Based on recent data from the Philippine Statistics Authority, the country has finally broken its contractionary streak by posting an 11.8-percent gross domestic product growth rate in Q2-2021. The services sector, which comprised three-fifths of Q2 GDP, expanded by 9.6 percent. Among the services sector’s top contributors was the “real estate and ownership of dwellings” subsector, which grew by 16.7 percent in Q2-2021, after contracting by 29.9 percent in Q2-2020. Nevertheless, the current real estate market is still 18 percent below its Q2-2019 level.
After declining for five consecutive quarters, perhaps, it would be good to review the sector’s current market trends and how it is positioned toward recovery. Let us take a look at the demand prospects of three real estate submarkets: 1) office, 2) residential, and 3) industrial.
“Vacancy” has been the real estate headline for the first semester of 2021, as Colliers reported further increases in vacancy rates within the capital region’s office and residential markets. In Q2-2021, the office market posted a 12.7 percent vacancy rate—up from 11.0 percent in the previous quarter—while vacancies in the residential market increased from 16.3 percent in Q1-2021 to 17.1 percent in Q2-2021. Among the top contributors of vacated offices has been the Philippine Offshore Gaming Operators (POGOs), which saw a massive decline in occupied space from 11 percent of Metro Manila’s total office stock in Q2-2020 to 6 percent in Q2-2021. As new supply completions add on to vacated spaces, Colliers projects vacancy rates to reach 15.6 percent and 17.6 percent in the office and residential markets, respectively, by end-2021.
On a brighter note, total office space transactions amounting to 223,000 sqm in the first semester of 2021 saw a 10-percent growth from the same period last year. 63,000 sqm of which came from provincial areas, where Iloilo and Cebu garnered over 60 percent of provincial transactions. Although the office market recovery hinges on a successful vaccine rollout of the government and the easing of mobility restrictions, Philippine Economic Zone Authority (PEZA) proclaimed spaces and the implementation of the CREATE Law (which will reduce corporate income taxes) would also be crucial in attracting outsourcing firms to operate in the country amid the pandemic. As the IT-BPM and traditional sectors remained to be the stable driver of demand for office spaces in the past year, analysts expect these sectors to lead market absorption in the next six to 12 months as well.
The residential market has mostly been supply-driven as condominium completions are expected to grow by 198.5 percent in 2021. This follows developers’ anticipation of a positive economic turnaround by year-end following mass vaccinations and optimistic government forecasts. Demand, on the other hand, has mostly been comprised of mid-income (38 percent) and upscale (57 percent) projects in Q2-2021, which are likely due to the rebound in remittances from OFW families and investors taking advantage of low interest rates. While residential demand is primarily reliant on the recovery of the office market, other factors that will help drive activity in the market include: 1) developments near infrastructure projects and transportation hubs, 2) continuous growth in remittances, and 3) digital payment solutions as recently endorsed by the Bangko Sentral ng Pilipinas.
Of the aforementioned subsectors, the industrial market has been the most resilient against vacancies in the sector, as the rapid growth of e-commerce in the country entailed industrial space. While prices and leasing rates in the office and residential markets continue to decline, warehouse rates have already recovered and are expected to increase beyond 2021 given the rising demand, especially for cold chain facilities. Right now, Covid-19 vaccines have been the main driver for cold storage demand. Opportunities brought about by the lockdown economy, however, have led to a rising demand for frozen goods, which future investors could capitalize on. In the recently launched roadmap by the DTI-Board of Investments, a 10 to 15-percent annual growth within the cold chain industry has been projected, with revenues reaching about P20 billion by 2023. Thus, developers and logistics firms have started looking into construction of new warehouses and upgrading of new assets.
In sum, the easing of restrictions, which should revive business and consumer confidence along with a robust economy, still hinges on the success of the government’s vaccination rollout and curbing of further infections amid the looming threat of new Covid-19 variants. However, following government initiatives on tax reform, infrastructure development, and industry roadmap development, the outlook on the office, residential, and industrial real estate markets are well-positioned towards recovery.
Author: Mr. Duke Donald R. Cotoco is a Research Associate at the Ateneo Center for Economic Research and Development.
Source: Business Mirror