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Global Research and Consulting

Metro ManilaMarketView

REAL DEMAND DRIVERS PREVENT PRICE HIKES IN PH PROPERTY MARKET

In real estate, it is necessary to obtainthe fundamental value of the asset.Relying on speculative priceappreciation and fast exchanges ofproperty is what led other countries toasset bubbles. In economics, thegeneral rule is that low supply and highdemand yields high prices. Propertybuyers expect increasing revenuesamidst limited developable land. Withthis mindset spread throughoutinvestors, fast property turnover willfurther escalate prices as each investortries to make a profit for everyexchange.

A number of countries in Asia haveimplemented new measures in order toprevent price escalations based onspeculation. Limiting transaction volumeis one of the effective approaches toachieve this. In Beijing and Shanghai, a20% capital gains tax wasimplemented. Hong Kong imposed anew double stamp duty raising themaximum rate from 4.25% to 8.5%.Singapore lowered the loan-to-value(LTV) ratio for second housing loans to50% from 60% and 40% for third loans.Foreign home buyers, which are someof the major drivers of transactionvolume, are also tapered throughstamp duty tax increase from 10% to

15%. Effectively, it is now more costly toinvest in real estate in mature anddeveloped markets, much more from aforeign investors point of view. Initialimpact of the increased transactioncosts is seen to be felt in volume butprices will remain firm in the short run.

The Philippine residential condominiummarket remains to be stable with noprice hikes being seen across MetroManila. Compounded annualescalation rates from 2008 to 2012yielded a range from 6%-12%depending on the location, projectquality and price scheme. The higherend of the spectrum was garnered byemerging business districts given thatthere is more room for development.Loan-to-value ratios for the countrymove steadily at a range of 70% to90%, which is a sign of strong liquidityin the Philippine banking system alongwith low interest rates.

The unique nature of the Philippine realestate market is its high sensitivity toreal market demand. Forinstance, residential transactions forinvestment aim to get the highest yieldsfrom rent.

Continued on page 6

Q2 2013

Q1 2013 GDP

7.8 % yoy

2011 GRDP

-3.2 % (year)

PHP/USD

1.068% (month)

10-YEAR T-BOND

4.00 (month)

91 T-BILL RATES

0.90 (month)

INFLATION

2.8% (month)

Fort Bonifacio, a rising BPO hub

Fort Bonifacio: An Emerging Business District

Brisk Expansion and CostSensitivity of Global FirmsStimulate Office Market

Encouraging economic figures hasturned all eyes to the Philippines, withglobal and BPO firms stimulating theoffice market.

Prudence Reigns forDevelopers in the midst ofSolid Investor Confidence inthe Residential Market

Developers are now movingcautiously in construction, taking intoconsideration demand andabsorption.

Power Sector Growth toReinforce ManufacturingIndustry

For 2013, investments in the power-energy sector notably increased withglobal and local firms vying to set uppower plants throughout the country.

Global Brands flock thePhilippine Retail Market

Changes in Filipino consumerspending has driven demand forglobal brands while heighteningcompetition for the limited retailspaces therefore pushing rents up.

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OFFICE

BRISK EXPANSION AND COST SENSITIVITY OF GLOBAL FIRMS STIMULATE OFFICE MARKET

Encouraging economic figures has turned all eyes to thePhilippines, with global and BPO firms stimulating the officemarket. Majority of the BPO companies have taken space inreasonably-priced locations resulting to low office vacanciesacross Metro Manila. Brisk expansions and cost-sensitivityamong global firms in Q2 2013 brought overall officevacancy rate in Metro Manila to drop from 3.21% to 2.51%q-on-q amidst supply pressures. Noticeably take up frommultinational and BPO companies was likewise observedfrom new tenants in Prime and Grade A office during thesaid quarter.

