RESEARCH

METRO MARKET UPDATE Q3 2017

METRO MANILA REAL ESTATE SECTOR REVIEW MANILA: A RISING GLOBAL CITY The recently launched Global Cities: The 2018 Report states that a city needs to have culture, diversity, lifestyle and opportunities necessary to draw talented people for it to be regarded as best in class. Environmental friendliness, infrastructure, walkability and public transport links are becoming important and critical elements in master planning communities and business district is rapidly rising as a Global City, exhibiting characteristics evident of the world’s Mega Cities all over the world.

1.) Similar to Kenya’s capital, development of new Central Nairobi, and other emerging Business Districts (CBD) and SNAPSHOTS markets, Metro Manila has a transport links that increase rapidly increasing population and connectivity within Asia Pacific. Economic Indicators the infrastructure is just struggling to keep pace. The Greater Manila population of about 25 Million is 4.) As in the case of San more than the reported number of Francisco, where technology 6.9% people in Hong Kong and growth affected both supply and GDP Singapore combined. Moreover, rent levels, Metro Manila office studies show that employee Q3 2017 space vacancy is very low at numbers have risen in key Global 4.62% and rents are increasing at Cities, partly as a result of general an average of 5 to 6% annually. population growth. Consequently, Furthermore, more than half of the firms are drawn to these areas upcoming spaces in San Francisco where critical mass of skilled and is already pre-leased, so the 3.5% creative workers are available. Inflation Rate additional leasable area will not result to oversupply. In Metro September 2017 Manila, an additional stock of 3 2.) The present administration’s Million square meters in the next 4 infrastructure program increases years is expected to ease the the attractiveness of Metro Manila supply problem, with the to local, regional and international presumption that the added spaces 1.9% property investors as infrastructure will be immediately pre-committed. OFW Remittances integrates the different components Q3 2017 of a sustainable development. In Dubai, the government has laid 5.) Comparable to Toronto, the down plans of expanding the escalating prices of residential metro, airport and road networks. houses within Metro Manila drive This ensures that the city can buyers to purchase condominiums 5.5% compete with the world’s top tier or properties in areas outside Avg. Bank Lending economies. Exceptional Manila. Metro Manila condominium infrastructure and quality of life are Q3 2017 prices increase at an average rate expected to draw employees and of 10% annually, signifying a visitors to this modern, forward- growing demand. looking UAE city. As in Dubai, integrated districts with easily accessible amenities and 1.96% community-focused, neighborhood 6.) The limited supply of land and 91-Day T-Bill feel are being considered in the over congestion in Metro Manila October 2017 master planning of various are pushing property developments and mixed-use developments to areas outside the projects in Metro Manila. city core. In Manhattan, a western shift of capital pushed the city’s core further west, closer to the 50.84 Hudson. A significant number of 3.) The employees from large, highly Avg. PHP-USD (BGC) in is a success story successful companies have Q3 2017 of development, with it being the migrated to less populated areas fastest emerging business district and opportunities for tenants in in Metro Manila. Hong Kong is more diverse locations started to continuously evolving with the emerge. In evolving markets such

2 as Boston, construction activity is education, lifestyle, technology and reported to be at an all-time high real estate will make Metro Manila and investors are focusing on a place where people would want fringe locations where to work, shop, play and live. infrastructure improvements are Hence, Metro Manila offers highly underway. Furthermore, a appealing growth prospects to continued growth in commerce, domestic and international real expanding tech sector and estate investors, making it the shortage of land in the CBD of ultimate rising Global City to watch Mumbai resulted to new out for. developments outside the city center. Shanghai Skyline

7.) E-commerce rapidly became a key driver of the economy of Shanghai. A large demand of warehouses was generated from the rise of online retail and e- shopping. In Metro Manila, e- commerce is already changing and improving the local retail experience. Popular online shopping websites include Lazada, Zalora, OLX, Metro Deal, Ensogo and eBay. Source: ambassador.sh.com

8.) Flexible office markets and co- working spaces are becoming an Dubai Skyline established feature of the real estate landscape in London and across Global Cities. This trend has already reached Metro Manila, where occupiers are demanding flexibility in terms of building design and lease terms, high quality and heavily serviced space, and a platform for informal networking and social interaction. Moreover, student accommodation and lifestyle retail, common in London, are notable innovations that are presently lifting the Metro Source: viewdubai.me Manila urban environment.

