Beyond The Build: PH Real Estate Midyear Review


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The Property Sector in general appears to be turning a corner if the key indicators for the 1st quarter of 2022 is of any indication. More particularly, the commercial segment of the sector has shown positive take-up versus 2020/2021 volume (after several quarters of negative take-up, i.e., non-renewals, pre-termination, etc.) whilst still way below the pre-pandemic levels.


Vacancies are still “elevated,” rents have declined and expected to further weaken in the current year as new supplies go live amidst lower demand compared with pre-pandemic levels. The BPO segment and the traditional “occupiers” are driving the resurgence with the BPO industry reporting that headcount and revenues for 2021 have expanded despite the lockdowns not only locally but globally. In general, the mood is one of “cautious” optimism that the segment will continue its upward trajectory and should return to its pre-pandemic curve in the next 2 years, even in the absence of the possible return of the gaming sub-sector that dominated the office market years prior to the pandemic. It’s cautious as there are headwinds ahead.


A potential uptick in covid incidents will break this recovery if it gets to the level of 2020/2021 with the emergence of subvariants (attributed to the slackening of hygiene protocols during the election and post-election periods, opening of the country’s borders to visitors and returning residents, etc.).


Inflation (pushed by higher oil prices) is one worrisome problem that is leading to higher interest rates and erosion of purchasing power, an offshoot of the Russian-Ukrainian war and the collective response of EU, the US, Japan, and allies. The war is also delaying the recovery of the global supply chain that has been greatly impacted by the global lockdowns, and the recent draconian response (zero covid policy) in key China cities to control the recent outbreak of covid. A global recession is ominous and not totally unlikely.


A lesser source of concern but nevertheless a real one, is the emerging trend in the BPO industry adopting a hybrid structure of part work-from-home and part on-site presence. While this is exceedingly popular among staff and mid-management levels of the organization and is generally embraced by HR executives, its likely impact on productivity is still to be fully tested.


Similarly in the residential segment, vacancies are still high and rental rates are below pre-pandemic years. While there was recent news (BSP property index) that prices have inched higher versus 2021, the effective price of new supplies and even in the secondary market could be lower if you consider the generous discounts and longer payment terms offered by developers to induce sale.


RFO (ready for occupancy) inventory is also high (despite the delay in completion and turn-over of projects started before the pandemic) owing to lower take-up (particularly for in-city high-rise developments and in fringes) both by end-users and investors. While remittances from foreign-based employees increased YOY (2020/2021), one of key drivers for residential demand, there was still a significant portion of overseas jobs that was lost, mostly in the hospitality (both land- and sea-based) and the maritime industries. Likewise, the higher local unemployment during the pandemic could have tempered the demand side of the equation. This makes us think that the higher value of remittance in 2021 must have been used for more pressing needs of relatives here.


Higher interest rates will also impact the housing mortgage market, and if the levels continue to increase to tame inflation and or buoy up the pesos vs other currencies, we will likely see a slow-down in take-up of the residential sector, particularly in the lower middle-income segment.


The silver linings in this segment include higher deployment of overseas employees during the 1st quarter of 2022; improving local employment rate as the economy opens up; relaxing hygiene protocols inducing a more robust economic activities on almost all sectors of the economy; opening of the country’s borders to foreign nationals; and a resurging BPO industry. Prognosis in the next two years is that demand will continue to improve as the economy inched its way to recovery. Much more will be known depending on the strategies to be adopted by the incoming administration to get us out of the slump towards a sustainable growth trajectory, and the outcome of the Russian-Ukrainian war.


The two segments of the Property Sector that were impacted hard by the pandemic are the hospitality and retail sector. The lockdowns effectively “locked-out” their primary source of revenues, i.e., local, and foreign tourist, and the consumers in general. Hotels closed and forced to adapt alternative uses such as for quarantine purposes and as temporary living quarters for nearby BPO offices, specifically the gaming sub-sector, but these creative alternatives were not enough to compensate for the lost revenue compared with the pre-pandemic periods. Some notable hotels have permanently closed down due to losses and other related reasons. During the 1st quarter of this year and as the economy opens up to both local and foreign visitors, we have seen a recovery of occupancy in both city hotels and resorts in what is now dubbed as “revenge travel” or more aptly “vacationing”. Again, the sustainability of this recovery will depend on the relevant macro drivers considered above.


The impact to the retail segment of the real estate industry was equally devastating as in the hospitality business. Malls and regional retail facilities were closed down and worst, no alternative uses for the unoccupied and inactive spaces were taken. However, digital commerce became widespread out of necessity to facilitate the exchange of critical goods both ways. As in the hospitality business, this was not enough to sustain occupancy levels in malls resulting in higher vacancies as lessees (mostly small- to medium-sized business) went bankrupt or had to pre-terminate their leases to stop the losses. In the midst of a “resurging” economy, the impact of digital commerce will have long-term structural implication to the current business model. It is presumed that the retail business will take longer to fully recover to pre-pandemic periods principally because of the substantial supply available and the phenomenon of digital commerce making it less “necessary” to occupy prime spaces to draw in customers. But again, the Filipino culture of “malling” to escape the humid heat during the summer season and as a favorite past time of families to go bonding (i.e., for meals, movies, and window shopping) earning for us the accolade of the mall capital in the world will still be a factor to consider. Additionally, malls have been quick to reinvent themselves during the downturn of 2008 (Housing Mortgage Crisis of 2008) when they converted unoccupied levels to accommodate BPO tenants looking for large floor plates.


Overall, we should keep our eyes focused on key indicators from outside the country that will affect the economy in general, the real estate industry, and high-level policies and fiscal strategies the incoming administration will adopt to induce economic growth amidst continuing uncertainties in the global marketplace.

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