Property Sector: Nowhere to Go But Up

With rents and capital values bottoming out, vacancy rates easing up, and developers
filling up pent-up demand, the property sector is experiencing a recovery in key
segments. But don't expect it to grow by leaps and bounds. And that's a good thing.
By Heinz Bulos
January 2004

ou can still see the remnants o
the deastating property bust o
199-98. Uninished oice
buildings, skeletal structures o high-rise
condominiums, and caernous holes in
the ground mar the skylines o Makati and
Ortigas.

Property deelopers are still reeling rom
the Asian crisis. Consumers and inestors
hae been badly burned. It`s been ie
years o stagnation. Surely, there`s
nowhere to go but up.

1he good news is the sector is posting
modest growth in key segments. 1he bad
news is there are uncertainties ahead. \es,
olks, we are in a recoery. \e just don`t
know how long it will last.

Richard Raymundo, Director o Research
and Consultancy at Colliers International
Philippines, an international property
management and real estate serices irm,
agrees that there is pent-up demand across
all product types. 1he property sector is
doing well because o low interest rates.
1he timing is ery good.`

lrom a high o 2 during the Asian
crisis in 199-98, interest rates or
consumer loans such as housing
mortgages are at their historic lows,
currently at 9-10. I there was a perect
time to buy a house, it`s now.

At the same time, Raymundo notes,
prices o mid-income housing haen`t
really gone up.` So it`s all an issue o
aordability. It comes as no surprise,
thereore, that the astest-growing
segment is the middle-income residential
market.

Residential segment
n the residential market, the bright
spot is the middle income segment,
including aordable high-rise
condominiums, residential lots, and single-
detached units.

Licenses to sell mid income housing,
approed by the lousing and Land Use
Regulatory Board ,lLURB,, increased by
26. to 192,19 units year-on-year or
the three quarters o 2003.

In the Makati Central Business District
,CBD,, residential condominium stock
has been rising steadily. New supply has
been quite low rom 1999 to 2002, but has
signiicantly improed in 2003. Approed
licenses or the high-rise residential
segment amounted to 10,023 units rom
January to September o 2003 compared
to just 6,366 in the same period in 2002.

As o end o September 2003, inentory is
up by nearly 4 rom the preious
quarter at 9,268 units. In the luxury
segment, the stock increased by 11.8 to
2,985, with the addition o 315 units rom
the second tower o Megaworld`s Paseo
Parkiew.

Raymundo points out that there has been
a shit in luxury condominiums. Beore,
deelopers built and sold large-sized units
- 3-bedroom ,3BR, units at an aerage o
300 sq.m. But ater 199, deelopments
ocused on aordability.` So now, we see
the likes o Greenbelt Parkplace, One
\
I
Legazpi Park, and 1he Columns oering
primarily studio or one-bedroom units.
1ake-up has been healthy.

But Raymundo expects a ew deelopers
that will test the market or bigger-sized
units. Ayala Land, or instance, introduced
1he Residences, with 2BR units. So has
Kuok`s Grand Shang. It did take quite
some time or een Ayala Land to ill up
its residential condominiums. And quite
some eort too. Deelopers stretched
payment terms, remoed interest, or
outright oered discounts just to lure the
market. At least or the residential
segment, unlike in the oice sector which
basically leases space, deelopers can pre-
sell projects, bringing in part o the
unding or their projects. 1hus, they can
take bolder steps in launching new
projects, especially with the aorable
interest enironment.

\et, oerall, acancy rates in the Makati
CBD are still in double digits. Oerall,
residential acancy was recorded at 16.2.
Luxury acancy rate is 13.6 while the
combined rate the remaining segments is
1.3.

Colliers beliee acancy rates will start to
drop rom hereon. listorically, we are at
record highs, as the year 1992 - the
second highest - posted a 13 acancy
rate. It dipped as low as almost 2 in
1996 beore it began its steady climb rom
then on.

1he optimistic iew rom Colliers is due
to eer decreasing rents. Rents hae been
discounted by almost 43 rom their
peak in 199, according to a Colliers
market report. Right now, the aerage rent
or a prime 3BR condo unit in the Makati
CBD is P308 per sq.m. per month.

