Suffering continues for property sector

MANILA, Philippines — With the global economic downturn, and as the local economy officially enters into a recession following a series of lockdowns, the country continues to reel from the impact of the COVID-19 pandemic.

An international property consulting firm is advising property owners and developers to convert and repurpose their assets to survive.

Colliers International Philippines, in its latest report, advises hotel operators to explore the viability of co-living and flexible workspace schemes, while industrial developers should modernize existing warehouses and look at converting vacant mall spaces into microwarehouses near business districts in Metro Manila.

For office landlords and tenants, Colliers advises them to consider adopting the hub-and-spoke model to reduce cost and improve employees’ work-life balance.

A review of current business models is indeed crucial. Colliers noted that while the Philippine economy contracted by 16.5 percent year-on-year in the second quarter of 2020, which is its worst performance since World War II, the government remains positive.

The potential for recovery, according to the NEDA and the Bangko Sentral ng Pilipinas, remains bright, projecting a 6.5 to 7.5 percent growth next year. International financial and credit rating agencies like the World Bank, ADB, Moody’s and Fitch  are looking at a growth  of between 6.2 to seven percent.

This optimism seems well founded. Colliers cited data from the BSP showing remittances from OFWs in June rebounding by 7.7 percent month-on-month after three consecutive months of declines and which is likely to increase consumer confidence and resuscitate the retail sector. The report noted that a recovery of global economies in 2021 should also result in a rebound in OFW remittances, which should have a positive impact on residential property demand across the country.

It also noted that legislative measures like the CREATE bill, which should clarify ecozone locators’ lingering concerns on their tax and non-tax perks, the Bayanihan 2 bill (which as of this writing is awaiting the President’s signature to become a law) and the ARISE Philippines Act, which should  benefit traditional office tenants, are likely to provide relief to the economy once implemented this year.

Colliers senior manager for research Joey Bondoc pointed out that the relaxation of lockdowns in key parts of Mega Manila, which include Metro Manila, Laguna, Cavite, Rizal, and Bulacan, would buoy economic activity in the region that accounts for about 50 percent  of the country’s economy. This should result in a revival of public and private construction which declined 33.5 percent year-on-year in the second quarter.

Colliers expects that in Metro Manila, new office completion this year will drop by 50 percent to only 532,600 square meters compared to its original forecast, while condominium completion will reach only 6,270 units in 2020, 57 percent lower than expected.

But again, recovery will take time. In the meantime, all property sectors continue to reel from the effects of the pandemic on their businesses.

In the case of the office sector, Colliers anticipates subdued leasing in 2020, with transactions in the first half already down by 64 percent compared to the same period last year due from traditional, offshore gaming, and outsourcing clients.

Colliers called on landlords to expand their options by offering available office space in non-core locations where tenants can avail of rents about 20 to 30 percent cheaper than those in major business districts. This, it said, is important especially for companies planning to implement a hub-and-spoke model (occupying smaller hubs across Metro Manila instead of relying on a single headquarter location) to reduce real estate costs, to access talent in alternative locations, improve work-life balance of employees, and reduce their living expenses.

As for the rising vacancies in malls, it said landlords should look at converting the vacant spaces into flexible workspaces.

Aside from the office sector, another segment badly hit by the pandemic is the hospitality sector.

Colliers projects hotel occupancy to reach only 30 percent in 2020 due to the substantial drop in foreign arrivals, compared to 72 percent in 2019. Occupancy will likely remain below 50 percent up to 2021, as local and foreign air travel continues to be disrupted. Average daily rates (ADRs), it said, are expected to drop by 30 percent  this year due to lower occupancy. ADRs are not seen improving over the next 18 to 24 months as the leisure sector continues to suffer from the global economic crunch and limited spending of local tourists.

Like other property markets, the report added that the hotel segment is likely to suffer from delayed completion of new projects as developers factor in a sluggish recovery, especially since IATA has already projected global air travel to recover only in 2024.

Colliers suggested that hotel operators and developers highlight compliance with health protocols, innovate services using technology, and consider other leasing models, and repurpose facilities into co-living facilities and flexible workspaces.

For the industrial sector, it said developers should modernize warehouses to capture the growing demand for e-commerce and firm up partnership with delivery firms to reach more consumers. It added that mall operators with vacant spaces should also explore converting or repurposing vacant retail spaces into warehouses to allow retailers to reach last-mile deliveries.

The report also revealed that the Metro Manila condominium market continues to reel from the impact of the pandemic and lockdowns, with secondary residential vacancy at 11.8 percent in the second quarter. Vacancy rates, it said, could reach the mid-teens by the end of 2020, reflecting the deeper impact on the Metro Manila residential market.

Colliers disclosed that as of the first quarter, there were about 44,800 unsold condominium units across Metro Manila, from 47,600 units as of the end of 2019.

Unfortunately, the impact of the COVID-19 pandemic on the secondary residential market was not yet apparent in the second quarter, and  the latest economic indicators (economic contraction, lower OFW remittances, record-high unemployment) point to a more precarious condominium market for the remainder of 2020, it said.

To prop up demand for the remainder of 2020, Colliers called on developers to continue extending attractive payment terms to potential clients to support the prevailing low interest rates in the market, which should anchor residential demand growth starting 2021.

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