Property sector badly hit by COVID-19

As expected, due to the spread of COVID-19, the Philippine economy is now seen to grow at a lower rate in 2020 than originally forecast.

Colliers International, in a new report, cited data from Oxford Economics which projects that the Philippine economy will grow by 3.9 percent in 2020 from its original estimate of 5.9 percent. However, Oxford Economics also expects a sharper recovery in 2021, with the country’s gross domestic product estimated to grow by 7.3 percent.

Assuming the outbreak peaks in the first quarter of this year, Colliers said a coordinated policy and monetary response from the Philippine government and the Bangko Sentral ng Pilipinas would likely instill confidence in the real property market before yearend.

Colliers projects office vacancy in Metro Manila to rise due to slower office space absorption from POGOs and traditional occupants due to travel bans imposed by the Chinese and Philippine governments and the Luzon quarantine. It said that inspection activity is likely to decline which should result in lower take-up in the first quarter of 2020.

It noted that a slower macroeconomic environment is likely to hinder traditional occupants’ expansion plans although demand is expected to recover in the first half of 2020 at the earliest.

But it said that this should be tempered by take-up from outsourcing and traditional occupants, especially once market sentiment improves by the second half of this year. As for vacancy, it expects it to be around 6.5 percent in 2020 assuming leasing activities pick up in the second half. However, should the pandemic take a more significant toll on demand, it expects vacancy to rise closer to eight percent in 2020.

It recommended that occupants look at new buildings in fringe locations where rents are cheaper than in major central business districts, even as it pointed out that the time is right to negotiate long-term leasing deals. For landlords, it said they should proactively attract traditional or outsourcing tenants for space vacated by POGOs, that they target likely resilient sectors such as pharmaceuticals and technology, and that they work with existing tenants to provide flexible lease terms while maximizing wellness features and prioritizing wellness certifications.

For the retail sector which was severely impacted by the community quarantine measures, Colliers cited Oxford Economics which expects private consumption to grow by a slower 3.6 percent this year but would rebound to 7.1 percent in 2021.

The report noted that luxury retail will feel the immediate pinch due to decline in tourist arrivals, especially those coming from China and South Korea which are the Philippines’ major source markets. On the other hand, online retailers including those with food and beverage deliveries and pharmacies should benefit during this period.

It said that domestic consumption is likely to weaken in the near term and recovery in demand is likely to depend on any government stimulus.

The Colliers report recommended that retailers implement online-to-offline strategy, that smaller tenants maximize their tie-ups with ecommerce operators and platforms, and that they target senior citizens who are embracing online shopping. For landlords, it said they must provide short-term rent concessions to support retailers and ensure and highlight hygiene standards in malls through good ventilation and adequate sterilization.

As for the residential sector, the report saw softer demand due to increasing unemployment or declining remittances from Filipinos abroad. It said that depending on the duration of the Luzon quarantine, prices in the secondary market will likely soften to their pre-selling levels, adding that demand in business districts that mainly house offshore gaming companies from China like the ones in the Bay Area are likely to decline especially if the travel ban continues.

Colliers anticipates the completion of about 14,270 new condominium units in Metro Manila in 2020. It said that with significant completion, developers should highlight property management since this is crucial to the health and safety of occupants and buildings and should offer more flexible terms to attract buyers.

In the event that the COVID-19 situation worsens and factoring in a slower take-up from Chinese investors especially in business districts where demand is POGO-driven, Colliers sees Metro Manila vacancy increasing to close to 20 percent from 11 percent in 2019.

The report recommended that office landlords maximize wellness features of buildings and strengthen property management capabilities while occupants should use this as an opportunity to negotiate long-term deals. It also said that condominium developers should offer more flexible terms to investors and note that developers who are able to respond well to the pandemic are likely to be remembered by buyers once market conditions normalize.

For end-users and investors, Colliers said that they should take advantage presented by better pricing for both the pre-selling and secondary markets and that they should look for units in fringe areas where there is still potential for capital value appreciation and where price increases have been due to end-user demand.

Also for residential investors, the report suggested that they cash in on better pricing due to lower interest and mortgage rates while mall operators should strengthen their e-commerce strategies.

The same report highlighted the immediate impact felt by the hotel sectors, where some hotel operators in Metro Manila have already reported occupancies going down to 35 percent as of end-February 2020 from 71 percent at the end of 2019, according to unofficial reports.

Colliers projects that 2020 foreign arrivals will likely be lower than 2019 figures due to the COVID-19 outbreak. It expects average occupancy rates for the first quarter of 2020 to decline below 50 percent due to substantial new hotel room supply as well as the adverse impact of a travel ban in China, the Philippines’ second largest source of tourists after South Korea. Daily rates of several hotels , it said, declined by about 30 percent at the end of February 2020 compared to rates in December 2019.

It said that operators should start lining up marketing efforts to recapture foreign and domestic tourist as the epidemic wanes. The report also noted that the hotel sector is likely to be the first to benefit from a government-initiated stimulus package.

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