COLLIERS QUARTERLY OFFICE | MANILA | RESEARCH | Q2 2019 | 09 AUGUST 2019 Joey Roi Bondoc BROADENING THE DEMAND BASE Manager | Research | Philippines +632 858 9057 Traditional occupiers and offshore gaming further diversify Manila office market [email protected] 2018-21 Summary & Q2 2019 Full Year 2019 Annual Average Dom Fredrick Andaya Recommendations Director | Office Services | Philippines > Colliers sees traditional and offshore gaming +63 917 831 6725 The national government’s firms complementing the outsourcing firms’ [email protected] directive halting the approval of Demand office space absorption from 2019 to 2021. 229,500 sq m 849,100 sq m 1.0mn sq m Philippine Economic Zone Authority (PEZA) applications is likely to constrict the expansion of outsourcing firms. But we see the > We see the Bay Area, Ortigas Center, and dip in absorption being offset by Fort Bonifacio accounting for a combined take up from traditional occupiers* 54% of new supply from 2019 to 2021 as Supply developers respond to offshore gaming and and offshore gaming firms that are 190,000 sq m 1.03mn sq m 1.08mn sq m traditional occupants’ requirements. ineligible for fiscal incentives given to PEZA locators. We recommend that developers: Annual Average target traditional tenants; push for QQQ/ YOY/ Growth 2018–21/ End Q2 End 2019 End 2021 the speedy approval of pending PEZA applications; and monitor > Year-on-year 2019 rents should rise at about 6%, higher than our Q1 2019 forecast of 5%, proposed legislation that should +2.1% +6.0% +6.0% due to cost-sensitive occupants competing for result in more foreign companies Rent available PEZA space and a flight-to-quality occupying office space in the with firms transferring to newer buildings. PHP985 PHP1,000 PHP1,120 country’s capital. Meanwhile, outsourcing tenants > Colliers projects an annual vacancy of 6.1% -0.5pp +1.3pp +0.0pp should consider PEZA space outside from 2019 to 2021, slightly lower than our Manila such as those in Iloilo and forecast of 6.3% in Q1 2019 due to sustained Cebu while offshore gaming firms 4.9% 6.0% take up from offshore gaming, outsourcing Demand 6.1% should consider new towers in Vacancy and traditional tenants. Ortigas Center and its fringes. Source: Colliers International. Note: USD1 to PHP51 as of the end of Q2 2019. 1 sq m = 10.76 sq ft. The Philippine Economic Zone Authority is also known as PEZA. *Includes companies in various sectors including legal, engineering and construction, government agencies and flexible worksp ace operators. COLLIERS QUARTERLY OFFICE | MANILA | RESEARCH | Q2 2019 | 09 AUGUST 2019 RECOMMENDATIONS SUPPLY TO BREACH 14 MN SQ M Tap traditional and non-BPOs’ office demand In Q2 2019, Metro Manila’s office supply increased by about 190,000 sq metres (2.0 million sq feet) to 11.3 million sq metres (121 million sq feet). The national government has ordered a moratorium on the processing of PEZA Alabang accounted for 33% of new office space following the completion of applications in Metro Manila. We see this constricting the expansion plans of CTP Asean (23,300 sq metres or 250,700 sq feet) and Filinvest Axis Tower 2 outsourcing firms in the country’s capital. Hence, Colliers encourages (39,300 sqmetres or 422,900 sqfeet). Fort Bonifacio chipped in 60,100 sq developers to be mindful of the demand of non-outsourcing occupants as metres (646,700 sqfeet) with the delivery of Ecoprime(35,300 sqmetres or these companies are ineligible for tax incentives given to economic zone 379,800 sq feet) and Milestone at Fifth Avenue (24,800 sqmetres or locators. Developers should specifically watch out for the requirements of 266,800 sq feet). Meanwhile, the Bay Area’s stock grew by 43,600 sq metres insurance, financial technology (fintech), engineering, construction firms as (469,100 sqfeet) with the delivery of DoubleDragonCenter East, Met Live, well as flexible workspace operators. Philflex Building and Y Building. Developers with pending PEZA applications to push for Colliers sees Metro Manila’s leasable office stock reaching 14.2 million sq speedy approval metres (152 million sqfeet) in 2021. This is 29% higher than the metro’s stock of 10.9 million sqmetres (117 million sqfeet) at the end of 2018. Colliers encourages Manila-based developers with pending PEZA applications About 54% of the new supply from 2019 to 2021 is likely to be in Ortigas to push for immediate approval of their applications. This is important to Center, Fort Bonifacio and the Bay Area as developers respond to rising address the tight office supply in Metro Manila from 2019 to 2022 especially in demand from non-outsourcing and offshore gaming firms as well as Makati CBD and the Bay Area where vacancy is already sub-1%. companies transferring to newer buildings. Monitor shift in economic policies Colliers sees sustained office completions in