I you must know, the most expensie to
rent a condo unit is at Rockwell ,aerage
P51 per sq.m. per month,, ollowed by
lort Boniacio ,aerage P425, and
Salcedo Village ,aerage P385,. 1he
cheapest` is along the Apartment
Ridge,Roxas 1riangle area ,aerage P342,.
O course, in absolute prices, Salcedo
Village is a good bargain as you can rent a
130 sq.m. condo unit at P40,000 a month.
It`s small but you can better aord it.

Capital alues are a similar story. In the
Makati CBD, a prime 3BR residential unit
is alued at an aerage o P64,000 per
sq.m. - a 35 discount rom 199 prices.
Colliers expect prices to remain the same
or 2003, with some capital appreciation
by late 2004.

As or socialized housing, the segment is
in the doldrums, with approed licenses
respectiely down by 24.6 year-on-year
to 1,851 units in the irst nine months o
2003. Low-cost housing improed in the
third quarter, up 15.4 to 20,51, but this
is not expected to lead the market.
Raymundo sees the problem as a unding
issue, as deelopers shy away rom this
sector or lack o enough buyers able to
pay.

Office sector
t`s a dierent story or the oice
sector. lor one, supply has been static
at 2.62 million sq.m. \hat`s good is
that Premium and Grade A buildings
account or 31 o the stock, compared
to just 6 in 1994.

And these newer buildings are the ones
beneiting rom the upgrade or light to
quality done by multinational companies,
which preiously were orced to take on
Grade B oices back in 1996 when there
was a lack o supply.

Ater the boom in 199, there was an
oersupply, which is only being addressed
in the past ew years as multinationals
I
moed to the newer buildings. Another
trend that has tremendously helped the
oice sector is outsourcing.

In recent years, the Philippines has
successully attracted global companies
that decided to outsource some o their
business processes, particularly their call
centers, legal, accounting, and lR
unctions to countries with a cheaper but
capable labor pool.

As such, call centers and shared serice
units hae drien demand or new oice
space in the Makati and Ortigas CBDs.
According to Colliers, take-up in the
Makati area is orecasted at 94,000 sq.m.
or the entire year.

Just as an example, RCBC Plaza, where
Colliers`s oice recently transerred, now
houses the Australian and Canadian
embassies. RCBC has the highest take-up
in the Premium segment, with acancy
alling to 48 as o 3Q03, while most
building occupancies remain unchanged..

\et interestingly, despite the inlux o call
centers and shared serice units, the
acancy rate or Premium oice space is a
high 21.1 as o the third quarter o
2003. But Colliers beliee this will ease to
single digits in the next 12 months.

Raymundo stresses, In the next three
years, there will be no new supply or
oice space in Makati. Lerything is
residential.` So while there`s a air amount
o space let and acancies are still high
,historical aerage in Makati is just 5,,
consider that there`s no new supply
coming in, and soon, it will be illed up.

As such, Colliers see oerall acancy rates
to drop to 10 in the next 12 months,
rom the current 12.5, equialent to
some 326,384 sq.m. lrom a high o
almost 18 in 2001, the acancy rate has
steadily decreased.

\ith ixed supply and increasing demand,
rents are expected to increase in the next
12 months. 1he oice sector has passed
its worst time. Vacancies hae peaked and
rent and capital alues hae already
bottomed out,` says Raymundo.

But as o the moment, landlords continue
to drop the rent, instead o their preious
desperate attempts o oering rent-ree
periods. Rents or Premium Grade oice
space in the Makati CBD are at an aerage
o P484 per sq.m. per month. 1hese are
around 50 rom 199 leels. But in the
next 12 months, Colliers see an uptick o
6 in this segment.

It`s the same orecast or Grade A oice
space, which is now leased at an aerage
o P358 per sq.m. per month. Grade B
rents decreased by 5 to an aerage o
P264 per sq.m. per month and is expected
to remain static in the short term. Rents
or Grade B space hae corrected by 60
compared to leels in 1996, as companies
moed to better oices.

Retail space
hings don`t look too good on the
retail side. Supply is static quarter-
on-quarter at 3.4 million sq.m.,
increasing eer so slightly by 1.2 by end
o 2003. Lxcept or Greenbelt 4 and the
SM Makati expansion, there hasn`t been
new stock o retail space since 4Q02.

