Numbers Don’t Lie

A part from being an economist and columnist for this paper, I am also a business owner of a medium-sized food group and a country head of an American multi-national firm. Like many involved in the food business and investments, 2017 and 2018 were good years for us. The favorable business conditions in our industries is something we are grateful for and do not take for granted.

Suffice to say that we have outgrown our two rented offices in the Ortigas Center and must now look for bigger spaces to accommodate our expansion. This time, we are contemplating investing in the property instead of just renting it. After all, it will look better on our balance sheet if our office space forms part of our asset account rather than a monthly operating expense.

The idea of purchasing office space prompted me to look deeper into the real estate industry. Is the property market facing a bubble? Is it the right time to buy? Are property values seen to increase in the medium term? How strong is demand in the re-sale market? Will it be easy to rent if ever we decide to do so?

The collective industry reports from the country’s three experts — Colliers International, Jones Lang LaSalle, and Leechiu Consultants — provided me the answers. Fortunately, they all tell the same story.

Lets talk about the worst-case scenario first. Is the property market in the midst of a price bubble? It will be recalled that the steep rise in property prices in Metro Manila over the last seven years raised rumors of a bubble last year. With all factors taken to account, the three property experts refute the idea, saying that if one compares property prices today versus what it was in 1997 (the year of the financial crisis), you will find that current prices are still 20% cheaper than it was back then when adjusted for inflation. Besides, the experts argue, the majority of buyers today acquire property to use, not to speculate. The price increases are justified by the spike in demand.

Four sectors are driving demand for office spaces in Metro Manila. The largest is still the IT-BPO industry. Although growth in this sector decelerated from double digits to just seven percent this year, it still comprises 41% of total take-up. Offshore gaming operations from China is another driver, comprising 28% of take-up. Growing rapidly too are flexible workspaces such as WeWork, KMC, Penbrothers, and Regus who collectively lapped-up four percent of all available office spaces in the city. Other large consumers of space are the finance & insurance industry, tech companies and multinational companies.

As of the end of 2018, Metro Manila had an inventory of 11.01 million square meters (sqm) of grade A and B office space, with 2.88 million sqm more coming on-line between 2019 and 2023. The bulk of new office spaces, 725,000 sqm to be exact, is presently being built in the Ortigas-Pasig-Mandaluyong corridor. Makati, BGC, Quezon City and the Bay Area each have between 400,000 to 580,000 sqm in the pipeline. Alabang and Las Piñas have 192,000 sqm under construction.

What is interesting is that out of the 2.88 million sqm under construction, 28% is already pre-leased or pre-sold. This is a strong indication of strength in demand. It is therefore safe to assume that prices will continue to climb in the medium term.

There has been a mad rush for PEZA-certified buildings since the investment agency stopped awarding new certifications in the National Capital Region region a few years ago. From 2019 to 2023, only 19 buildings were awarded PEZA certifications, leaving in limbo 48 other application. PEZA hopes that limiting the number of PEZA-certified buildings in Metro Manila will induce developers to expand outside the city center, thereby paving the way for development and employment opportunities in provincial areas. It is also a way to shore-up generous incentives given to IT-BPO companies. These companies need to be located in PEZA-certified buildings to qualify for a package of fiscal incentives. Hence, having the opportunity to invest in a PEZA building will ensure easy rentals at premium rates and tremendous value appreciation.

As far as vacancies are concerned, unsold or unleased properties were lowest in the Bay Area, Alabang, and Makati at one percent, two percent, and three percent of total inventory, respectively, as of the end of 2018. Vacancy rates stood at six percent in Ortigas-Pasig-Mandaluyong and seven percent in BGC. It was highest in Quezon City at 15%.

The nature of our business requires us to be in the center of the financial district. Hence, we are looking at properties in the Fort, Makati, and Ortigas areas. We do not require the building to be brand-new but we factored-out those that are seven years or older. Also important is for the developer to have a good track record in construction, maintenance, and management.

In BGC, we looked at the new Finance Center building. For a 245-sqm space, the asking price is P61.2 million or roughly P250,000 per square meter. In Ortigas, there are no new grade A buildings for sale (the new BDO towers above the Podium Mall are exclusively for lease). The next best option is the 25-year-old Tektite Tower whose office space goes for P73,000 per sqm. In Makati, we are looking into the Stiles Enterprise Plaza for which the going rate is P250,000 per square meter.

Our analysis would not be complete without looking into lease rates. We found that lease rates for grade A office spaces in Makati is most expensive at P1,300 to 1,600 per sqm depending on the age of the building. This represents a 100% increase from rental rates in 2010. Rates in BGC range from P1,000 to P1,400 per square meter, a 140% increase from what it was nine years ago. Having the lowest rise in least rates is Quezon City whose rental costs stand at P600 to P800 per sqm, a mere 40% uptick from a decade ago.

Alabang properties command between P650 and P750 per sqm, while those in Ortigas-Pasig-Mandaluyong go for as low as P500 per sqm.

Taking all the information into consideration, my board and I concluded that the office property market in Metro Manila is in the midst of a long road of growth which will ride in tandem with the economy. For as long as the economy grows at its current pace, the momentum of the property market will follow. In fact, studies show that office space value will spike anew in 2022 when demand outstrips supply. Several analysts equate the Manila property paradigm to that of Hong Kong in the early 1980s.

So, what can foil the otherwise rosy picture of the property market? Eco-political turbulence. These include uncertainty brought about by shifting tax laws, the specter of federalism and the uncertainty it brings, government’s pro-China foreign policy backfiring, and a deteriorating current account deficit.

So in the end, we conclude that the risks to the property market are not due to weaknesses from within nor demand-supply issues. The risks are external. Far as long as one has confidence in the government and the policies it espouses, then investing in property is a safe bet.


Andrew J. Masigan is an economist.