The Philippines recorded a GDP growth of 5.6% in Q1 2019, the slowest pace in 16 quarters, according to Philippine Statistics Authority (PSA). For the remainder of the year, Colliers see GDP growth picking up and this should support office demand from non-outsourcing and traditional tenants. Colliers encourages developers to cater to these occupants’ requirements (e.g. flexible office space cuts).

"Residential developers planning to build condominium and house and lot (H&L) units in areas with strong end-user demand should look at Pampanga, Bacolod, Cebu, Iloilo, and Davao," says Colliers. 

Meanwhile, industrial locators should consider industrial parks in Northern Luzon where Colliers see a more pronounced development of industrial and warehouse space from 2019 to 2021.

Slower growth due to national budget delay

Economists mainly attribute the lackluster growth in the first three months of 2019 to the delay in the passage of the national budget and lower inflow of foreign direct investment. Economic results in Q1 2019 showed a contraction of public construction by 8.6% as the reenacted national budget stalled the development of public projects intended to be implemented during Q1 2019. The private sector, meanwhile, filled the void as it expanded by 8.6%. Colliers believes that the growth reflects the sustained development of offices, condominiums, and malls in and outside of Manila.

Colliers is optimistic that the economy is likely to grow at a faster pace from Q2 to Q4 2019 following the enactment of the 2019 national budget in April. "The country’s socio-economic planning agency expects a ramped up implementation of infrastructure projects for the remainder of 2019 and we see developers cashing in on this aggressive infrastructure completion."

Non-outsourcing firms drive demand

About a decade ago, Colliers estimated that about 50% to 60% of office space in Metro Manila was occupied by outsourcing firms. These are business process outsourcing (BPO) companies providing voice support services as well as knowledge process outsourcing (KPO) firms that offer higher-value outsourcing services such as health information management, software engineering, legal transcription and finance and accounting. This demand eventually diversified, including the influx of offshore gaming firms from China in Q4 2016. But Colliers has observed that office space absorption from the traditional and non-outsourcing locators (which includes engineering and construction firms, multinational corporations, government agencies and flexible workspace operators) has been expanding over the past 24 months.

In our opinion, developers should closely observe this non-outsourcing segment given the growing leasing opportunities. In Q1 2019, the segment covered 35% of transactions or 116,800 sq metres (1.3 million sq feet). An insurance company in the Makati CBD expanded while several foreign flexible workspace operators are currently looking at new space in the Makati CBD, Fort Bonifacio, and Ortigas center. Even local flexible workspace operators have been aggressive in scouting for available space in new Grade A buildings across Metro Manila.

‘Golden Age of Infra’ to spur office space take up

Colliers has observed that firms actively taking part in the government’s infrastructure projects are also occupying larger office spaces. Colliers recorded a combined 14,000 sq metres (150,600 sq feet) of deals from engineering and construction firms in Q1 2019 in Makati, Quezon City, and Fort Bonifacio. The government intends to double its infrastructure spending to about 6% of annual GDP or PHP1 trillion (USD19 billion) per year from 2019 to 2022. This is likely to support expansion of construction and engineering firms’ activities which should eventually compel them to occupy larger office spaces across Metro Manila.

Colliers sees continued demand from non-outsourcing tenants as these are companies that are indifferent to the availability of Philippine Economic Zone Authority (PEZA)-proclaimed space but whose annual expansions hinge on the growth of the country’s economy. "We see the sustained macroeconomic growth boosting the office space demand of the non-outsourcing occupants, particularly construction, insurance, and flexible workspace operators over the next three years."  

Ramped up residential supply outside manila

Over the next three years, demand for residential units, particularly H&L, in the provinces should be supported by sustained remittances from overseas Filipino workers (OFW), which reached USD 5.3 billion (PHP281 billion) in the first two months of 2019, up 2.3% yoy according to the central bank. OFW remittances cover about a tenth of the country’s GDP. The sustained growth in remittances along with decelerating inflation and the central bank’s decision to cut interest rates by 25 basis points, should result in a cheaper cost of borrowing money. Developers looking for sites with strong end-user demand should consider provincial locations such as Pampanga, Cavite, Laguna, Batangas, Bacolod, Iloilo, and Davao.

Industrial firms head north

Colliers believes that take up of industrial space and warehouses over the next three years should be sustained by steady growth of the manufacturing sector. The segment grew by 6.8% per annum over the past three years, faster than the 6.6% annual GDP growth during the period.

The development of the first Sino-Philippine industrial park by Ayala Land north of Metro Manila shows growing interest from industrial locators and developers to expand outside of the Cavite-Laguna-Batangas corridor, the country’s primary industrial hub. The Philippines’ warm relations with China, competitive wages, and improving cargo rail infrastructure should entice more Chinese manufacturers to invest in the Philippines.

Filinvest Land Inc. also announced that it is likely to start the construction of its industrial park in New Clark City in Tarlac (about 120 km from Manila) in 2019. This should further raise industrial investments north of Manila.

Source: Colliers International Philippines

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