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METRO MANILA OFFICE MARKET OVERVIEW 2017 & OUTLOOK 2018: Strong Market But Could Have Been Stronger

PT Updates

MAKATI CITY, PHILIPPINES  January 10, 2018 – “2017 was a positive year for the office market. We are cautiously optimistic that 2018 will be a strong year for the industry as well,” Pronove Tai International Property Consultants’ CEO, Monique Pronove said at the 2017 Metro Manila Office Market Overview briefing today.

Record Supply in Philippine History

With 100% delivery rate, 46 new buildings or 1.2m sqm leasable office space had been added to the 2017 existing stock. “This is the highest supply in Philippine history and is a marked improvement from last year’s delays delivering only 49%,” Pronove added.

Makati City is still the largest office district at 3.3m sqm of the 9.7m sqm total office stock as at December 2017. At 1.9m sqm, Taguig City has overtaken Ortigas Center (1.6m sqm) as the second largest office district. Ortigas Center rounds up the top three.

Furthermore, Taguig City contributed the largest 2017 supply at 432,000 sqm. In terms of growth, Bay Area is still the fastest growing office district at 55% or 268,000 sqm new supply in 2017 for a total stock of 753,000 sqm.

Highest Vacancy

“2017 saw Metro Manila office vacancy levels rise to a healthy 5% for the first time in 7 years,” Pronove continued. “This can be attributed to acceleration of construction as well as completion of long overdue buildings from previous years.”

“Having said that, Makati City still has very low vacancy rate at 3%. This is tight and uncomfortable for businesses to grow within the same building or even within the city,” Pronove said. Quezon City has the highest vacancy rate at 11%, followed by Mandaluyong at 8% and Taguig City at 7%.

Strong Pre-Leasing Buoyed by Offshore Gaming

“While we noticed a slowdown in IT BPM take up, POGOs (Philippine Offshore Gaming Operators) buoyed us over in 2017,” Pronove said. In 2017 pre-leasing, 41% or 316,000 sqm came from ITBPM and Offshore Gaming was a strong second at 35% or 275,000 sqm.

“POGO had a strong take up despite being only allowed in Makati and Pasay. If not for this sector, vacancy rates would have gone up to 8% in Metro Manila,” Pronove added.

 Seeking Government Support

These two demand drivers’ take up could have been stronger in 2017 if not for lack of government support that caused a wait-and-see attitude among the players. Among these issues were threat of revocation of VAT exemption in accordance to the 1997 Tax Code for IT BPM, slow Presidential proclamations of PEZA buildings, unclear initial licensing authority for POGO, and only two cities issuing Letter of No Objection (LONO) to offshore gaming operators.

POGO sector’s growth is limited to the cities that give LONOs. Local government units, specifically of Quezon City, Mandaluyong, and Taguig, should consider allowing the operators within their cities. “These cities have the highest vacancy rates. Once LONOs are given to POGOs in these areas, there will be better opportunities for the sector to further grow,” Pronove said.

Proclamations of Philippine Economic Zone Authority IT parks and buildings were slow in 2017, with an average of six months turnaround time nationwide. “There are still Php42B worth of PEZA applications in 2017 that are pending approval,” Pronove said.

High Rental Rate

In terms of rental rate, Makati is still most expensive in the country at Php 1460/sqm/month. Taguig City has the highest rental growth in Metro Manila at 26% YoY. In fact, as at December 2017, Makati City rental rate has 23% premium over Taguig City.

“Again, this could have gone higher were it not for the stumbling blocks I mentioned,” Pronove stressed. “This would then encourage decentralization of economic activity to other more affordable cities nationwide.”

Increased Zonal Valuation

In 2017, the Bureau of Internal Revenue increased the zonal valuation in Makati City for the first time in four years. For instance, average zonal valuation for Ayala Avenue grew by 198% to an average of Php 198,000/sqm. “While it seems that the zonal valuation skyrocketed, this is more of an alignment to current market value,” Pronove said.

For the full table of the zonal valuation, please get in touch with our PR Manager here.

 Welcome TRAIN

The first package of Tax Reform for Acceleration and Inclusion Bill does not directly affect the corporate real estate sector. It does, however, include provisions for residential leasing and dwelling that Pronove Tai welcomes to help simplify the tax scheme for real property.

“TRAIN also retains the VAT exemption of ITBPM which would help keep our highest demand driver in the Philippines,” Pronove said.

For Pronove Tai's take on TRAIN, follow this link.

 Optimistic about Growth

As at December 2017, pre-leasing for 2018 supply was already at a strong 43% or 354,000 sqm. Compared to the same time last year, pre-leasing for 2017 supply was at 23% or 288,000 sqm. This bodes well for the office market showing signs of sustaining its growth in 2017. Of the pre-leased space, traditional office took up 60% or 211,000 sqm while ITBPM remains a strong demand driver at 143,000 sqm pre-leased office space.