Growth in the Philippine office property sector is expected to continue in 2017, but the residential property market may be dampened by cooling investor appetites in the face of US Fed interest rate hikes, Colliers International said on Tuesday.
In its Top 10 Predictions for 2017 report, Colliers International said the overall Philippine real estate sector will continue to benefit from the country’s economic growth.
“Colliers sees GDP growing between 6 percent and 6.5 percent annually over the next three years as macroeconomic fundamentals remain sound and the contribution of investments and manufacturing to national economic output continually expand,” the report said.
In the third quarter of 2016, the Philippine economy grew by 7.1 percent, outpacing the growth of other emerging economies in Asia.
“Private construction will continuously grow due to sustained appetite for office and retail developments while outsourcing and tourism-related activities will continue to drive the Services sector,” Colliers said.
Colliers noted that the growth of the office property sector will continue to be driven by the robust Business Process Outsourcing (BPO) sector.
“Amidst concerns from industry stakeholders in the middle of the year of a potential decline in BPO demand due to the President’s anti-US rhetoric, Colliers nevertheless believes BPOs will continue to drive the office market,” the report said.
Colliers also expects a surge in office space demand next year from offshore gaming companies.
The Philippine Amusement and Gaming Corporation (PAGCOR) launched its Philippine Offshore Gaming Operation (POGO) late this year, and POGO licenses are expected to double to 50 in the next six months, from the initial 25 licenses at present.
In 2016, offshore gaming companies took up more than 80,000 square meters of office space, according to Colliers.
Colliers pointed out that in the fourth quarter of 2016 there was a surge in inquiries from offshore gaming companies, each with a minimum requirement of 10,000 square meters, which put pressure on the availability of BPO spaces.
The steady demand from the BPO industry will continue to increase demand for alternative locations to Metro Manila, Colliers noted.
“We consider Cebu, Bacolod, Iloilo, Pampanga, and Davao as most viable alternative locations for growth given the talent pool, business competitiveness, and LGU and ICT council support,” in those areas, the report said.
Similarly, Colliers said there would be more opportunities for other property sectors outside of Metro Manila due to the government’s infrastructure development thrust.
“The implementation of infrastructure projects nationwide should provide access to properties that could be redeveloped into mixed commercial, residential, hotel/leisure and industrial estates,” Colliers said.
Tight labor market
However, the ramping up of public infrastructure projects will increase pressure on the private construction sector and lead to more construction delays due to the lack of skilled labor.
Colliers explained that a total of 900,000 square meters of office space was initially forecast to be completed in 2016, but this has been revised downward due to the lack of skilled labor.
“This has been adjusted downwards by more than 30 percent due to project delays related to the tight labor supply in the construction sector,” the report said.
“The intensified development of public infrastructure projects around the country will exacerbate this problem,” Colliers added.
Fed rate pressure
Apart from delays in construction, another potential challenge to the property sector in 2017 is the impact of US Fed interest rate hikes to the residential property market.
The US Federal Reserve raised interest rates by a quarter point earlier this month, which will be followed by series of rate increases expected between 2017 and 2019.
“The rate increase will affect residential developers as development costs would most likely increase with the rise in the cost of debt,” Colliers said.
Also, a decline in purchases from speculative investors is anticipated as they are more sensitive to higher borrowing costs.
Higher borrowing costs will also constrict access to capital, Colliers pointed out.
“We expect growth in CBD land values to be at about 5 percent,” Colliers said.
Other trends expected in the Philippine property markets in 2017 are the expansion of the flexible workspaces and the rise of lifestyle-oriented malls, both of which caters to the millennial workforce, most of which are employed by the BPO industry.
“Developers are buildings new malls with the millennials in mind. They are starting to offer a unique tenant mix and house retailers that specifically cater to millennials,” Colliers said.