Major economies and Super Cities, such as London, Manhattan, San Francisco, Paris, Tokyo and Hong Kong, are expected to continue to attract majority of the investment activities worldwide. Nevertheless, investors are likewise looking into emerging markets, such as Manila, for higher returns and less competition. In addition, the compelling mix of infrastructure,

3 OFFICE MARKET GAINS FURTHER MOMENTUM WITH THE ADDITION OF NEW SUPPLY Office | Office market driven by aggressive construction and several building completions

Evidenced by continuous TABLE 1 FIGURE 1 construction activities and various Office Market Data Weighted Avg. Lease Rates project launches, the Metro Manila office market remains as an Q3 2017 vs. Rental Growth Rate attractive investment target 1,000 4% Weighted Avg. location for both local and foreign Vacancy Lease Rate firms. More than 220,000 square Rate 800 (PHP/sqm/mo.) 0% meters of additional Gross 600 Leasable Area (GLA) has been CBD 1,263.15 2.65% added to last quarter’s recorded 400 -4% office stock. This brings the total Fort Bonifacio 1,027.27 4.65% 200 Prime and Grade A office supply to more than 4.5 Million square 668.59 7.08% 0 -8% meters. In addition, over 3.7 Million 777.24 10.52%

square meters of office GLA is

Q3 2011 Q3 Q3 2009 Q3 2010 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3 2016 Q3 2017 Q3 estimated in the next 5 years. Ortigas 660.71 2.47% 2008 Q3

Newly opened office buildings in Bay Area 725.43 1.02% Weighted Average Lease Rate the third quarter include the office Growth Rate segment of Ayala Land’s property Source: Santos Knight Frank Research Source: Santos Knight Frank Research in Ortigas Center. The 30th Corporate Center is a 19-storey office building with an estimated 47,000 square meters of GLA. In FIGURE 2 , Rockwell Business Net Absorption (sqm) vs. Vacancy Rate (%) Center’s Sheridan Towers, with a 300,000 14% total GLA of around 44,000 square meters, added office inventory to 250,000 the end of second quarter 12% remaining stock. 200,000 10% The Metro Manila Weighted 150,000 Average Lease Rate grew by 1.6% 8% from last quarter and 4.3% from 100,000 the same period last year. Average 50,000 rental rates increased more than 6% 10% compared to the second 0 quarter numbers in both Bonifacio 4% Global City (BGC) and the Bay -50,000 Area. Nevertheless, Makati still 2% -100,000 holds the highest asking rate of PHP1,263.15 per square meter per -150,000 0% month, followed by BGC with PHP1,027.27 per square meter per

month. The continuous escalation

Q3 2009 Q3 Q1 2008 Q1 2008 Q3 2009 Q1 2010 Q1 2010 Q3 2011 Q1 2011 Q3 2012 Q1 2012 Q3 2013 Q1 2013 Q3 2014 Q1 2014 Q3 2015 Q1 2015 Q3 2016 Q1 2016 Q3 2017 Q1 2017 Q3 in rates demonstrates a robust and resilient office sector. Net Absorption Vacancy Rate

Vacancy in Metro Manila increased Source: Santos Knight Frank Research to almost 5% in the third quarter of

Continued on Page 8…

4 RESIDENTIAL SALES DEMAND STILL ROBUST, PROPERTY PRICES ON THE RISE Residential | Supply-side pressures to challenge the rental market