The office market in Makati Central Business District (CBD)continued to draw in multinational corporations amidsttightening supply. Vacancy rates for the CBD furtherdeclined to 4.27% in Q2 from 5.07% in the previousquarter. Prime office spaces in the CBD continue to drawinterest from multinational firms which resulted to a lowervacancy rate of 5.61% from 7.87% in the previous quarter.In addition, expansions in BPO firms offering higher valueservices have absorbed the available prime office spaces.Strong demand pushed prime average lease rates up to PhP1,041.05, or an increase of 1.25% q-on-q. The Grade Aoffice market experienced a different scenario as vacancyrate slightly increased to 2.83% from 2.44% in the previousquarter. This minimal movement is mainly due to addedavailability from two new office buildings. Despite the slightincrease in vacancy, average lease rates for Grade A officespace in the CBD was almost unaffected with rates eveninching upward to PhP 783.97. The robust demand in themarket has dampened the effect of the increased vacancy

Prime and Grade A Office Stats

Business District Vacancy RateAverage Asking

Lease Rate

Makati 4.27% 901.46

Fort Bonifacio 0.87% 770.29

Ortigas 3.66% 566.90

Alabang 1.31% 587.41

Quezon City 0.11% 609.09

Prime and Grade A Occupied Space (000s GLA)

which is seen to be easily absorbed in the coming months.Consecutively, average asking lease rate for the entire CBDin the second quarter increased to PhP 901.46, an increaseof 1.26% from PhP 890.27 q-on-q.

In Fort Bonifacio, vacancy rate dipped to 0.87% from1.01% q-on-q brought by migration from expanding globaland local companies. The business district continues to bethe alternative office settlement to the Makati CBD formultinational and BPO industries.

The movement of cost-sensitive BPO companies haslowered vacancy rates in Fort Bonifacio offices. Averageasking lease price were slightly augmented in the secondquarter from PhP763.74 to PhP770.29 due to heightenedcompetition on acquisition of office spaces. Supply pressureis projected to ease in the business district as an additional150,389 square meters of office spaces are slated forturnover in the remaining quarters of the year.

For Ortigas Center, vacancy rating plunged to 3.66% from5.04% q-on-q an indication of interest from cost sensitivecompanies as lease rates in the area are relatively loweragainst other business districts. Despite an escalation of1.87% q-on-q, Ortigas Centers average lease rate ofPhP566.90 has been the most inexpensive among themajor business districts. Ortigas Center had the highestdecrease in vacancy brought by demand from BPOcompanies and expansion of local firms. Upcoming officespaces remain scant for the year with only RobinsonsCyberscape Beta and 45 San Miguel to open in theupcoming months.

Cost sensitivity among BPO firms has also led to increasedspace take up in Quezon City as vacancy rate plummetedto 0.11% from 0.82% in the first quarter of 2013. Averagerent escalated in the second quarter to PhP 609.09 fromPhP 582.28 due to the increased demand in the area.Upcoming supply for the year is estimated to beapproximately 63,259 square meters upon completion ofUP Ayala Technohub Building M & L and the FairviewTerraces BPO.

0

200

400

600

800

1,000

Makati CBD

Fort Bonifacio

Ortigas Quezon City

Alabang

Continued on page 6

BPOs stimulate the Office Market

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PRUDENCE REIGNS FOR DEVELOPERS IN THE MIDST OF SOLID INVESTOR CONFIDENCE IN THE RESIDENTIAL MARKET

RESIDENTIAL

The Philippine economy continued to thrive in the secondquarter following the announcement of a stellar firstquarter GDP growth and investment ratings upgrade bytwo of the largest credit rating agencies. The strongeconomic performance has encouraged foreign investorsto enter and expand in the country, which in turn broughtabout an increase in the number of expatriates andavailability of high paying jobs. The residential propertysector largely gained from employment growth andincreased purchasing power as the housing marketbecame one of the priority investment ventures of middleand high income households.

Over the years, vertical residential developments haveproliferated to address the housing demands of thoseworking in the business districts. Makati CBD and FortBonifacio became the primary destinations forcondominiums as they have established themselves as thecountrys most important financial and business districts.Both districts have also been the home of high-endcommercial and institutional establishments. Internationalschools, foreign embassies and luxury retailers burgeon inthe area, which accordingly attract the high-incomepopulation. Consequently, luxury residential projects aregenerally located within the business districts of Makatiand Fort Bonifacio.