1hus, acancy rates, though currently high
at 15.1, easing rom 18 in 2Q02, is
expected to cap 2003 at 14, which is still
quite high. 1here are just too many malls
in the metro. Raymundo sees tenancy mix
being compromised. \hereas beore, i a
certain wing or loor is assigned to
computer shops, you`ll see only computer
shops. Now, you sometimes see a shop
1
that`s a bit o,` notes Raymundo. One
reason, he says, is the list o tenants has
grown short. 1he tenancy base in the
Philippines is small. \hat you see in one
mall, you see in another.` ligh-end
stores, or instance, are dominated by a
single company, Rustan and its subsidiary,
Stores Specialists, Inc.

1he trick, he explains, is how you put
them together. It`s not the usual ormat.
\ou now think o positioning, een
ambiance.` Beore, Raymundo says, it`s all
just an air-conditioned mall in a box. But
now, deelopers are experimenting with
new ormats. A perect example is the
new Greenbelt, which mixed shops,
cinemas, bars, restaurants, and residential
units amidst greenery and integrating parts
o the old Greenbelt Park.

1he retail property deelopers also
moing into another trend: inding their
niche. \hereas it used to be mass retail,
best exempliied by the SM chain,
deelopers hae since moed into the
upscale market, pioneered in 1996 by
Shangri-La Mall in Ortigas, and imitated
by SM`s 1he Podium and Benpres
loldings` Rockwell Center.

Smaller deelopers are targeting the low-
income market with malls in Aenida and
Carriedo.

But those that are doing well, Raymundo
notes, are those that cater to the middle-
income segment. Older, mass-income
malls are upgrading to middle-class.
Recent example: the Greenhills shopping
complex. Current example: the Araneta
Center. Plus there are brand new projects
like Market! Market! in lort Boniacio,
rom Ayala Land.

Len within a shopping center, market
niches are segregated. At the Ayala Center
in Makati, or instance, there`s the middle
income area - the ormer Quad ,now
Glorietta 1, and Park Square. 1here`s the
mid-to-high end Glorietta ,3 and 4,,
which itsel has wings catering to arious
segments. It has its Gold Crest row o
restaurants right outside. And then, there`s
the, mid-income old Greenbelt ,with its
ast ood restaurants, and the three new
Greenbelts ,with their high-end bars and
caes,. Len the cinemas are positioned
dierently.

Retail is dynamic,` Raymundo points
out. \ou hae to change the ormat
oten and guide tenants. It`s trend-drien
in terms o tenancy mix and design.`

It`s highly competitie, as consumers now
hae a lot o choices. In Makati alone,
they can go to Greenbelt, Glorietta, SM,
Landmark, or Rockwell. In
Ortigas,Greenhills, there`s SM, 1he
Podium, Robinson`s Galleria, Crossings,
Star Mall, Shangri-La Mall, and Greenhills.
I you go to the east, there`s Robinson`s
Metro Last and Sta. Lucia Last. I you go
south, there`s Alabang 1own Center, and
lilinest lestial Mall.

Raymundo beliees Metro Manila is
reaching saturation in the retail sector.
Mall rents hae not increased since 4Q02,
pegged at an aerage o P1,030 per sq.m.
per month in Ayala Center and P820 in
the Ortigas area. Same-store sales are also
starting to record declines.

No wonder SM and Ayala Land are going
outside Metro Manila or growth, with
smaller-sized malls o around 40,000 to
50,000 sq.m. compared to the typical
Metro Manila mall size o around 100,000
sq.m.

Next growth areas
ut Ayala Land has an ace up its
sleee. \ith its entry in lort
Boniacio, it suddenly now has an B
inlux o land to build arious projects on.
\ith Makati already a maturing market,
with little space to expand on, lort
Boniacio poses huge potential or Ayala
Land. Prior to the Ayala,Campos
takeoer, Boniacio Land Corporation
boasted that lort Boniacio will be an
alternatie city to Makati. Now, it`s being
built as an expansion o Makati.

lort Boniacio, ater a promising start,
saw a slow down in deelopment, such
that it almost became a ghost town. Now,
Ayala Land has jumpstarted deelopment,
tweaking the original master plan to suit
its purpose. And other deelopers such as
SM Prime hae properties in the area that
will urther boost deelopment.