The Metro Manila residential TABLE 2 condominium sales market Q3 2017 Residential Condominium Sales Demand Statistics maintained its robustness in the third quarter of 2017 as market players continued to bank on the Units Sold (%) Avg. Monthly Take-up (Units) segment’s huge investment Makati City 93% 16 potential. Average monthly take-up rates across central business Taguig City 88% 20 districts (CBDs) remained strong Quezon City 80% 13 stemming from the continuous Ortigas* 74% 12 positive inflow of remittances from overseas Filipino workers (OFWs), Alabang 72% 10 weaker dollar-peso exchange rate Bay Area 96% 86 and low interest rate environment. These resulted to a higher level of METRO MANILA 85% 18 purchasing power for both * Includes parts of Mandaluyong, , and San Juan investment buyers and end-users. Source: Santos Knight Frank Research Among the major CBDs, Taguig City exhibited the highest average monthly take-up, rising to 20 units TABLE 3 from 12 units a year ago, and 14 Q3 2017 Property Turnovers units in the previous quarter. The increase in monthly take-up was Residential Condominium Developer Location Inventory mostly due to the performance of newly launched projects, Park Terraces - Tower 2 AyalaLand Premier Makati City 370 particularly Park Avenue within Federal Land’s Veritown Fort and Shang Salcedo Place Shang Properties Makati City 525 Tower 1 of Avida Towers Vireo in Viceroy - Tower 3 Megaworld Corp. Taguig City 304 . Furthermore, the city’s location and massive construction Studio City - Tower 3 Filinvest Land Alabang 450 activities, not only in real estate but Avida Vita - Tower 2 Avida Land Quezon City 700 also on the infrastructure side, played a huge role in leveling up its Viera Residences DMCI Homes Quezon City 730 appeal to property buyers. The Capital Towers - Rio Tower Federal Land Quezon City 538

Ortigas and Alabang also recorded One Eastwood Avenue - Tower 1 Megaworld Corp. Quezon City 680 a rise in average take-up with 12 The Sapphire Bloc - West Tower Robinsons Land Ortigas 352 and 10 units sold per month from 8 and 3 units in the same period last Source: Santos Knight Frank Research year, respectively. The notable recovery of Alabang’s performance originated mainly from the brisk Quezon both recorded a modest the rise of alternative options in demand for studio units, which was year-on-year (y-o-y) drop in other CBDs, as well as emerging 55% of its total stock. Companies average monthly sales with 16 and business districts, had somewhat locating in the area, particularly in 13 units from 20 and 14 units, created pressure on the respectively. Condominium- Northgate Cyberzone, sought specific take-up has slightly performance of the cities. nearby living spaces for their tapered off in the said cities, which For the Bay Area, covering certain workers. is considered a normal areas within the cities of phenomenon for a condominium’s In contrast, the cities of Makati and inventory selling life. At the same, Continued on Page 8…