District Rental Rates

Makati CBD PhP240K - PhP250K

Rockwell Center PhP230K - PhP250K

Bonifacio Global City PhP200K - PhP220K

Luxury Residential Condominium

Luxury Residential Houses

Village Rental Rates

Forbes Park PhP350K - PhP450K

Dasmarinas, Urdaneta PhP250K - PhP500K

Bel Air Village PhP120K - PhP 250K

San Lorenzo PhP110K - PhP250K

Magallanes PhP80K - PhP180K

In Metro Manila, Grand Hyatt Residences and DiscoveryPrimea are the only luxury residential condominiums thatare presently selling. Luxury developments are performingfairly well with an average take-up of 10 units per month.High-income individuals and expatriates have sustainedthe demand for luxury residential condominiums in bothpurchases and rents. There has been continuous growth inthe number of end-user buyers anchored by low interestrates and flexible payment terms. Foreign investors arealso investing in luxury residential properties as the countryoffers lower prices than most Asian countries. The averageprice of currently-marketing luxury projects in the countryis at US$427 per square feet (PhP200,000/sqm.), which issignificantly lower than the regional average of US$1,143per square feet (PhP535,000/sqm).

Although demand is present, developers have beencautious in launching luxury developments because of thelonger construction period and slower returns. Owing tothe limited supply, capital values of luxury propertiesincreased by 2.4% q-o-q. Rental values on the other handremained stable as property owners try to keep theircompetitive edge. In addition, rents were maintainedbecause of the abundant supply of high-end residentialproperties that have become a viable alternative to rentingout luxury condominiums because of its lower rental ratesand comparable amenities to that of luxury developments.

Currently, large-scale developers have been more focusedon developing affordable and mid-market residentialcondominiums as these collectively account for more than80% of the total units for completion from 2013 through2019. High-density residential complexes targeting the lowto middle income market have proliferated in the fringesof the major business districts as more households andindividuals choose to own condominium units over houseand lots that are located outside of Metro Manila.Preference for condominium living is brought about by theinclination of the working population to relocateproximate to their place of work for efficiency and so as todefer costs associated with transportation. Demand foraffordable and mid-market is primarily driven by OFWsand middle income individuals. The governments loanmediums such as Pag-IBIG fund have especially stimulatedthe growth of the condominium market by allowing buyersof affordable and mid-market condominiums to avail oflong-term housing loans at low interest rates.

With investor confidence solidified, it is anticipated thatthe demand for residential properties will continue to pickup in the coming quarters. Expatriates, foreign investorsand high net worth individuals will drive the demand forluxury residential properties while OFWs and middleincome individuals will buoy the middle and affordablesegment. Developers are anticipated to continueconstructing residential properties, taking intoconsideration demand and absorption

0 10,000 20,000 30,000 40,000 50,000

Others

Muntinlupa

Paranaque

Pasig

Pasay

Taguig

Mandaluyong

Manila

Makati

Quezon City

Affordable

Mid-Market

High-end

Luxury

Distribution of Upcoming Residential Condominiums

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Metro Manila

POWER SECTOR GROWTH TO BOLSTER MANUFACTURING INDUSTRY

INDUSTRIAL STATS

SUBIC BAY FREEPORT

Metro-Manila : 130 kms (68 Miles) / 2.5

Hours

Size : 67,000 hectares / 165,560 acres

Power : 130 mws

Water : 33,000 cubic meters/day

Telco Provider: Subictel (PLDT)

Lease Rate : US$0.40 -US$1.70 /sqm*

US$2.00 -US$20.00/sqm (SFB)*

CLARK FREEPORT ZONE

Metro Manila : 80 Kms (50 Miles) /

1+Hour

Size : 33,653 Hectare / 83,158 Acres

Power : 50mws + External

Water : Max 40k cubic meters/day (2010)

Telco Providers : PLDT &Digitel

Lease Rate :

US$ 0.30 -US$ 2.00/sqm (Main Zone Lot)*

PhP5,500 -PhP25,000 /ha (Sub Zone Lot)*

US$3.00-US$5.00 /sqm (SFB)*

CALABARZON

Metro-Manila :110 Kms (68 Miles) /

2 Hour Drive to Batangas

Power : Varies by Location

Water : Varies by Location

Telco Providers : Varies by Location (PLDT

etc.)