Raymundo agrees it`s the next growth
area, along with Lastwood City, Alabang,
and Rockwell.

Len lilinest City in Alabang is seeing
growth. Ater positioning it as an
alternatie to Makati, it has since shited
its strategy gien the diiculty o
competing with the more strategic
locations o Makati and Ortigas as
business centers. Now, lilinest, like lort
Boniacio, is taking on a more creatie
approach. It has positioned itsel as an I1
zone and has successully promoted its
leisure club, 1he Palms Country Club.

New categories
necessity is the mother o inention,
then desperation is the ather o
creatiity. 1he major deelopers hae
become quite creatie in packaging their
projects, practically inenting new
categories, or at least unique twists to an
old concept.

One such category are I1 parks, which
includes I1 buildings. \hen the
technology sector boomed at the turn o
the century, many property deelopers
rode the bubble, launching I1 parks,
applying or PLZA accreditation or
otherwise straightorward oice buildings
and industrial parks, and een changing
their names ,remember Cyber Bay
Corporation,.

Raymundo considers this segment a
success, thanks largely to contact centers
illing an otherwise oersupply in space.
\hat made them a hit, according to him,
is the way they hae been packaged.
1hey don`t only oer oice
accommodation,` says Raymundo.
Lastwood City, or instance, sold itsel as
a small community - high-tech oices
along with high-rise condominiums, a row
o shops and restaurants, a chapel, and
schools. \ithout incenties, they`ll
remain idle,` argues Raymundo. So these
deelopers worked with the goernment
to lure locators by oering tax breaks,
excellent telecommunication acilities, and
strategic locations.

Another niche segment is liestyle and
leisure communities, which are really a
small niche. 1he more popular ones are
residential arm lots, targeted at weekend
armers. Licenses to sell such arm lots
increased a hety 214 in 3Q03, to 446.
Another one is gol communities, added
to lure more buyers by making them club
members when they buy a property in the
community. 1hey`re not promoted as
primary residences, but positioned as your
leisure home during weekends.

Deelopers hae also looked outside the
Philippines or buyers and inestors or
their projects. Ayala Land and Megaworld
both hae international diisions that
target oerseas lilipinos. Although selling
oerseas is not new, this time, deelopers
are moing up the ladder rom promoting
low-cost housing to oerseas lilipino
workers ,Ol\s, to selling middle-class
projects.
I

Boom and bust
n general, Raymundo beliees the
property sector has bottomed out and
it has no way to go but up. But he
cautions that certain segments will
continue to lag. \hat will do well in 2004
are the middle-income residential and
oice sectors.

Ironically, 1hailand, where the real estate
meltdown and Asian inancial crisis
started, is now leading the charge in the
property sector in Asia.

1he major, healthy deelopers like Ayala
Land, Megaworld, and lilinest will
beneit rom the sector`s growth, the ones
that are actie now, says Raymundo.
which ones will ace diiculties
Raymundo declines to name names. 1he
ones not actie right now,` he quips.

But don`t expect a pre-199 boom. \hich
is just as well. Slow and steady -which
hopeully translate to sustainable - growth
is good or the industry and the economy.
1his is the time that demand is illing up
the oersupply o the 199 bubble. 1he
market reached its peak in 4Q96 with
114,05 license units, plunging thereater
to a low o 35,09 in 1Q00. It has since
improed to the current ,969 licenses in
3Q03.

But Raymundo also thinks this is the start
o a new deelopment cycle, based on the
12-month moing aerage o licenses to
sell. So we will be seeing increased
deelopment actiity in the next ew years.

1he problem is, once the economy and
business and consumer conidence pick
up, and as soon as oreign inestments
come in, there will be rapid spurts in the
property sector, leading to another
possible oersupply.

As Raymundo explains, Supply doesn`t
coincide with demand. Supply and
demand always chase ater each other.` As
was the case back in 1996, when there was
no supply. Demand picks up when the
economy sailed. 1hen, deelopers started
building, and during the rush to market,
een beore many o their projects are
completed, the economy sags, demand
dips, and we end up with an oersupply.
Rents and capital alues all and acancy
rates shoot up. Another boom-and-bust
cycle.

