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Developers Convert and Repurpose Assets Amid Pandemic and Lockdown

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The Philippine economy continues to reel from the impact of the pandemic and lockdowns, officially entering into a recession.

Developers convert and repurpose assets amid the pandemic and global economic crunch

  • Companies looking at implementing hub-and-spoke leasing model while developers explore converting vacant mall spaces into flexible workspaces
  • Hotel operators encouraged to pivot to co-working and co-living as occupancy is likely to drop to only 30% in 2020
  • Vacant mall spaces likely to be offered as micro-warehouses to tap the rising demand for storage and logistics and reach last-mile deliveries

The Philippine economy continues to reel from the impact of the pandemic and lockdowns, officially entering into a recession. The country’s GDP contracted by 16.5% YOY in Q2 2020, its worst performance since World War 2. Despite this, the government remains positive with the potential for economic recovery.

OFW remittances to buoy retail and residential demand

Data from the Philippine central bank show that remittances sent in by Overseas Filipino Workers (OFW) in June rebounded by 7.7% MOM after three consecutive months of decline. This is likely to increase Filipino consumer confidence and help resuscitate a retail sector reeling from the pandemic and strict anti-COVID social distancing measures. A recovery of global economies in 2021 should also result in a rebound of OFW remittances and we forecast a positive impact on residential demand across the Philippines.

Economic bills to support property

Legislative measures likely to provide relief to the economy and property are pending in Congress and are likely to be implemented before the end of Q3 2020. These include the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) bill which should clarify ecozone locators’ (including outsourcing firms) lingering concerns on tax and non-tax perks. Other important bills include the Senate version of the Bayanihan To Recover As One Act or Bayanihan 2 which sets aside PHP10 billion (USD200 million) for the ailing hospitality sector, and the small business-focused PHP1.3 trillion (USD26 billion) Accelerated Recovery and Investments Stimulus for the Economy (ARISE) Act which should benefit traditional office tenants.

Office: Landlords and occupiers explore hub-and-spoke model

Colliers encourages landlords to expand their options by offering available office space in non-core locations where tenants can avail themselves of rents about 20% to 30% cheaper than major business districts. This is important especially for companies planning to implement a hub-and-spoke model wherein occupiers reduce the reliance of a single headquarters location for a more dispersed occupancy strategy. This also enables firms to reduce real estate costs by shrinking headquarter location and occupying smaller hubs across Metro Manila. Typically, these would be in lower cost locations and would allow companies to access talent in alternative locations. Colliers believes that this arrangement improves work-life balance of employees and reduces living expenses.

Landlords seeing rising vacancies in their malls should explore the viability of converting these vacant spaces into flexible workspaces. This is crucial given that malls are near residential communities and this arrangement should significantly reduce employees’ commuting time.

Hotel: Innovative use under the new normal

Data from the Philippine Statistics Authority (PSA) showed that spending for accommodation and food services fell by 68% while other services (arts, leisure, entertainment and personal services like wellness and grooming) dropped by 63%. This is likely due to Filipino households skimping on non-essential spending. Colliers projects hotel occupancy to reach only 30% in 2020 due to a substantial drop in foreign arrivals. This is significantly lower than the 72% posted in 2019. Colliers expects average daily rates (ADR) to drop by 30% in 2020 due to lower occupancy.

Colliers encourages hotel operators and developers to highlight compliance with health protocols, innovate services using technology, and consider other leasing models and repurpose facilities into co-living facilities and flexible workspaces. These schemes, however, should comply with the government-mandated physical distancing measures.

Residential: Opportunistic buyers take advantage of low mortgage rates

As of Q1 2020, there were about 44,800 unsold condominium units across Metro Manila, from 47,600 units as of the end of 2019. These are a mix of pre-selling and ready for occupancy (RFO) units.

In our opinion, the impact of the COVID-19 pandemic on the secondary residential market was not yet apparent in Q2 2020. However, the latest economic indicators (economic contraction, lower OFW remittances, record-high unemployment) point to a more precarious condominium market for the remainder of 2020.

Colliers encourages developers to continue extending attractive payment terms to potential clients to prop up demand for the remainder of 2020. In our opinion, this should support the prevailing low interest rates in the market which should anchor residential demand growth starting 2021.

Industrial: Bright spot amid the pandemic

Colliers recommends that developers modernize warehouses to capture the growing demand for e-commerce and firm up partnership with delivery firms to reach more consumers. Mall operators with vacant spaces should also explore converting or repurposing vacant retail spaces into warehouses. This should allow retailers to reach last-mile deliveries.

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