The Philippine economy contracted by 0.2% in Q1 2020, ending 84 consecutive quarters of growth. While the Philippine central bank is projecting a 0.8% contraction in 2020 it expects a sharper rebound in 2021 with a growth rate of 7.8%.
Outlook for Philippine Property Recovery Amid A Lethargic Q1 GDP
Colliers believes that this pace of economic expansion is likely to anchor growth in the property sector in 2021.
In our opinion, the impact of this pandemic is probably worse than the Global Financial Crisis of 2008-2009 but probably not as bad as the Asian Financial Crisis as the Philippines’ financial system is stronger and interest rates remain low.
Meager private construction growth partly offset by public infra rebound
In Q1 2020, public construction growth rebounded to 0.3%, compared to the 9.1% contraction recorded in in Q1 2019, due to the timely approval of the 2020 national budget. The new budget supported new infrastructure development projects throughout the country. Private construction grew by only 4.4% compared to 26.5% in the same period in 2019, as work stoppage due to the ECQ in Luzon and supply chain disruptions slowed the construction of office towers, residential units (condominiums and houses & lots), and malls. We expect a recovery in private construction in 2021 as developers respond to a likely recovery in office space and residential demand.
Office rents to drop 17%, due for a slow recovery in 2021
Colliers has downgraded its net take-up forecast due to a softer demand in the market. This is supported
by the contraction recorded in Q1 2020. We believe our original projection of 900,000 sqmetres of net absorption (9.7 million sq feet) is unlikely to be achieved. For 2020, Colliers is now looking at a net take up of between 300,000 sq metres (3.2 million sq feet) and 600,000 sq metres (6.5 million sq feet). As a result, vacancy will likely hover between 5.5% and 7% in 2020. We see this supply and demand imbalance resulting in a 17% drop in office lease rates in Metro Manila this year.
Colliers Philippines data show that the last time the Philippine GDP contracted, in 1998, average office lease rates dropped by 16% and only began recovering in 2004 when rents rose by 14%.
The bitter experience of the 1998-1999 Asian Financial Crisis taught office developers an important lesson –turn off the supply tap quickly. Developers did this during the 2008-09 Global Financial Crisis. After ramping-up supply to 480,000 sqmetres(5.2 million sqfeet) in 2008 and 540,000 sqmetres(5.8 million sqfeet) in 2009, completions fell sharply to 203,000 sqmetres(2.2 million sqfeet) in 2010 as projects were deferred or outright cancelled. This supply cut is one of the reasons why the Metro Manila office sector turned around quickly post-GFC, posting a 5.6% vacancy in 2010 from 8.6% in 2009, even with less diversity among the demand drivers compared to today.
Low interest rates to help stoke condominium market in 2021, unsold condominium at 47,600 units
For 2020, Colliers expects a slowdown in condominium completion due to work stoppage following the enhanced community quarantine (ECQ) implementation in Luzon. We now expect the delivery of about 10,900 units, a 26% drop from the 14,700 units we initially estimated for 2020.
The Philippine condominium market is facing a tremendous challenge. The slowdown in business activities as well as the government-projected rise in unemployment and drop in remittances from Filipinos working abroad are likely to result in softer demand for condominium units in Metro Manila. Colliers sees rents in the secondary residential market, which covers completed units, falling by 5.5% in 2020. This is slower than the 15% contraction during the Asian Financial Crisis in 1998 but steeper than the 3.7% fall in 2009 during the Global Financial Crisis.
As of end-2019, Colliers recorded an unsold inventory of about 47,600 condominium units all over Metro Manila. Among the locations with a significant number of unsold condominium units are the Bay Area, Manila North, Quezon City North, and Pasig City.
This is likely to be a result of imbalance between supply and demand. Hence, Colliers encourages developers with a significant number of unsold units to implement creative leasing schemes.
Low-interest rates should keep mortgage rates low, and this should enable developers to offer flexible lease terms to buyers. Colliers believes that low mortgage rates should help propel the Metro Manila condominium market once the pent-up demand kicks in starting Q1 2021.