Raymundo thinks deelopers hae learned
their lesson this time. Some are een
oerly cautious, as you can see in the
oice sector.` 1here will still be a boom
and bust, but hopeully smaller in
magnitude and slower in buildup.`

1here hae been bubbles in preious
decades but not like 199. \ith that year
still resh rom our minds, it`s unlikely
we`ll see the same mistake committed
again. \ell, maybe until the next
economic boom.

But or 2004, we don`t hae to worry
about bubbles. Interest rates are expected
to increase, which will hae a dampening
eect on the housing sector, which is
sensitie to mortgage rates.

1here`s also the national elections. On the
upside, we`ll see brisk spending in the run-
up to the elections, which is good or the
retail sector. On the downside, i
somebody not acceptable to the business
and inestor community wins the
Presidency, expect deelopers to slow
down or een delay new projects and
consumers and companies wait out the
new administration.

So it depends on who wins. But
Raymundo sums up the most important
point: It`s not just property |that will
I
suer| but all sectors.` At this point, we
don`t een hae to worry about a uture
property bubble, just a possible economic
crisis.


Sidebar

Lxecutive Summary
1he property sector is showing some
signs o lie. \hich areas will do well and
which will remain in the doldrums

Do well
Mid-income residential
1he residential sector is leading the early
stages o recoery. Low interest rates and
more aordable prices or residential lots
and mid-income condominium units are
spurring demand. And deelopers are
responding with more supply.

Office space
It`s relatiely lat really, but with no new
supply in the pipeline, acancies are easing
and rents appear ready or an uptick, and
that`s good or Premium and Grade A
buildings.

I1 parks and buildings
I1 zones hae been quite successul,
despite the prolieration. 1he growth in
contact centers and business process
outsourcing ueled the improement in
occupancy rates in this sector. And I1
parks continue to reinent themseles as
ull-serice communities.

Doldrums
Socialized and low cost housing
1he socialized and low cost housing are
not doing well, particularly the ormer.
Licenses to sell are down almost 25
year-on-year in the irst nine months o
2003, due to unding issues.

Industrial parks
Deelopment o new industrial parks is
down 52 year-on-year in the irst nine
months o 2003, with lat demand. \ith
less emphasis on manuacturing and
greater push or inormation sectors,
things are not looking up.

Retail
1here`s saturation in Metro Manila,
orcing deelopers to expand in the
proinces. Rents hae been static, with a
limited retail base and lat same-store
sales.

Winners and losers
I middle-income housing is turning out
to be a winner while Premium and Grade
A oice buildings ,including I1 zones, are
bound to be illed up, a ew deelopers
will beneit rom the trend. And then, o
course, there are the likely losers - those
specializing in such niches as socialized
and low-cost housing, hotels, and
industrial lots.

Some winners
Ayala Land, Inc.
Major sectors: retail, residential lots,
residential condominiums, mid-income
housing
Return on assets: 4.0
Debt to equity ratio: 0.58
Net proit margin: 22.55
Reenues: 11.1 billion
Net income: 2.5 billion

Megaworld
Major sectors: residential condominiums,
oice buildings
Return on assets: 1.4
Debt to equity ratio: 0.6
Net proit margin: 15.0
Reenues: 2.8 billion
Net income: 431 million

Lmpire Last Land
Major sectors: mid-income housing
Return on assets: 10.5
Debt to equity ratio: 0.43
Net proit margin: 6.9
Reenues: 1.5 billion
Net income: 106 million

Iilinvest Land
Major sectors: I1 parks, mid-income
housing
Major on-going projects:
Return on assets: 2.06
Debt to equity ratio: 0.33
Net proit margin: 30.48
Reenues: 1.6 billion
Net income: 504 million

Robinsons Land
Major sectors: retail, mid-income housing
Major on-going projects:
Return on assets: 3.29
Debt to equity ratio: 0.61
Net proit margin: 15.5
Reenues: 3.8 billion
Net income: 600 million

Some losers
Belle
Major sectors: leisure communities
Major on-going projects:
Return on assets: -21.5
Debt to equity ratio: 1.48
Net proit margin: -1.182
Reenues: 240 million
Net income: -2.8 billion

C&P Homes
Major sectors: low cost housing
Major on-going projects:
Return on assets: -6.2
Debt to equity ratio: 131.6
Net proit margin: -5.8
Reenues: 2.2 billion
Net income: -1.2 billion