(Ortigas Park completed December 2005. As demand for Grade A Office space rise, Ortigas and Company, Inc. tries to refurbish the Ortigas Center to maintain its competitiveness.)
It appears that the “globalizing” components of the Philippine economy—i.e. companies engaged in business process outsourcing like call centers and overseas Filipino workers—have started to rock the property markets in 2005. It will continue to do so in 2006. But don’t expect an all out partying next year, the experts say, because the country is not yet poised to get back to the frenzy prior to the 1997-98 Asian financial crisis.
Certainly, owners and developers of the prime and grade A office spaces in both Ortigas and Makati will be smiling all their way to the banks. Claro Cordero, Jr., manager for consultancy services of the Makati-based LeeChiu and Associates (LNA) said these properties—large, efficient floor spaces with high-tech specifications and finish located in Ayala Avenue, Makati Avenue, Paseo de Roxas—will enjoy rising values and rents.
“Prices of prime and grade A properties have bottomed in 2003 but we have seen a recovery in the last two years,” said Cordero, stressing that vacancy rates in said property segments in Makati have gone down to about 5 percent. At this vacancy rate, one could say prime office spaces are practically filled up, except a few small non-contiguous office spaces. The reason for this high occupancy, about 95 percent on average, is the mushrooming of many business process outsourcing companies that gobbled up these prime office spaces.
Cathy Casares-Ko, real estate division head of the Ortigas & Company said that the Ortigas Center has attracted a lot of outsourcing companies because the area is close to bedroom communities of Quezon City, Antipolo, and Taguig. “Three years ago occupancy rates here in Ortigas was 60 percent. Now occupancy rate is about 80 percent due to all those call center facilities. We expect that trend to continue in 2006.”
Cordero noted that vacancy rates for Grade B and C office spaces in Ortigas and Makati, however, are still high at 25 percent. “These are mostly inefficient spaces, with limited power supply, and poor workmanship,” he explained. He said that there’s a recovery in B-C office market, most observers are still cautious as the prospect of this segment of the market.
“So overall, there’s going to be a continued recovery but it will not bring us to the level of prices and rental rates prior to the Asian crisis,” said Cordero. “Before the Asian crisis, you could find spaces and rent from P1000 to P1200 per square meter. Right now, the average is about P500-P600 per square meter, but we don’t see rents going up to P800-P900 per square meters.”
“Rental rates will not be able to support prime office developments similar to the Enterprise Center or the RCBC Plaza,” said Cordero. This is because, according to Cordero, outsourcing companies are likely to go to areas outside Makati and Ortigas or even to cities in the Visayas, where they are likely to get the labor pool that they need. The rapid growth of the outsourcing industry has led to the scarcity of skilled labor, particularly of good English-speaking workers, in Metro Manila.
Another factor, Cordero explained is the emergence of 14 new business districts all over Metro Manila that will pose competition to Ortigas and Makati. Mostly completed or initiated after 1995, these new business districts covering 1,300 hectares of developed land include the Eastwood City in Libis (Quezon City), Araneta Cyber Center (Quezon City), Greenhills Redevelopment, Edsa Central (Mandaluyong), Robinsons Gateway Center (Mandaluyong), Rockwell Center, For Bonifacio Global City, McKinley Hill, SM Central Business Park (Manila Bay), Metropolitan Business Park (Manila Bay), Newport City (Pasay City), Aseana IT Business Park (Parañaque), Asiaworld City (Pasay), Madrigal Business Park (Alabang), and the Filinvest Corporate City (Alabang).
“Competition among these business districts will deter rental escalations,” Cordero said, saying there might even be a “gradual decline in land values in Makati, Ortigas, and Binondo.
Because of these factors, developers—according to Cordero—will largely be conservative in developing additional buildings. Speculative buildings, he said, will be generally smaller, mid-rise facilities with 15,000 to 25,000 gross floor area (GFA).
Paulo Campos III, issues management associate of the Ayala Land, agrees to this analysis saying that new developments in 2006 will likely be towards “built-to-suit” types of projects where buildings are constructed based on the specific demand and specifications of would-be occupants. As an example, Campos said that Ayala Land is going to start a new nine-storey building designed specifically for the domestic back office operations of the Hongkong and Shanghai Bank (HSBC).
“The ground breaking ceremony will be December 23 to be completed sometime next year,” said Campos. “We are hoping that this project will be a catalyst for further developments in 2006.”
Jan Bengzon, assistant vice president for external affairs of the Ayala Land explained that the trend towards built-to-suit or customized projects is a new phenomenon in the property development industry. “There are no more one size-fits-all types of buildings.”
If there’s a consensus as to the prospects of the office markets, however, analysts and property developers can’t seem to agree on the direction of the residential property markets. Cordero expects two trends next year.
