Philippine Property Sector: Still a Buyer’s Market Amid Oversupply and Low Interest

Low demand and vacancies across all segments continue to plague the Philippine property sector even in a post-pandemic regime.

Low demand and vacancies across all segments continue to plague the Philippine property sector even in a post-pandemic regime.

Colliers Philippines expects vacancy rates of 17% to 19% across the office, residential, and retail sectors, as market demand fails to cover the high supply of new developments in the market. However, there are pockets of opportunities in the property sector.

Office Segment: New Supply Overrides Demand

As of the end of first quarter 2024, office deals in Metro Manila increased by 88% from a year ago. Traditional companies, outsourcing firms, and POGOs accounted for majority of the transactions.

But the vacancy rate still reached 19%, just marginally lower from the 19.3% in the previous quarter, as the influx of new supply still overrode demand. Colliers Philippines said it retains its projection of a 19.6% vacancy by the end of 2024, due to the influx of new supply and expected surrenders from pre-pandemic leases. Out of 96,100 sqm new supply in the market, only 75,000 square meters were taken up.

The Bay Area, Quezon City and Fort Bonifacio led transactions in the first quarter, covering nearly two-thirds of Metro Manila deals.

Provincial deals soared by 81% to 51,700 square meters. Cebu accounted for 35% of total provincial transactions, followed by Pampanga (17%), Davao (15%), Iloilo (13%) and Bacolod (12%). Colliers said it expects developers to remain cautious in launching new projects in Metro Manila, as demand has not yet returned to pre-pandemic levels.

Colliers also sees a marginal 2.5% increase in office rental rates. Despite the measly change, the property consultant said, it is still an improvement from the 38% fall from 2020 to 2023.

Residential Segment: Vacancy Set to Rise

Colliers forecasts vacancy to rise to 17.7% by the end of the year, due to the substantial amount of ready-for-occupancy units in the market. “It usually takes one year to take up vacant units, but now it’s longer due to the increase in construction materials and mortgage rates”, explained Colliers’ Research Head Joey Bondoc.

The oversupply is also expected to lead to sluggish rental growth. Yet despite the large supply of units, overall property prices are still increasing. Colliers said it recorded a gradual rise in prices in the first quarter because of improving demand from end users and investors. Developers have been compensating through longer and more flexible payment terms.

This also means that property prices are growing at a faster pace than rents this year, which may lead to lower investment return for properties purchased for investment purposes.

The silver lining lies in horizontal projects in areas outside of Metro Manila, and upscale condominium developments that are more price-resistant and continue to generate interest.

Horizontal Developments: Uptick in Provincial Projects

Because of the lukewarm pre-selling market in Metro Manila, major players in the industry have been setting their sight in areas outside of Metro Manila, and marketing horizontal developments composed of house and lots, and lots. Colliers says, they have observed steady demand in areas such as Pampanga, Bulacan, Cavite, Laguna, and Batangas.

From 2022 to 2023, annual average take up for these horizontal projects reached 29,000 units, from 28,700 average units sold from 2020 to 2021. Some of these developers include Rockwell Land, which has an 85-hectare beach property in Lian, Batangas, and a 300-hectare project in San Jose, Bulacan. Century Properties is also launching five new projects under the Phirst brand, totaling 85 hectares.

Colliers believes this trend will continue, with demand coming from end users.

Upscale Projects: Steady Increase

Colliers reported that the share of upscale to luxury residential projects to total pre-selling take up in Metro Manila increased to 18% in 2023 from 10% in 2022. While the sale of mid-income projects remained steady, the share of pre-selling condos priced PHP 12 million and higher has been steadily increasing. Colliers suggested entering into joint ventures with local or foreign developers, as this raises the price of the pre-selling developments. As of end 2023, joint venture luxury projects in Metro Manila have take-up rates of between 64% and 100%.

Completion, Launches, and Rentals

Unit turnovers increased by 80% in the first quarter from the fourth quarter of 2023 but developers are slowing down on new launches. The launch of pre-selling units reached 2,600 units in the first quarter, a drop of 59%.

 “In our view, developers remain cautious of launching new projects due to elevated mortgage rates, continued increase in prices of construction materials, surging land values in Metro Manila and lengthened remaining inventory life,” explained Bondoc.

Colliers is also looking at slower rent and price growth, forecasting vacancy to reach 17.7% by end of 2024, near the 17.9% peak in 2021.

Residential rent and price increase also remained flat in the first quarter, and will likely stay that way due to the high vacancy rate. “From 2024 to 2026, we forecast annual average rental growth of 1.6% and yearly price increase of 2.2%, stated Bondoc.

Retail Segment: Rental Rate to be Flat

Malls and other commercial centers are aggressively renovating and upgrading their spaces to attract more consumers. “Pockets of renovation and total mall redevelopment are visible all over Metro Manila as landlords and retailers aim to sustain footfall and consumer spending, despite dissipating impacts of revenge spending,” said Bondoc.

Food and Beverage and fast fashion continue to dominate the retail space, while the Bay Area and Quezon City are expected to contribute to new retail space completion until 2026.

Rental rate is expected to be flat for the year, because of the completion of substantial new leasable space in Metro Manila, which has also led to higher vacancy. Colliers forecasts a vacancy rate of 17% in 2024, with the completion of additional mall space in the second half of the year.

‘It’s Going to Be Spotty’

Colliers said that that the present high interest rates which is also pushing mortgage rates higher, and the oversupply are making developers take a step back. “There’s some cautiousness,” admitted Colliers Managing Director Richard Raymundo. “Developers are not putting in new projects because of high interest rates and higher cost of construction materials.”

He adds that a recovery, when it happens, will not occur all at once either. “It‘s going to be spotty. It will come in certain areas first,” he stated.

Demand though, remains healthy for horizontal projects (houses and land), which Colliers said presents opportunities for development and investment.