Metro Manila from 2019 to 2021. We see this being complemented by new supply in sites outside The government’s proposal to ease foreign ownership restrictions in economic Manila such as Cebu, Iloilo, Clark, and Davao. These are the preferred sites sectors such as telecommunications, transportation, construction and retail due to the availability of skilled manpower and improving infrastructure. We should contribute to increased office space absorption. Colliers recommends expect the national government to expedite approval of PEZA applications in that developers closely monitor the status of these bills pending in Congress. these locations to support the government’s efforts in spurring economic Expansion outside Manila opportunities outside of the country’s capital. With the moratorium on PEZA applications in Metro Manila, Colliers sees cost- Vacancy At 6.1% By 2021 sensitive outsourcing firms scrambling for available PEZA-approved space. We encourage occupants to consider PEZA buildings outside Manila including Despite the completion of 190,000 sqmetres (2.0 million sqfeet) in Q2 those in Cebu, Iloilo, and Davao. 2019, Colliers recorded a lower vacancy of 4.9% from 5.4% in Q1 2019 following substantial absorption of office space in Quezon City and Ortigas Offshore gaming and non-outsourcing in Ortigas and Quezon City CBD and its fringes. Colliers now sees an annual vacancy of 6.1% from 2019 For offshore gaming tenants, Colliers encourages developers to explore newly- to 2021. This is equivalent to an annual supply of 1.08 million sq meters opened office spaces in Ortigas Center that accommodate offshore gaming (11.6 millionsqfeet) and yearly net absorption of about 1.0 million sq firms while cost-sensitive non-outsourcing tenants such as government metres (10.8 million sqfeet). agencies and start-ups operators should consider buildings in Quezon City that offer cheaper lease rates compared to Makati and Fort Bonifacio. 2 COLLIERS QUARTERLY OFFICE | MANILA | RESEARCH | Q2 2019 | 09 AUGUST 2019 New supply in the Bay Area, Ortigas Center, and Quezon City should be Meanwhile, traditional and non-outsourcing firms including those involved in tempered by demand from offshore gaming and traditional or non- the healthcare services, construction and engineering, food and beverage outsourcing occupants. We also see the tight vacancy in PEZA buildings (F&B), flexible workspace, and information technology sectors are marginally driving lease rates up from 2019 to 2021. continuously growing on the back of sustained macroeconomic growth. Deals with these firms reached 271,000 sq metres (2.9 million sqfeet) in H1 MetroManila office forecast, (sq m) 2019, about 22% higher than 222,000 sq metres (2.4 million sqfeet) closed in the same period in 2018. Among the firms that took up space during the Supply Net Take-up Vacancy 1,600,000 10% period include Siemens, Tenet Healthcare, Jollibee Foods Corporation, and 1,400,000 Common Ground. 8% 1,200,000 Metro Manila office transactions: 1,000,000 6% Gaming 800,000 H1 2018 23% 4% 600,000 H1 2019 37% 400,000 2% 200,000 KPO - 0% H1 2018 2013 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F 2012 29% H1 2019 16% Source: Colliers International Voice H1 2018 19% NON-BPOs FILL THE VOID H1 2019 10% Compared to the 361,000 sq metres (3.9 million sqfeet) of transactions closed in H1 2018, outsourcing deals reached 199,000 sqmetres (2.1 million Others sqfeet) in H1 2019, 45% lower YOY. Among the firms that occupied space in H1 2018 29% H1 2019 H1 2019 are AFNI Philippines, 24/7 Intouch, and IBEX Global Solutions. We 37% attribute the dip in transactions to the slower approval of economic zone Source: Colliers International applications in Metro Manila and uncertainty regarding the approval of the second package of comprehensive tax reform program which intends to reduce corporate income tax rates but purge incentives given to foreign investors including outsourcing firms. RENTS CONTINUE TO RISE The demand from offshore gaming firms, meanwhile, has been relentless We project Metro Manila’s average rent rising by about 6% per year from with transactions reaching 274,000 sqmetres (2.9 million sqfeet) in H1 2019 to 2021, higher than our forecast of 5% in Q1 2019 due to tight supply 2019. Deals were closed in Alabang, Bay Area, Quezon City, Ortigas, Makati of PEZA-approved office space. We still see healthy rental growth in sub- CBD and its fringes in Q2 2019. Colliers sees take up from these firms locations such as the Bay Area as well as Makati CBD and its fringe areas due breaching 300,000 sq metres (3.2 million sqfeet) in 2019 especially with to offshore gaming operations and limited supply. We also see Ortigas new business hubs being more accommodating to offshore gaming Center rates catching up due to the turnover of new and high-quality office operations.