Metro Manila MarketView

Metro Manila MarketView Q2 2013 Global Research and Consulting Q1 2013 GDP 7.8 % yoy 2011 GRDP -3.2 % (year) PHP/USD 1.068% (month) 91 T-BILL RATES 0.90 (month) 10-YEAR T-BOND 4.00 (month) INFLATION 2.8% (month) REAL DEMAND DRIVERS PREVENT PRICE HIKES IN PH PROPERTY MARKET Fort Bonifacio, a rising BPO hub Fort Bonifacio: An Emerging Business District 1 Brisk Expansion and Cost Sensitivity of Global Firms Stimulate Office Market Encouraging economic figures has turned all eyes to the Philippines, with global and BPO firms stimulating the office market. Prudence Reigns for Developers in the midst of Solid Investor Confidence in the Residential Market Developers are now moving cautiously in construction, taking into consideration demand and absorption. Power Sector Growth to Reinforce Manufacturing Industry For 2013, investments in the powerenergy sector notably increased with global and local firms vying to set up power plants throughout the country. Global Brands flock the Philippine Retail Market Changes in Filipino consumer spending has driven demand for global brands while heightening competition for the limited retail spaces therefore pushing rents up. In real estate, it is necessary to obtain the fundamental value of the asset. Relying on speculative price appreciation and fast exchanges of property is what led other countries to asset bubbles. In economics, the general rule is that low supply and high demand yields high prices. Property buyers expect increasing revenues amidst limited developable land. With this mindset spread throughout investors, fast property turnover will further escalate prices as each investor tries to make a profit for every exchange. A number of countries in Asia have implemented new measures in order to prevent price escalations based on speculation. Limiting transaction volume is one of the effective approaches to achieve this. In Beijing and Shanghai, a 20% capital gains tax was implemented. Hong Kong imposed a new double stamp duty raising the maximum rate from 4.25% to 8.5%. Singapore lowered the loan-to-value (LTV) ratio for second housing loans to 50% from 60% and 40% for third loans. Foreign home buyers, which are some of the major drivers of transaction volume, are also tapered through stamp duty tax increase from 10% to 15%. Effectively, it is now more costly to invest in real estate in mature and developed markets, much more from a foreign investor s point of view. Initial impact of the increased transaction costs is seen to be felt in volume but prices will remain firm in the short run. The Philippine residential condominium market remains to be stable with no price hikes being seen across Metro Manila. Compounded annual escalation rates from 2008 to 2012 yielded a range from 6%-12% depending on the location, project quality and price scheme. The higher end of the spectrum was garnered by emerging business districts given that there is more room for development. Loan-to-value ratios for the country move steadily at a range of 70% to 90%, which is a sign of strong liquidity in the Philippine banking system along with low interest rates. The unique nature of the Philippine real estate market is its high sensitivity to real market demand. For instance, residential transactions for investment aim to get the highest yields from rent. Continued on page 6

OFFICE BRISK EXPANSION AND COST SENSITIVITY OF GLOBAL FIRMS STIMULATE OFFICE MARKET Encouraging economic figures has turned all eyes to the Philippines, with global and BPO firms stimulating the office market. Majority of the BPO companies have taken space in reasonably-priced locations resulting to low office vacancies across Metro Manila. Brisk expansions and cost-sensitivity among global firms in Q2 2013 brought overall office vacancy rate in Metro Manila to drop from 3.21% to 2.51% q-on-q amidst supply pressures. Noticeably take up from multinational and BPO companies was likewise observed from new tenants in Prime and Grade A office during the said quarter. Prime and Grade A Office Stats Business District Vacancy Rate Average Asking Lease Rate Makati 4.27% 901.46 Fort Bonifacio 0.87% 770.29 Ortigas 3.66% 566.90 Alabang 1.31% 587.41 Quezon City 0.11% 609.09 The office market in Makati Central Business District (CBD) continued to draw in multinational corporations amidst tightening supply. Vacancy rates for the CBD further declined to 4.27% in Q2 from 5.07% in the previous quarter. Prime office spaces in the CBD continue to draw interest from multinational firms which resulted to a lower vacancy rate of 5.61% from 7.87% in the previous quarter. In addition, expansions in BPO firms offering higher value services have absorbed the available prime office spaces. Strong demand pushed prime average lease rates up to PhP 1,041.05, or an increase of 1.25% q-on-q. The Grade A office market experienced a different scenario as vacancy rate slightly increased to 2.83% from 2.44% in the previous quarter. This minimal movement is mainly due to added availability from two new office