Colliers Semi-Annual | Industrial | Manila | 30 July 2021 Hot on cold storage Industrial sector’s streak continues as cold storage demand heats up 2021–25 Insights & Recommendations H1 2021 Full Year 2021 Annual Average Colliers believes that the industrial Colliers expects e-commerce companies to be the sector will thrive beyond 2021 as we primary demand drivers for warehouse space. We also anticipate an increased demand for cold storage see recovery in both local and global 1 ha 38 ha 44 ha facilities in the next 12 months as the government demand sustaining the growth of e- Demand commerce, domestic manufacturing accelerates its Covid inoculation program. and the export sectors. Colliers recorded no new completion for H1 2021 due We expect developers to remain to construction delays as a result of Covid. We expect proactive in acquiring parcels of land supply increasing by H2 2021 with the completion of 0 ha 117 ha 35 ha that can be developed into industrial expansion projects such as the Lima Technology Park parks and in refurbishing assets to Supply Expansion in Batangas, Cavite Technopark Phase 2, meet the demand for modern and the Suntrust Ecotown Tanza Phase 2. warehouses and cold storage facilities. We attribute the surge in Annual Average QOQ / YOY / demand to a continuously thriving e- Growth 2020–25 / End H1 End 2021 commerce sector and ramped up End 2025 Covid vaccination efforts across the We recorded a slight increase in land leasehold rates country. in H1 2021 as e-commerce companies drove the +1.9% +2.5% +2.2% demand for warehouses. We expect warehouse lease Colliers encourages developers to rates to continue growing at a faster pace in the next consider divesting industrial assets Rent 12 months with the increased take-up from FMCG1 PHP81 PHP82 PHP89 into their respective REIT vehicles; and e-commerce firms. expand cold storage assets; modernize warehouses; Colliers expects vacancy to increase in 2021 due to monitor the demand for built-to-suit the substantial upcoming supply. We see vacancy -0.1pp +0.4pp -0.1pp facilities; and continuously monitor declining starting 2022 as we project the economic 2 government incentives for firms incentives from the CREATE law benefitting occupiers Vacancy bridging the supply gap for cold chain and increased investment inflows raising industrial 5.6% 6.1% 5.4% assets, which may include tax space absorption. breaks. Source: Colliers Note: USD1 to PHP48 as of the end of Q4 2020. 1 sq m = 10.76 sq ft; pp = percentage point. Data in the table above represents land leasehold rates. 1FMCG = Fast-moving Consumer Goods; 2CREATE = Corporate Recovery and Tax Incentives for Enterprises. Colliers Semi-Annual Industrial | Manila | 30 July 2021 We also encourage occupiers to explore the adoption of sustainable alternatives Recommendations such as the utilization of solar power to help reduce operational costs. Tap the demand for cold storage facilities Expand last mile delivery segments in fringe areas The growing preference for online shopping has been propelling the demand for Colliers believes that e-commerce will likely continue to drive logistics leasing warehouses and cold storage facilities specifically for perishable food items and demand beyond 2021 as more retailers shift to online platforms. A survey other essential products. As the country accelerates its Covid inoculation program, conducted by NielsenIQ has shown that 67% of Filipinos are likely to continue demand for specialized cold storage facilities for the vaccines and other online shopping even post-Covid5. To reach more consumers and increase the pharmaceuticals is also likely to rise. To meet the growing demand, we encourage efficiency of delivery services, we recommend e-commerce and third-party logistics developers to consider expanding their assets to include cold chain facilities or to (3PLs) firms to consider expanding their warehouses and delivery hubs in areas refurbish existing supply to include specialized cold storage features such as pre- outside of Metro Manila such as Cavite, Laguna, Batangas, Bulacan, and Pampanga installed chillers, increased floor load capacity, and higher ceiling heights. The which are also prime locations for ecozones and upcoming residential projects. Bureau of Investments (BOI) projects the revenue of the country’s cold chain industry to reach PHP20 billion (USD417 million) by 2023 as a result of this thriving Take advantage of government incentives demand3. Even with Covid, the Philippines remains as an ideal investment hub as investors Consider divesting industrial assets into REITs continue to look at the country for their expansion plans. Government policies such as the recently-enacted CREATE Law introduces incentives for investors which The Real Estate Investment