5 RETAIL SEGMENT BOOMING WITH DEMAND- DRIVEN MARKET Retail | Retail trade to drive economy further

The Metro Manila retail scene Another notable upcoming retail remains vigorous with the rising development is Sunshine Fort FIGURE 3 number of retail spaces and Landmark Mall in BGC. It is a 1.5- Q3 2017 Retail Openings by continuous entry of local and hectare Japanese-inspired mixed- Sector foreign retailers. The country’s sound macroeconomic use property, scheduled to be fundamentals and high property completed by the year 2025, and market potentials lead to has a gross leasable area of increasing business and 25,000 sqm. In San Juan, the investment activities setting off the redevelopment of Greenhills Others expansion of the retail industry. On Shopping Centre into a mixed-use 29% Food & the development side, property complex featuring residential (The developers are aggressively Beverage Connor), office and hospitality 46% searching and competing for the components is on its way, starting acquisition of limited available land within Metro Manila that could be with the reopening of the new and Clothing & possibly developed into mixed-use improved Unimart last July 2017. Apparel properties and lifestyle 25% Further to the above, Metro Manila communities. retail vacancy rate is projected to Third quarter retail space take-up increase to at least 6% resulting was driven mostly by retailers of from the turnover of major retail Source: Santos Knight Frank Research food and beverages and clothing developments in the next couple of apparel, comprising 46% and 25% years. Renovation of existing malls of total retail openings, to keep up with newly established respectively. The remaining portion FIGURE 4 were under homeware, consumer competition and mall expansion Upcoming Retail Openings electronics, department store and will push the vacancy farther up. by Location supermarket. Vacated spaces are expected to be occupied immediately after Retail rental rates in Makati, completion due to the increased 4% Bonifacio Global City (BGC) and desirability following renovation. Alabang slightly increased in the 12% third quarter of the year to an Lastly, with the retailers now taking estimated average rate of advantage of e-commerce, 43% PHP1,534.74 per square meter per consumer spending is predicted to 12% month. However, rates are expected to remain competitive gather additional speed especially considering the number of nearing the fast approaching upcoming retail developments. An holidays. 14% estimated Gross Floor Area (GFA) of more than 182,300 square meters of space is 15% anticipated to be turned over before yearend. Majority of the Pasay City City expected turnovers are located in Pasig and Bay Area. Construction Pasig City Makati City completion of shopping malls and Taguig City Quezon City expansions are expected in the areas of Alabang, Quezon City, Makati and BGC. leads the pack with most of the Source: Santos Knight Frank Research remaining turnovers for the year 2017, including Ayala Malls Heights, Feliz Town Center and Southvale Retail.

6 MANUFACTURING STILL BOUYANT AMIDST MINOR SETBACKS Industrial | Demand for additional spaces strengthens as opportunities in the retail scene rocket

The Philippine economy continues such as chemical products, (CALABARZON) and Region VII to flourish registering a Gross furniture and fixtures, basic metal (Central Visayas). Furthermore, Domestic Product (GDP) growth of industries and food manufacturers, prices of industrial properties 6.9% in the third quarter of 2017, offset the slowdown in the remain competitive. Industrial lots slightly higher compared to the previous quarter’s adjusted GDP production of textiles, rubber and have rental rates ranging from growth of 6.7%. Moreover, growth plastic products, tobacco, wearing PHP25 to PHP42 per square meter particularly in the industry sector apparel and petroleum and other per month and are selling from was brought about by increasing fuel products. Industrial activities PHP3,300 to PHP7,000 per square activities in manufacturing, trade are anticipated to further rise in the meter. Rental rates of factory and real estate. The industrial coming quarters, with retail trade buildings, on the other hand, range sector posted a 7.5% growth which as one of its major drivers, from PHP130 to PHP350 per is highest among the sectors. following the emergence of top square meter per month, varying Despite the decline in the country’s international firms investing in the depending on the economic zones volume of production and value of country including the world’s proximity to infrastructures. production indices in largest and most valuable retailer manufacturing, which exhibited and famous online shopping site, Outlook of the industrial sector growth rates of -3.7% and -4.3%, Alibaba. remains positive, backed by respectively, manufacturing was resilient business confidence, in recognized as the main contributor In addition, demand for spite of softening domestic and to the growth of the industrial warehousing and storage spaces export demand. Moreover, further sector in the third quarter. The continues to increase as a result of improvement in the production significant increase in the sector the dwindling supply in ecozones environment will depend on the coming from manufacturers of and other private industrial movement of foreign exchange and radio, television and communication equipment and properties within Metro Manila and the rapid completion of major apparatus and other contributors, other major investment infrastructure developments both destinations like Region IV-A inside and outside Metro Manila.