buildings. Despite the slight increase in vacancy, average lease rates for Grade A office space in the CBD was almost unaffected with rates even inching upward to PhP 783.97. The robust demand in the market has dampened the effect of the increased vacancy which is seen to be easily absorbed in the coming months. Consecutively, average asking lease rate for the entire CBD in the second quarter increased to PhP 901.46, an increase of 1.26% from PhP 890.27 q-on-q. In Fort Bonifacio, vacancy rate dipped to 0.87% from 1.01% q-on-q brought by migration from expanding global and local companies. The business district continues to be the alternative office settlement to the Makati CBD for multinational and BPO industries. The movement of cost-sensitive BPO companies has lowered vacancy rates in Fort Bonifacio offices. Average asking lease price were slightly augmented in the second quarter from PhP763.74 to PhP770.29 due to heightened competition on acquisition of office spaces. Supply pressure is projected to ease in the business district as an additional 150,389 square meters of office spaces are slated for turnover in the remaining quarters of the year. For Ortigas Center, vacancy rating plunged to 3.66% from 5.04% q-on-q an indication of interest from cost sensitive companies as lease rates in the area are relatively lower against other business districts. Despite an escalation of 1.87% q-on-q, Ortigas Center s average lease rate of PhP566.90 has been the most inexpensive among the major business districts. Ortigas Center had the highest decrease in vacancy brought by demand from BPO companies and expansion of local firms. Upcoming office spaces remain scant for the year with only Robinsons Cyberscape Beta and 45 San Miguel to open in the upcoming months. Cost sensitivity among BPO firms has also led to increased space take up in Quezon City as vacancy rate plummeted to 0.11% from 0.82% in the first quarter of 2013. Average rent escalated in the second quarter to PhP 609.09 from PhP 582.28 due to the increased demand in the area. Upcoming supply for the year is estimated to be approximately 63,259 square meters upon completion of UP Ayala Technohub Building M & L and the Fairview Terraces BPO. Prime and Grade A Occupied Space ( 000s GLA) 1,000 800 600 400 200 2 BPOs stimulate the Office Market 0 Makati CBD Fort Bonifacio Ortigas Quezon City Alabang Continued on page 6

3 RESIDENTIAL PRUDENCE REIGNS FOR DEVELOPERS IN THE MIDST OF SOLID INVESTOR CONFIDENCE IN THE RESIDENTIAL MARKET The Philippine economy continued to thrive in the second quarter following the announcement of a stellar first quarter GDP growth and investment ratings upgrade by two of the largest credit rating agencies. The strong economic performance has encouraged foreign investors to enter and expand in the country, which in turn brought about an increase in the number of expatriates and availability of high paying jobs. The residential property sector largely gained from employment growth and increased purchasing power as the housing market became one of the priority investment ventures of middle and high income households. Over the years, vertical residential developments have proliferated to address the housing demands of those working in the business districts. Makati CBD and Fort Bonifacio became the primary destinations for condominiums as they have established themselves as the country s most important financial and business districts. Both districts have also been the home of high-end commercial and institutional establishments. International schools, foreign embassies and luxury retailers burgeon in the area, which accordingly attract the high-income population. Consequently, luxury residential projects are generally located within the business districts of Makati and Fort Bonifacio. Luxury Residential Condominium District Makati CBD Rockwell Center Bonifacio Global City Village Forbes Park Dasmarinas, Urdaneta Bel Air Village San Lorenzo Magallanes Luxury Residential Houses Rental Rates PhP240K - PhP250K PhP230K - PhP250K PhP200K - PhP220K Rental Rates PhP350K - PhP450K PhP250K - PhP500K PhP120K - PhP 250K PhP110K - PhP250K PhP80K - PhP180K In Metro Manila, Grand Hyatt Residences and Discovery Primea are the only luxury residential condominiums that are presently selling. Luxury developments are performing fairly well with an average take-up of 10 units per month. High-income individuals and expatriates have sustained the demand for luxury residential condominiums in both purchases and rents. There has been continuous growth in the number of end-user buyers anchored by low interest rates and flexible payment terms. Foreign investors are also investing in luxury residential properties as the country offers lower prices than most Asian countries. The average price of currently-marketing luxury projects in the country is at US$427 per square feet (PhP200,000/sqm.), which is significantly lower than the regional average of US$1,143 per square feet (PhP535,000/sqm). Distribution of Upcoming Residential Condominiums Quezon