Trust (REIT) industry in the Philippines is at an early include extended income tax holidays. Department of Finance (DOF) classified stage but we see developers further utilizing it resulting in a more competitive and industries based on their capacity to create more jobs and boost the country’s diversified REIT market. DoubleDragon has signed a PHP3.97 billion (USD82.7 competitiveness6. Industries involved in the manufacturing of medical equipment million) deal with Jollibee Foods Corp. to create the Philippines’ first and largest and supplies, export products, and electronic components and semiconductors are industrial REIT4. We encourage investors to further explore the viability of among the sectors likely to enjoy these tax incentives. Longer duration tax holidays industrial REITs in the country. In our view, the industrial segment continues to will also be given to investments outside the capital region to spur more economic record growth amid Covid, and we see it thriving beyond 2021. activity in the countryside. Colliers recommends investors of these industry segments to take advantage of the available incentives as they plan out their Retrofit and renovate existing facilities investment ventures in the Philippines over the next 3 to 5 years. Colliers believes that developers can further capture the rising opportunities in the industrial sector by refurbishing their existing warehouse facilities to meet the Manufacturing thrives amidst Covid demands of tenants. We recommend logistics players to improve the specifications Data from the Philippine Statistics Authority (PSA) show that approved foreign of their properties through advanced-technology features such as facility direct investments (FDI) in Q1 2021 amounted to PHP19.6 billion (USD408 million), automation, artificial intelligence (AI) systems, and cloud-managed IT solutions. :6 2 Source: 3BusinessWorld, BoI sees cold chain industry revenue at P20 billion by 2023. :4ABS-CBN News, Source: Philippine News Agency, FIRB adopts framework for investment perks applications. DoubleDragon, Jollibee sign P3.97-B deal for CentralHub expansion, eye PH's first industrial REIT. 5Business Mirror, Pinoys seen to still do online shopping post-Covid Colliers Semi-Annual Industrial | Manila | 30 July 2021 a 32.9% decline compared to the PHP29.1 billion (USD606 million) approved FDI in Department of Trade and Industry’s (DTI) e-commerce roadmap, the sector is the same period in 2020. This marks the fifth consecutive quarter of decline for projected to contribute about PHP1.2 trillion (USD25 billion) by 20229. approved foreign investments in the country, still an impact of the uncertainties We see the rising demand for cold storage facilities improving warehouse occupancy brought upon by Covid. rates in the next 12 to 36 months. With the government’s vaccine procurement, cold Despite subdued foreign investment pledges, Colliers sees the industrial sector storage facilities are likely to expand in areas outside Metro Manila in order to thriving as the PSA reports that FDI committed to fund manufacturing projects ensure the quality of the vaccines delivered across the country. amounted to PHP11.1 billion (USD231 million) in Q1 2021, about 11% higher Colliers sees an increase in industrial stock by H2 2021 with the completion of compared with the PHP10 billion (USD208 million) allocated to the industry in the expansion projects such the Lima Technology Park Expansion, Cavite Technopark same period last year. In terms of regional share, Region IV-A or CALABARZON7 Phase 2, and the Suntrust Ecotown Tanza Phase 2. Despite the amount of upcoming received the highest foreign investment allocation of PHP7.5 billion (USD156 million), supply, we project vacancy rates to continue declining as we see the demand for 38.6% of total approved FDI for the quarter. The Cavite-Laguna-Batangas (CALABA) warehouses and industrial spaces rising beyond 2021. corridor houses majority of the country’s industrial parks, a preferred location for several manufacturing firms. Gradual rental recovery begins As business sentiment in the country gradually recovers from COVID-19, manufacturing activity in the country also records a slow rebound. IHS Markit Colliers observed a slight increase in land leasehold and warehouses lease rates in reports that the Philippine Manufacturing Purchasing Manager’s Index (PMI) rose to H1 2021. Compared to the figures recorded in H2 2020, land leasehold and 50.8 in June 2021, breaching the 50 neutral mark which separates expansion and warehouse lease rates grew by 1.9% and 0.9%, respectively. Colliers attributes the contraction8. IHS Markit attributes this improvement to the increasing demand, increase to the robust demand for warehouse space driven by e-commerce firms.