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The New Normal in Commercial Real Estate: Create-ing the Future Amidst COVID19

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Colliers International Philippines is one with the nation and the world in Doing What is Right for the people, clients and communities in combating the spread of COVID-19.

When this is over, it will not be business as usual. This pandemic will change the way of life across the board. In commercial real estate, we see significant changes in how this sector will rebound and evolve when this pandemic is over. While we are all busy coping and surviving this challenge, we intend to share our knowledge to accelerate the success of our partners by writing a series of papers about The New Normal in Commercial Real Estate (CRE). We need to be ready and preparation starts now.

CREATE-ing the Future Amidst COVID19

The Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), formerly the Corporate Income Tax and Incentives Reform Act (CITIRA), seeks to (1) repackage the tax reform program in response to relevant and immediate needs faced by businesses, and (2) attract more investments as the economy moves toward recovery. CREATE is one of the government’s key instruments under PH-PROGRESO, a phased and adaptive stimulus package in response to the COVID-19 pandemic.

The key provisions of the recalibrated CREATE bill are as follows:

  • Immediate corporate income tax (CIT) rate reduction for all firms from 30% to 25%, effective July 1, 2020;
  • Additional  two-yearsunset provisions for firms registered under Investment Promotion Agencies (IPAs) that are enjoying the 5% gross income earned (GIE) incentive;
  • Extended applicability of the net operating loss carryover (NOLCO) for losses incurred in 2020 to five years from the current three years

Several members of the business community, including business chambers, expressed strong support for the immediate passage of the CREATE bill to restore, boost, and provide relief to firms adversely affected by the pandemic. Similarly, the Department of Trade and Industry (DTI) believes that the immediate reduction of the CIT rate to 25% will help ease the disruption in supply chains and markets and will provide a competitive incentive regime for attracting new investors. Meanwhile, the Philippine Economic Zone Authority (PEZA) lobbies to maintain the status quo on the current fiscal incentives given to enterprises for at least five years to allow firms to recuperate from the impact of the pandemic.

State of the CRE Market

During the quarantine period, few office transactions took place, bringing the year-to-date transactions to 270,000 sqm. This is down by 56% compared to the same period last year. Market vacancy inched up to 4.7% from 4.1% due to delays in office leasing decisions brought about by uncertainties in the market

 new normal creating future

In the same light, no buildings were completed during the quarantine period primarily due to the limitation in manpower and available resources. Buildings that were already in advanced phases of construction are now delayed for at least two quarters from their target completion dates. Those that are still in the early planning stages may be put on hold or delayed as numerous developers have announced significant reduction in capital expenditure. This is expected to maintain market vacancy at its current levels for a few more months. By end of 2020, market vacancy is expected to further increase as buildings are completed and as more spaces re-enter the market due to possible contract defaults and cancellations by occupiers that are greatly affected by the pandemic. Occupiers who have unutilized spaces due to clients scaling down or cancelling contracts would be looking to dispose or sublease these spaces if these are not filled up soon. The initial impacts of the pandemic will be reflected once the data for Q2 2020 is analyzed, while the data for Q3 2020 will expose how deeply the CRE industry is affected. The demand is expected to slow down, except for those coming from essential industries. Occupiers who are looking at the opportunities available in this market have become more critical in their assessments of contracts, particularly for provisions that address the impact of the pandemic. Rents have yet to change but some landlords have expressed willingness to be more flexible in accommodating new transactions in order to improve the occupancy in their buildings.

What this means to the CRE Industry

The immediate passage and implementation of the CREATE tax reform bill would be a welcome development. The reduction in the CIT to 25% starting July 1, 2020 will aid the MSMEs, often touted as the backbone of the Philippine economy, in recovering from the effects of this pandemic. We showed in our past article that companies with footprints of 1,000 sqm or less occupy about 4% of the office market. The CIT reduction will not only extend the lifeline of these occupiers but also decrease the possibility of bankruptcy and eventual lease defaults.

Furthermore, the extension of the sunset provisions will ensure that PEZA-registered companies can enjoy the 5% tax on gross income earned (GIE) for another contract period of five years. With this, Colliers encourages occupiers to actively look at PEZA-proclaimed buildings in anticipation of new businesses and possible flight-to-cost movements which happened in the aftermath of the Global Financial Crisis. We also urge the government to be more active in approving new PEZA zones to complement the extension of the 5% tax on GIE; otherwise, its purpose will not be maximized.

Landlords are encouraged to be more creative in extending any form of relief, where financially feasible, to their occupiers in order to protect their portfolio and occupancy. Accommodations on commercial terms must be considered especially for those in dire need of assistance. This will be beneficial for both parties so occupiers can endure through this daunting period, while landlords can maintain or even increase their occupancy, ultimately maintaining a healthy CRE market.

Both the government and the private sector play critical roles in overcoming today’s pressing challenges. It is certain that actions and decisions made today will shape how the real estate sector will emerge after this critical period. The current situation imposes a need for everyone to be more discerning in their decision-making. Now, more than ever, Colliers promotes the value of “bayanihan” in the Filipino nation. 

Read Part 1
Read Part 2
Read Part 3

Read Part 4
Read Part 5

 


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Dom Fredrick Andaya

Senior Director

Office Services

Manila

Dom began his career in Colliers International as a Research Assistant for the Research and Consultancy Division in February 2007.  In that capacity, he was responsible in gathering and organizing of data needed to generate commissioned market reports and quarterly release of The Knowledge, Colliers’ Market Review publication. 

He moved to Tenant Representation – Office Services Department in 2013. As a manager, he was tasked to handle various office space requirements of multinational clients. He was promoted to Associate Director in 2016 leading the Office Services team to hit the revenue target in the midst of leadership
transition. He started heading the Tenant Representation business as the Director in 2017 in charge of ensuring the growth and profitability of this business line. He helped the team stabilize in 2017 amidst market slowdown due to geopolitical concerns that affected the offshoring and outsourcing growth in the country and still achieved 18% profitability.

In 2018, he led the Tenant Representation to exceed the revenue target by 60% and achieve a 48% profit margin.

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