of Cebu was deemed contrary, were slightly at par with overseas Filipino (OF) remittances even more desirable backed by the those that have been turned over. A display robust growth, and the BPO government’s thrust of empowering total of 1,486 units were unveiled, industry continues to expand. All other cities outside the busy mostly under the mid-end and other things constant, the remaining metropolitan of Manila with the affordable classifications. These unsold units or about 18% of the hopes of decongesting the latter. projects include Apple One Banawa total stock is expected to be fully More developments are in the Heights Villa 5 by Apple Properties absorbed in the next 2.2 years. pipeline and robust optimism is in Cebu City, Tambuli Seaside notable in the island as more Living Tower E and F by TPDI in infrastructure projects are directed Lapu-Lapu City, and Grand San towards the Visayas and Marino Residences by LandTraders region. A large number of World Properties Corp. in Mandaue opportunities await the business City. The new additions brought the districts of Visayas presenting the potential of being the next big star of the country, following the footsteps of Metro Manila.

Tambuli Seaside Living Masterplan

Source: Santos Knight Frank Research

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