First, prime housing are bound to rise because, according to Cordero, supply of quality houses is limited, there are no prime villages coming up, and the pace of renovation of old houses does not keep pace with demand.
“The terms will continue to in landlords’ favor as the expatriate community grows,” he said. Demand for high quality houses, Cordero said, stems from the increasing number of top executives from business process outsourcing companies setting up shop in the country.
And second, Cordero expects prices of condominiums starting next year as the supply of condo units are expected to rise by 100 percent in the next four years. He said that prices may even plunge 30 percent especially if the economy slows down. This trend, however, will benefit the middle class as quality accommodations become more affordable.
“They always say that,” said Jaime Cura, president of the Chamber of the Real Estate and Builders Association and chief executive officer of the Creba-GSI, Inc., a company engaged in providing real estate and property development information, in reaction to Cordero’s projection. “Every research organization tends to say there’s going to be a glut. You go to Hongkong, property researchers there also say there’s going to be a glut [territory].”
But nothing is farther from the truth, says Cura, who thinks that developers always build with a little of bit of oversupply because nobody could predict the business cycle in the property market. Of course, many small players, he said, would lose their shirt when the bubble burst. In the Philippines, however, the residential sector, especially condominiums, does not seem to indicate a possible glut in the near term.
He attributes this trend to the rising inflow of money into the mid-range residential properties or properties ranging from P1.5 to P2.5 million, the payoff of their pioneering selling missions abroad particularly in the cities of Hongkong, Malaysia, Riyadh in Saudi Arabia, Singapore, Milan, Athens, London, and other cities where there are high numbers of OFWs. That is why, he said, sales of these condominium units have been growing at 30-40 percent in the last two years.
“When we started doing selling missions to reach the OFW market three years, many thought we were just having junkets,” said Cura, stressing that their efforts are now paying off for the entire real estate industry. It’s a strategy, he said, that is now being copied by most real estate companies including Ayala Land.
“Most of the developments were fully sold last year. I heard that in Manansala, a residential condominium developed by the Lopezes at Rockwell, 70-80 percent of the buyers are OFW. Due to the success of Manansala, the twin towers of Hoya, right beside Manansala is also doing very well among the OFW,” said Cordero. “Megaworld is doing the same for Forbestown Center as well as their developments in Cubao. They have setup offices in the United States, London, and Europe to reach the OFW markets.”
Even the hotels, residential resorts and leisure homes are getting a positive outlook from analysts. Cordero, for instance, said that values and prices for hotels may yet rise in the near future due to the continuing improvement in tourism arrivals. On the supply side there are few or limited developments in the pipeline. If there’s one niche that is slowly getting so much buzz, however, it’s in the residential resort and leisure homes.
“The major residential resort five years ago was just Punta Fuego in Batangas. The success of Punta Fuego has attracted other developers like Ayala Land,” said Cordero. SM is poised to do another Punta Fuego in Hacienda Looc, and other developers are looking into this market.”
Other major developments in 2006, Cordero said, would include Metro Pacific’s plans to reopen Cebu Plaza Hotel as a serviced apartment and medical facility for foreign retirees; the opening of an SM-owned hotel at SM Cebu City complex; a Shangrila Hotel and Resort to be situated in a 12-hectare Boracay prime land; a 580-room expansion by the Fairways and Bluewater Resort and Country Club; and another 80-room hotel by the Discovery Group.
Real estate developers like Creba tends to support the optimism for the residential resorts and leisure homes. Cura explained that China, with its rapidly expanding middle class, is looming as a huge market for these sea-side resorts in the Philippines. China doesn’t have good beaches, he said, and the Philippines could be the most likely destination of those Chinese tourists.
Analysts, however, do not seem to extend their favorable outlook on the retail property and industrial land markets. Cordero expects new completions in 2006 to further expand supply of retail space at a time when retail sales are flat. He said that narrowing margins among retailers are a major concern in the industry. The latest report by Collier International seems to indicate a continuing high vacancy rates, validating Cordero’s observations.
“As of end September 2005, the stock of retail space expanded by nearly 4 percent quarter on quarter to 3.87 million square meters with the completion of SM San Lazaro,” said the October Colliers Report ‘The Knowledge.’ “Manila-wide retain vacancy rate is estimated to have slightly increased to 13.1 percent from the previous quarter’s 13.0 percent.”
As to the industrial land market, Cordero said that continuing excess supply will continue to exert downward pressure on rents and prices. This is because, Cordero said, the proliferation of unplanned industrial estates all over the country.
“There are exceptions, of course, like the Laguna Technopark is looking to expand their industrial park, but basically locators are not new businesses,” he said. “These are present locators looking to expand their facilities within the park.