Headwinds and tailwinds

Part 1 of 2

The Philippine property sector continues to recover after the disruptions brought about by the COVID-19 pandemic in 2020 and 2021. While challenges remain, Colliers believes that opportunities are on the horizon and developers and investors need to remain proactive in capturing gains from a rebounding property sector. The Philippine economy is expanding with foreign investors, including property players, expressing interest in developing in the Philippines. This has been very evident even before the pandemic with foreign property firms, including hotel operators, aggressively scouting for Philippine developers to tie up with.

In our view, the property market’s rebound should be supported by sustained macroeconomic growth, with the Philippines projected to be one of the fastest-growing economies in Southeast Asia in 2024. Then there are remittances from Filipinos working abroad which continue to fuel the demand for affordable to lower mid-income (PHP2.5 million to PHP6 million per residential unit). We are optimistic that while supply and demand in the Metro Manila pre-selling sector have been stifled by high interest and mortgage rates, rising land values, and extended remaining inventory life for ready-for-occupancy (RFO) units, this weakness is being offset by developers’ push outside of Metro Manila.  Outsourcing firms continue to look for spaces outside of the capital region benefiting Cebu, Pampanga, Laguna, Iloilo, and Davao. In contrast, the retail and leisure sectors continue to benefit from Filipinos’ rising disposable incomes. While F&B spending is being crippled by inflation, Filipinos continue to travel, enticing foreign and local hotel players to expand their footprint across the Philippines and essentially explore the unexplored destinations in the countryside.

It’s not all doom and gloom, definitely. There are headwinds, but property stakeholders continue to bank on the positives – the tailwinds – and these should lead the Philippine real estate sector’s growth for the remainder of the year.  

Office vacancy remains elevated

Colliers Philippines continues to see a slowdown in the office sector. The Chinese offshore gaming players have practically left the Philippines and this left a huge void in the office sector. The POGO segment used to be a major driver of office space demand from 2017 to 2019 – we are seeing some returning POGOs coming back in trickles. These are the Southeast Asian POGOs including Thai, Indonesian, and Vietnamese firms. We are still seeing increasing vacancies across Metro Manila as firms continue to rationalize office space while rents continue to correct, especially in business hubs with vacancies higher than the Metro Manila average vacancy of 19.3% as of the end of 2023.

 Some firms are now returning to traditional office setup while some are implementing hybrid schemes. A positive offshoot from this is that the demand for flexible workspaces has been rising, with operators aggressively looking for locations in Metro Manila where they can open co-working facilities, especially near the residential hubs of employees.  The Metro Manila flexible office market’s vacancy improved to 16.7% in 2023 from 41% in 2020. This provides an upside not just for flexible workspace operators but also for condominium developers that can house co-working spaces within their residential towers.

Both for office and residential segments, there has been a substantial demand for green and sustainable office towers. We are also seeing boutique developers catering to this demand by building LEED-certified residential projects. Overall, we have seen a greater demand for green and more open spaces. My colleague Maricris Sarino-Joson, who heads Colliers Philippines’ Landlord Representation team, has seen major BPO occupiers occupying massive and sustainable LEED Platinum-certified office spaces. The Makati Commerce Tower is one office building that is getting queries from large BPOs and MNCs planning to occupy healthy and sustainable office space in Makati.

Headwinds in the residential sector

 We are seeing a tempered launch of new condominium units in Metro Manila. We attribute this to high interest and mortgage rates, with developers now becoming more cautious of new launches in the capital region as overall demand in the pre-selling market slowed especially in 2023. Other factors behind the lukewarm pre-selling launches in Metro Manila include surging land values, increasing prices of construction materials, and the dearth of developable land especially in Metro Manila’s major business districts.

Developers optimizing tailwinds

 Local investors and end-users are looking for homes that are near offices, malls, and transportation hubs. Security and accessibility are top considerations. Investors are also searching for residential units that offer large, open spaces. These preferences were only highlighted by the pandemic. 

In our view, the luxury condominium segment in Metro Manila remains strong as investors utilize these properties priced from P20 million and up as viable hedges against inflation. Investors are also banking on these properties’ price appreciation potential, maximizing the availability of top-notch concierge services and high-end amenities. The market is relatively small especially if you focus on demand in Metro Manila and Cebu but this luxury market is awash with cash and remains a steady source of demand both for end-use and investment purposes.  In fact, developers venturing outside of Metro Manila are actively testing these price segments as they aggressively push the price barrier, especially for resort and leisure-themed developments.

To be continued.