City Makati Manila Mandaluyong Taguig Pasay Pasig Paranaque Muntinlupa Others Affordable Mid-Market High-end Luxury 0 10,000 20,000 30,000 40,000 50,000 Although demand is present, developers have been cautious in launching luxury developments because of the longer construction period and slower returns. Owing to the limited supply, capital values of luxury properties increased by 2.4% q-o-q. Rental values on the other hand remained stable as property owners try to keep their competitive edge. In addition, rents were maintained because of the abundant supply of high-end residential properties that have become a viable alternative to renting out luxury condominiums because of its lower rental rates and comparable amenities to that of luxury developments. Currently, large-scale developers have been more focused on developing affordable and mid-market residential condominiums as these collectively account for more than 80% of the total units for completion from 2013 through 2019. High-density residential complexes targeting the low to middle income market have proliferated in the fringes of the major business districts as more households and individuals choose to own condominium units over house and lots that are located outside of Metro Manila. Preference for condominium living is brought about by the inclination of the working population to relocate proximate to their place of work for efficiency and so as to defer costs associated with transportation. Demand for affordable and mid-market is primarily driven by OFWs and middle income individuals. The government s loan mediums such as Pag-IBIG fund have especially stimulated the growth of the condominium market by allowing buyers of affordable and mid-market condominiums to avail of long-term housing loans at low interest rates. With investor confidence solidified, it is anticipated that the demand for residential properties will continue to pick up in the coming quarters. Expatriates, foreign investors and high net worth individuals will drive the demand for luxury residential properties while OFWs and middle income individuals will buoy the middle and affordable segment. Developers are anticipated to continue constructing residential properties, taking into consideration demand and absorption Q2 2013 Metro Manila MarketView 3

Metro INDUSTRIAL Manila POWER SECTOR GROWTH TO BOLSTER MANUFACTURING INDUSTRY The international investment community has shown renewed interest in the country amidst its economic performance. The government s efforts of implementing fiscal and structural reforms have paid off as the country achieved two investment grade ratings during the first half of 2013. The government is taking advantage of the favorable investment climate by drawing in more foreign direct investments into the country. FDI inflow in the Philippines observed the sharpest year-on-year growth among the ASEAN nations in 2012. For 2013, industrial firms like Yokohama Tire Philippines, Inc. and Shimano, Inc. have correspondingly expanded and entered the Philippine market during the second quarter. Furthermore, investment pledges grew 91.9% to PhP83.69 billion in the first half of 2013 from the same period of 2012 as Japanese companies such as Funai Electric, Philippines, Inc., Cebu Mitsumi, Inc., and Ibiden Philippines, Inc. took interest in the country s manufacturing potential. Investments in the power-energy sector also notably increased with global and local firms vying to set up power plants throughout the country. With the Philippine Energy Plan (PEP) 2012-2030 in effect, it is expected that more firms will venture into power generation projects. The PEP envisions a more secure power sector by endorsing the use of renewable energy and exploration of petroleum and coal plants in the country. Along with this, efficient and sustainable energy systems and facilities will be developed to ensure the effective distribution of energy throughout the country. remain abundant in the short to medium term. An incentive for investors to set up operations in the country is predominantly derived from lease PEZA Manufacturing Ecozones by Region (in ha) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 29,864 Region III 3,087 3,070 Region IV Region X Region VII 853 680 921 Region XII Others rates and capital values that were held stable as landlords try to keep their rates at a competitive level. The government needs to persist on developing and implementing sustainable long-term solutions that will help revive the country s manufacturing sector. Addressing the power problems of the country is a step towards transforming the manufacturing industry by means of enhanced firm productivity and strengthened supply chains. The development of new power generating plants is anticipated to produce enough energy to address the demands of the general population and the ongoing industrialization of the economy. It is also expected to lower the cost of energy prices through competition among power suppliers. INDUSTRIAL STATS SUBIC BAY FREEPORT Metro-Manila : 130 kms (68 