Bleak short-term prospects
HIDDEN AGENDA - Mary Ann LL. Reyes (The Philippine Star) - May 3, 2020 - 12:00am

Prospects are not looking good for the residential sector of the local real estate industry, at least in the short term.

In a just released report, real estate professional services firm Colliers International said that residential demand in Metro Manila is expected to soften in 2020 due to the impact of the COVID-19 pandemic, particularly in business districts dependent on Philippine offshore gaming operators (POGOs).

It said that if the virus is contained in the first half of 2020, market sentiment is expected to improve from the third quarter of this year and a recovery in demand and supply likely to happen next year.

In terms of supply, Colliers said it projects a slower completion in 2020 due to work stoppage following the implementation of the enhanced community quarantine in Luzon. Delivery of new units is anticipated to rebound in 2021 as new supply moved in step with the pickup in demand, it added.

The report revealed that around 1,670 new units were delivered in the first quarter of 2020, the lowest number of completions recorded in the past six quarters. The new condominium units are located in Fort Bonifacio and the Bay Area.

It expects the delivery of about 10,900 units, a 26 percent drop from the 14,700 units initially estimated for 2020. Colliers said that the work stoppage has pushed back the completion of a couple of residential towers due to be completed in the fourth quarter of 2020 to the second quarter of 2021.

But it noted that the downward adjustment in new supply should temper the increase in vacancy in the Bay Area, where the demand for residential units has primarily been driven by POGOs.

In its report dated April 30, Colliers added that the work stoppage in March and April is likely to
have a ripple effect on Metro Manila’s residential supply up to 2022. It said that while it sees completion picking up next year with 7,900 units, the capital region’s stock by the end of 2022 will only hit around 155,730 units, compared to an initial forecast of 158,290 units, following delays in some projects in the Bay Area, Alabang, and Makati central business districts as projects initial scheduled for the second half of 2022 were delayed to 2023.

Colliers believes that while overall demand for condominiums in Metro Manila is likely to decline in 2020, business districts, such as the Bay Area, are at risk of greater impact.

It explained that in business districts, much of the take-up has primarily been driven by POGOs over the past three years. Meanwhile, in areas outside the Bay Area, it said demand is also likely to be tempered by concerns about rising unemployment as well as a fall in overseas worker remittances projected by the National Economic and Development Authority (NEDA).

Colliers noted that economic analysts are projecting  remittances to drop by $3 billion to $6 billion in 2020, about 10 to 20 percent lower compared to remittances received in 2019. These remittances, it said, partly fuel demand for condominium units classified as affordable(P1.7 million to P3.2 million) and mid-income(P3.2 million to P5.9 million) segments.

Colliers also said it believes that a rebound of Metro Manila’s office sector in 2021 is likely to have a spill-over impact on residential demand. It expects an increase in demand in key business districts where outsourcing and traditional occupiers are concentrated. Among the business districts likely to benefit from a pick-up in residential demand are Fort Bonifacio, Alabang, Ortigas Center and Rockwell Center.

In the same report, the property consulting firm projects rent for prime three-bedroom units in major business districts to decline due to softer demand in the secondary market and for rents to recover in 2022 as the market improves.

With softer demand for condominium units in Metro Manila due to the pandemic, Colliers sees rents in the secondary residential market falling by 5.5 percent in 2020, which is is slower than the 15 percent contraction during the Asian financial crisis in 1998 but steeper than the 3.7 percent fall in 2009 during the global financial crisis.

It explained that historically, about a year after the Asian and global financial crises, rents rebounded. With economic growth and office leasing likely to pick up pace in 2021, Colliers said this should support demand for condominium units all over Metro Manila, and lease rates are anticipated to grow at a moderate rate of about 1.9 percent annually from 2021 to 2022.

In terms of vacancy in the secondary market, this is expected to rise due to softer take-up following the COVID-19 outbreak. Vacancy, it said, will likely ease in 2021 with a rebound in secondary residential demand.

The report stated that vacancy in Metro Manila’s secondary market, which includes ready-for- occupancy (RFO) units in key business districts, slightly increased to 11.3 percent in the first quarter of this year, up from 11 percent in the fourth quarter of 2019. Colliers said the full impact of the pandemic on vacancy is likely to be seen in the second quarter of this year.

Colliers expects vacancy to rise to 15 percent in 2020 from 11 percent in 2019 due partly to lower demand caused by the health crisis which coincided with the delivery of almost 11,000 units in 2020.

Colliers sees residential prices declining in 2020. We see prices rising at a slower pace than rents in 2021, following a recovery of demand from local and foreign employees, including POGO workers.

The report noted that assuming the worst-case scenario of an economic contraction of six percent projected by NEDA and the absence of demand from the POGO sector which played a major role in raising condominium prices since 2017, residential prices may drop by about 15 percent in 2020 with a slow recovery in 2021 assuming the pandemic is contained starting the third quarter of 2020.

It said the pent-up demand should lead to higher take-up in 2021 once market conditions improve, noting that previous crises have shown that prices recover immediately once market sentiment and business activities start to improve.

To take advantage of the recovery, Colliers recommended that developers highlight high-quality property management with a focus on sanitation and emergency preparedness, implement creative lease terms for ready-for-occupancy (RFO) units, and offer flexible payment terms to attract buyers, especially as pent-up demand starts to be released in 2021.

Meanwhile, the report emphasized that now is the time for condominium buyers to take advantage of better pricing in the market due to softer demand especially in the mid-income segment priced from P3.2 to P5.9 million per unit.

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