FIGURE 5 Industrial Production Growth Rate (year-on-year)

25.0

20.0

15.0

10.0

5.0

0.0

-5.0

-10.0

Jul-16 Jul-17

Oct-16 Apr-16 Apr-17

Jan-16 Jun-16 Jan-17 Jun-17

Mar-16 Mar-17

Feb-16 Feb-17

Aug-16 Sep-16 Nov-16 Dec-16 Aug-17 Sep-17

May-16 May-17

VoPI VaPI

Source: Philippine Statistics Authority

7 Continued from Page 4 Office Continued from Page 5 Residential Quick Overview of the Rental Market the year. This, however, is mainly and Parañaque, average monthly During the third quarter of 2017, a due to the large number of take-up further surged to 86 units total of 3,589 residential units were additional stock introduced during from 51 units in the same period launched, nearly three times higher the said quarter, most of which are last year, and 70 units from a than the 1,420 units introduced to already pre-committed. Moreover, quarter ago. The brisk sales the market in the same period last net absorption was higher remained supported by the office, year. At the same time, property compared to the previous quarter and entertainment and gaming turnovers continued to recover with at more than 150,000 square segments boom in the vicinity. about 4,649 units delivered in the meters, signifying a sustained third quarter compared to the demand for office space. Foreign investors likewise carried 1,859-unit turnovers a year ago. on partaking in the potential of the Majority of these units are under Business outlook in IT-BPM Bay Area as developers have the middle-income classification, industry remains positive as more reported that foreign nationals, which is generally 64% of the total employees go from low-skill Chinese and Koreans in particular, stock in Metro Manila. Moreover, contact center jobs to mid-skilled have been firm in maximizing their 54% are in the pre-selling and jobs and high-skilled services, 40% ownership cap, resulting to construction stages. generating more than 350,000 bulk-buying. The remaining 60%, additional contact center jobs. on the other hand, continued to Alternatively, the growing pool of While news of a decreasing originate from OFWs and middle- office workers across CBDs Business Process Outsourcing income earners. prompted several property (BPO) presence in the local market developers to build a chain of circulates, Metro Manila continues The upswing in residential demand affordable living spaces that follow to bank on its competitive labor among majority of the Metro a dormitory-type concept. Seen as pool and cheap labor costs. Its Manila CBDs provided enough a next growth area, these people remains to be Manila’s attestation of a healthy market. The developments began to capture the secret sauce. The young velocity of the demand is perceived interest of companies considering demographics, and high levels of to be catching up with supply albeit the relatively cheaper and fixed literacy and English proficiency at a gradual pace but with enough rents. Additionally, they offer gives Manila a competitive room for property developers to amenities typical of affordable or advantage in the global real estate increase property prices. middle-income condominiums. playing field. By classification, prices of luxury With the continuous influx of Manila’s population grew more condominiums grew 28% y-o-y and project launches and property than 9.2% from 2010 to 2015. As currently range from PHP182,000 turnovers, and the introduction of of 2013, Manila’s basic literacy to PHP350,000 per square meter, alternative choices for the upper- was recorded at a very impressive while prices of high-end low to middle-income earners, the 99.5% rate. Furthermore, 2016 condominiums rose 4% y-o-y, rental market is likely to experience records show an 86% English ranging from PHP78,000 to a downturn that is expected to proficiency rate in Manila, PHP176,000. In addition, prices of continue in the coming periods and increasing the attractiveness of middle-income and affordable would eventually weigh on vacancy locating in this rising Global City. condominiums increased 6% and and rental rates. However, the 7% y-o-y, respectively. Middle- impact is imagined to be modest income prices range from as the need for rentable living PHP78,000 up to PHP176,000 per spaces proximate to workplace in square meter, while prices of CBDs continues to persist, arising affordable units start at from worsening traffic situation in approximately PHP57,000 to the Metro, and additional PHP89,000 per square meter. consumable income is expected from the forthcoming tax reform approval.

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Santos Knight Frank Research Reports are available at santos.knightfrank.ph/research Christian Ocampo Research Analyst [email protected] © Santos Knight Frank 2017 This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Santos Knight Frank for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Santos Knight Frank in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Santos Knight Frank to the form and content within which it appears. Santos Knight Frank is a long-term franchise partnership registered in the with registered number A199818549. Our registered office is 10/F Ayala Tower One, Ayala Ave., Makati City where you may look at a list of members’ names.