Miles) / 2.5 Hours Size : 67,000 hectares / 165,560 acres Power : 130 mws Water : 33,000 cubic meters/day Telco Provider: Subictel (PLDT) Lease Rate : US$0.40 -US$1.70 /sqm* US$2.00 -US$20.00/sqm (SFB)* CLARK FREEPORT ZONE Metro Manila : 80 Kms (50 Miles) / 1+Hour Size : 33,653 Hectare / 83,158 Acres Power : 50mws + External Water : Max 40k cubic meters/day (2010) Telco Providers : PLDT &Digitel Lease Rate : US$ 0.30 -US$ 2.00/sqm (Main Zone Lot)* PhP5,500 -PhP25,000 /ha (Sub Zone Lot)* US$3.00-US$5.00 /sqm (SFB)* CALABARZON Metro-Manila :110 Kms (68 Miles) / 2 Hour Drive to Batangas Power : Varies by Location Water : Varies by Location Telco Providers : Varies by Location (PLDT etc.) Selling Rate : PhP2,000 -PhP4,500 /sqm (Lot) Lease Rate : PhP43-PhP76 /sqm (Lot)* US$2 US$6 /sqm (SFB)* * Lease rate per month SFB (Standard Factory Building) Industrial firms like Yokohama Tire Philippines, Inc. and Shimano, Inc. which have correspondingly expanded and entered the Philippine market during the second quarter will benefit from the resulting lower power costs in the future. Through this, the government hopes to address the high electricity rates that have burdened the country s major industrial sectors, particularly manufacturing. Industrial firms will benefit from future lower power costs. 4 The manufacturing sector continues to be challenged by relatively high labor and power costs compared to its neighboring nations. As a result, while renewed interest in the country s industrial sector is evident, investments in these types of projects may take some time before it materializes, with supply of industrial properties to

RETAIL MORE GLOBAL BRANDS ENTER THE PHILIPPINE RETAIL MARKET Consumer sentiment remained upbeat in the retail market as the country moves to a higher growth trajectory. Benign inflation and strong purchasing power continue to propel retail activity in Metro Manila. Potential in the retail market remained strong brought by the expanding BPO industries and steady growth of OFW remittances. Retail sales continued to be solid demonstrating upticks in consumer spending and an encouraging outlook for real estate and tourism sectors. Compact household expenditure has been supported by the growing inflow of remittances and the wellanchored inflation forecasts. Luxury vehicle brands have also seen the potential in the Philippine retail market. The entry of British luxury vehicle brand Rolls-Royce in the country stems from the spending patterns of Filipinos. The Chamber of Automotive Manufacturers of the Philippines (CAMPI) has affirmed the country s strong consumer-based market. Automobile sales increased by 20% with 87,226 sold units in the 1H 2013, up from 72,871 units in the same period last year. The entry of luxurious brands and products has signified the growing size of the affluent and increased purchasing power of the Filipino community. Q2 2013 Metro Manila MarketView The quarter saw the entry and expansion of new and existing global brands in different retail core sites. Newly-opened SM Aura in Taguig has offered a variety of the latest brands in the quarter such as TM Lewin, Miss Selfridge, Suiteblanco, Stefanel, BB Dakota, Yves Rocher, J Lindberg, Farah Vintage, Paul Boulangerie, NBA Café, and Todd English Food Hall. Other international brands have also located in selected prime, suburban and secondary retail areas. These brands have settled in the new Shangri-La East wing, Robinsons Magnolia, Glorietta and Greenbelt. For Q2 2013, an approximate of 7,579 sqms. of leasable space has been taken up by these internationally brands. HH Final Consumption Expenditure Q1 2013 Retail supply space continue to increase Rents edge further as international brands locate in prime retail establishments. High demand for global brands heightened the competition for the limited retail spaces therefore pushing rents up. Low vacancy rating was sustained, hovering at the 5% level. This 2013, the expected completion of approximately 432,000 square meters of additional gross leasable area will ease supply pressure. Retail market businesses will remain profitable for the remainder of the year due to a strengthening Philippine economy driven by the growing BPO industry, OFW remittances, and strengthening middle market that can sustain the operations of retail establishments. Source: NSCB 5 BPO-retail integrated facilities continue to create waves in the business districts via convenience store expansions. Family Mart, a Japanese convenience store chain owned by the Rustan's Group and Itochu is one of the new establishments with 24/7 services catering to BPO and middle class employees. The increased income of the labor force in business centers, specially those in the BPO sector, sustained the expansion of convenience stores near offices while concurrently strengthening ground floor retail trend. Global brands set up shop in the country 5

