On the road to recovery: Property developers ride out pandemic humps

Property developers are looking into the long-term for recovery in the real estate sector, expecting some hiccups in the next twelve months or so.

Indeed, despite the vaccination rollout instilling some optimism in the real estate market, developers remain uncertain of the sector’s outlook in the short and medium terms due to the rise of new variants and slow-paced vaccinations, results of a survey by Cushman and Wakefield Philippines showed.

In the second edition of its COVID-19 real estate developer sentiment survey, Cushman and Wakefield found that developers are looking into the long-term for the market’s recovery.

“The return to pre-pandemic vibrancy of the real estate sector is expected to come only in the next two to three years as the short- and medium-term growth outlook remains uncertain,” Cushman and Wakefield said.

Real estate developers in the Philippines remain less optimistic in the short-term as they expect the market to remain vulnerable with weak sentiment and trimmed supply and demand, as well as declining property values and rental rates, survey results showed.

“The survey respondents expressed optimism in the mid-term (or the next 12 months) with some 31 percent expecting the real estate market to show early signs of recovery – with both supply and demand strengthening, as well as moderate growth in property values and rental rates,” Cushman and Wakefield said.

But some real estate developers see the vulnerability of the real estate market persisting in the next 12 months.

“In the long-term (or a period of two to three years), 62 percent anticipate the real estate market to build-up momentum with strong rebound of both supply and demand,” the firm said.

Within that time frame, 31 percent of developers said property values and rental rates will revert to pre-pandemic level, while the other 31 percent see moderate growth in property values and rental rates.

Stalled economic recovery

Despite the Philippines finally breaking free from the pandemic-induced recession after registering a double-digit growth of 11.8 percent in the second quarter of the year, the implementation of stricter quarantine measures this month is stalling anticipated economic recovery.

Metro Manila and several other areas have again been placed under enhanced community quarantine restriction from August 6 to 20. Currently, Metro Manila is under a modified quarantine classification until the end of the month.

Occupancy to worsen

Cushman and Wakefield said demand prospects for the majority of the real estate sub-sectors remain dim in the short term.

Based on the survey, 75 percent of hotel and retail developers said they expect that the decline in occupancy will persist in the next 12 months.

For the office sub-sector, more than half or 54 percent of office developers expect a decline in new lease volume.

Similarly, most residential developers (38 percent) expect that there will be a decline in sales transactions in the next 12 months.

In contrast, demand prospects for the industrial sub-sector are promising, with 83 percent of industrial developers expecting an increase in new lease volume, while 50 percent expect an increase in sales transactions in the next 12 months.

Rental adjustments to continue

Cushman and Wakefield emphasized that majority of the respondents in other sub-sectors, except for industrial, have made some adjustments in their rental rates amid the pandemic, with all of the survey respondents engaged in hospitality and retail having made rental adjustments over the course of the pandemic.

In addition, 62 percent of office developers and 67 percent of residential developers have implemented rental adjustments for their tenants.

Results of the survey show that these developers are likely to continue implementing rental adjustments in the near term, with 75 percent of hotel developers and 63 percent of retail developers saying they are likely to do so in the next 12 months.

In addition, 31 percent of office developers think that there will still be rental adjustments in the next 12 months, while another 31 percent believe that they are less likely to do so.

Sixty-seven percent of industrial developers, on the other hand, believe that rental adjustments are not necessary within the next 12 months.

“For tenants that were not able to operate during the varying levels of community quarantine, retail developers are still able to extend forms of rental relief. For the office sub-sector, 62 percent of the office developers no longer extend rental relief while industrial developers no longer extend assistance to tenants which have yet to resume their operations,” Cushman and Wakefield said.

Uneven market recovery

Cushman & Wakefield Philippines Director and Head of Research, Consulting & Advisory Services Claro Cordero said that market recovery will be uneven across the real estate sub-sectors.

Bright spots seen amid challenges

Despite the pandemic providing more challenges in the medium term, Cushman and Wakefield said there are still several new trends that present various opportunities for the industry’s future growth such as the country’s real estate investment trust (REIT) market.

“The success of the recent listings prompted more local real estate developers to tap into the REIT market. Several developers have lined up REIT listings, showing the potential of this investment vehicle to answer the demand for alternative investment instruments,” Cordero said.

REITs in the market are Ayala’s AREIT Inc., Double Dragon’s DDMP REIT Inc., and Filinvest REIT Corp. of the Filinvest Group.

Megaworld Corp.’s MREIT Inc. and Robinsons Land Corp.’s RL Commercial REIT are gearing up for public listing as well.

A well-diversified REIT vehicle provides downside protection and creates value for its unit holders.

Aside from the REIT market, Cushman and Wakefield also highlighted the opportunities from the growth of the e-commerce market.

“Several shopping mall operators and developers have implemented online ordering, payment, and delivery systems – allowing continued patronage and support for their respective tenants, especially during stricter community quarantine measures,” Cushman and Wakefield said.

“Moving forward, as the vaccination program covers more areas, consumer and market mobility will be the key to unlock the still strong pent-up demand and stunted growth of the market,” Cordero concluded.