Increase of Business Operations in Philippines to Boost Demand for Space

The Philippine economy has shown remarkable growth in the past few years, being one of the fastest-growing economies in Southeast Asia. Aside from its gross domestic product (GDP) growth, the economy has also been labeled as one of the most attractive structural stories not only within the region, but also in global scope.

"Within the past three decades, the Philippines has started its transformation from a highly agricultural economy to a service-based one, almost entirely disregarding the industrialization that is common to most economies," said Michael McCullough, co-founder and managing director of KMC MAG Group, the Philippine associate of global property advisor Savills.

"Private services currently account for roughly half of the gross domestic production, which makes it the biggest sector in the economy. While primary production, which are agriculture, hunting, forestry, and fishing, and the industrial sector have continuously decreased, services have increased its share to 57.0% of GDP in 2015."

This shift has contributed to the high economic performance of the country. Economic growth under the current administration, which started in 2010 and will end on June 30, averaged 6.2%, making it the best rate since the 1970s.

The 6.3% economic growth in the fourth quarter of 2015 witnessed the growth of the services sector, which expanded by 7.4% following a 7.2% upsurge in the second quarter.

With the increasing number of global companies transferring operations and production and manufacturing operations to the country, more Filipino micro, small, and medium enterprises are entering the global value chain, creating more employment and demand for spaces.

Remarkable demand in Metro Manila's office spaces

McCullough said that the growth of outsourcing and off-shoring companies in the country has resulted in a remarkable demand in Metro Manila's office spaces.

"2015 saw net take-up for Premium and Grade A office spaces totaling to 459,000 square meters, which is the highest that we've recorded," he said.

Makati's Central Business District maintains its position as the most premium CBD in Metro Manila, while the Bay Area and Quezon City are expected to continue outperforming other Metro Manila sub-markets given the supply and demand dynamics within these markets.

Due to the strong demand for office spaces in the area, Makati CBD results to an average rental rate of PHP 980.8 (US$ 21.25) per sq m/month, the highest in Metro Manila.

Vacancies in the metro area are likely to increase in the next three years even with strong pre-leasing activity due to the entry of some 1.8 million sq m of office spaces, most of which are located in Makati CBD, Bonifacio Global City, Alabang, Quezon City, and the Bay Area. The entry of these supplies is expected to ease the rental growth in most sub-markets in the coming years.

"Looking at it from a global perspective, the Philippines and Asian real estate in general have enjoyed a strong run over recent years," said McCullough. "In the fourth quarter of 2015, Asian markets were able to put US interest rate worries behind them as the US Federal Reserve increased the base rate by 25 basis points, with little immediate fall out."

Fourth highest Grade A Market Yield

According to Savills' World Office Yield Spectrum, Manila has the fourth highest Grade A Market Yield at 8% in December 2015, with Hanoi being the highest, followed by Ho Chi Minh and Adelaide.

The Market Yield is derived by capitalizing current market rents, which includes the rent payable by the tenant and the value of any incentive paid to the tenant, against current capital values for office buildings.

In terms of Grade A Effective Yields, Manila places third globally with an effective yield of 7.5%, with Hanoi being the highest followed by Ho Chi Minh. Effective Yields are derived by capitalizing current market rents, which includes the rent payable by the tenant and excludes the value of any incentive paid to the tenant, against current capital values for office buildings.

"Globally, much of what happens in 2016 will be dependent on the course the US Federal Reserve takes with regards to interest rates. The movement of US interest rates will determine how currencies behave, how trade flows, and how capital moves around the world," said McCullough.

"Risk premiums of between 2% and 3% in most office investment markets around the world continue to look like fair value, so we anticipate ongoing strong international demand in office property in 2016."

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