COVER STORY However, the residential market has a threshold for rent per segment, pricing beyond the threshold would decrease chances of leasing it out and in effect such an investment will be recovered later than expected and becomes less saleable. Currently, most of the buyers of residential developments are end-users. With an end-user market, there is no immediate need to gain yields from their disbursements. This would mean less transaction volume and hence, no price hikes. Likewise, rent is the primary source of revenue for property investors in the office market. The office market is dominated by BPO demand composing 80% of yearly take-up and BPO companies prefer to locate in quality offices with low rents in order to save costs. However, property investors in the office segment expect a certain level of return from their investment and if the market cannot sustain target rent, they would be at a loss. In addressing BPO market demand and investor concerns, developers in the country have been offering projects with competitively low rents suited for BPO occupiers to maintain its high occupancy. Offering excessively high rents would drop renewals and occupancy in the office segment. This business environment currently fuels the office expansion of BPO companies in Metro Manila and even in the countryside. OFFICE In Alabang, vacancy rates remained at 1.31% for the first and second quarter of 2013. The business district continues to encourage BPOs to locate in the area. Average rents slightly increased to PhP 587.41 for the second quarter of 2013 from PhP 584.89 in the previous quarter. For the remaining quarters of 2013, Filinvest One Building and Plaz@E will add new supply to the pipeline with a combined total 34,783 sqm of gross leasable area. Outlook for the office market remains optimistic for the rest of the year. Supporting tailwinds from an increasing office space demand from multinational and BPO companies shall sustain the office market. Average rent is expected to increase due to upcoming supply rendering quality alternative spaces for new tenants. Total upcoming office supply in Metro Manila for the year amount to an approximate 548,689 square meters. Vacancy rates in emerging business districts will decrease as more costsensitive BPO firms are anticipated to take up space in the area. Philippine economic growth signifies encouraging possibilities for the office market. BPO opportunities are expected to diversify into other skilled and knowledgebased fields such as finance, accounting, software development, IT and other high-value services. The central bank is also doing its part enforcing financial prudence in the banking sector to avoid a property bubble. Price hikes are prevented by the 20% real estate exposure regulatory limit set by the Bangko Sentral ng Pilipinas. By limiting investments of banks in real estate, volume transaction is also expected to decrease, preventing price hikes from speculation. The end-user demand for the residential segment and the highly cost sensitive BPOs for the office segment are the strongest factors preventing price hikes in the real estate market. External influences on real estate prices are merely knee-jerk reactions on the market. Real demand not speculation is what keeps prices at a stable growth pattern. Office market remains optimistic 6

CONTACTS For more information, please contact: Manila Office 10 th Floor, Ayala Tower One & Exchange Plaza Ayala Avenue, Makati City 1226 t:(632) 752-2580/848-7388 f: (632) 752-2571 e: ricksantosteam@cbre.com.ph w: www.cbre.com.ph Cebu Office Unit 1505, Ayala Life-FGU Center Mindanao Avenue corner Biliran Road, Cebu Business Park Cebu City 6000 t:(6332) 318-0070/236-0462 2012-2013 BEST INTERNATIONAL LETTINGS AGENCY (WORLD, ASIA PACIFIC, PHILIPPINES) BEST REAL ESTATE AGENCY MARKETING MARKETING BEST REAL ESTATE AGENCY NO. 1 REAL ESTATE ADVISOR 2013-2014 BEST INTERNATIONAL LETTINGS AGENCY (ASIA PACIFIC, PHILIPPINES) MARKETING (ASIA PACIFIC, PHILIPPINES) BEST REAL ESTATE AGENCY MARKETING MARKETING HIGHLY COMMENDED REAL ESTATE AGENCY Rick Santos Chairman Rick.Santos@cbre.com.ph Calvin Javiniar Senior Director Investments and Capital Markets Carlo.Javiniar@cbre.com.ph Nelson Del Mundo Vice President Facilities Management Nelson.Delmundo@cbre.com.ph Joey Radovan Vice Chairman Global Corporate Services Joey.Radovan@cbre.com.ph Mabel Luna Director Valuation and Advisory Services Mabel.Luna@cbre.com.ph Allan Napoles Executive Director Project Management Allan.Napoles@cbre.com.ph Jan Custodio/ Alvin Fernandez Senior Director/ Director Global Research and Consultancy Jan.Custodio@cbre.com.ph Alvin.Fernandez@cbre.com.ph Edwin Samarista Executive Director Property Management Edwin.Samarista@cbre.com.ph Yvette Acebedo Director Residential Services Yvette.Acebedo@cbre.com.ph + FOLLOW US GOOGLE+ FACEBOOK TWITTER LINKEDIN Global Research and Consulting This report was prepared by the CBRE Philippines Research Team which forms part of CBRE Global Research and Consulting a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. 7 Disclaimer 2013 CBRE Philippines. Part of the CBRE Affiliate Network. CBRE Philippines confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.