Selling Rate : PhP2,000 -PhP4,500 /sqm

(Lot)

Lease Rate : PhP43-PhP76 /sqm (Lot)*

US$2 US$6 /sqm (SFB)*

* Lease rate per month

SFB (Standard Factory Building)

INDUSTRIAL

The international investmentcommunity has shown renewedinterest in the country amidst itseconomic performance. Thegovernments efforts of implementingfiscal and structural reforms have paidoff as the country achieved twoinvestment grade ratings during thefirst half of 2013. The government istaking advantage of the favorableinvestment climate by drawing in moreforeign direct investments into thecountry. FDI inflow in the Philippinesobserved the sharpest year-on-yeargrowth among the ASEAN nations in2012.

For 2013, industrial firms likeYokohama Tire Philippines, Inc. andShimano, Inc. have correspondinglyexpanded and entered the Philippinemarket during the second quarter.Furthermore, investment pledges grew91.9% to PhP83.69 billion in the firsthalf of 2013 from the same period of2012 as Japanese companies such asFunai Electric, Philippines, Inc., CebuMitsumi, Inc., and IbidenPhilippines, Inc. took interest in thecountrys manufacturing potential.

Investments in the power-energy sectoralso notably increased with global andlocal firms vying to set up powerplants throughout the country. Withthe Philippine Energy Plan (PEP) 2012-2030 in effect, it is expected that morefirms will venture into powergeneration projects. The PEP envisionsa more secure power sector byendorsing the use of renewableenergy and exploration of petroleumand coal plants in the country. Alongwith this, efficient and sustainableenergy systems and facilities will bedeveloped to ensure the effectivedistribution of energy throughout thecountry.

The manufacturing sector continues tobe challenged by relatively high laborand power costs compared to itsneighboring nations. As a result, whilerenewed interest in the countrysindustrial sector is evident, investmentsin these types of projects may takesome time before it materializes, withsupply of industrial properties to

remain abundant in the short tomedium term.

An incentive for investors to set upoperations in the country ispredominantly derived from lease

rates and capital values that were heldstable as landlords try to keep theirrates at a competitive level.

The government needs to persist ondeveloping and implementingsustainable long-term solutions thatwill help revive the countrysmanufacturing sector. Addressing thepower problems of the country is astep towards transforming themanufacturing industry by means ofenhanced firm productivity andstrengthened supply chains.

The development of new powergenerating plants is anticipated toproduce enough energy to address thedemands of the general populationand the ongoing industrialization ofthe economy. It is also expected tolower the cost of energy pricesthrough competition among powersuppliers.

29,864

3,087 3,070853 680 921

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Region III

Region IV

Region X Region VII

Region XII

Others

PEZA Manufacturing Ecozones by Region (in ha)

Industrial firms will benefit from future lower power costs.

Industrial firms like Yokohama TirePhilippines, Inc. and Shimano, Inc.which have correspondingly expandedand entered the Philippine marketduring the second quarter will benefitfrom the resulting lower power costs inthe future. Through this, thegovernment hopes to address the highelectricity rates that have burdened thecountrys major industrialsectors, particularly manufacturing.

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MORE GLOBAL BRANDS ENTER THE PHILIPPINE RETAIL MARKET

RETAIL

Consumer sentiment remained upbeat in the retailmarket as the country moves to a higher growthtrajectory. Benign inflation and strong purchasing powercontinue to propel retail activity in Metro Manila.Potential in the retail market remained strong broughtby the expanding BPO industries and steady growth ofOFW remittances. Retail sales continued to be soliddemonstrating upticks in consumer spending and anencouraging outlook for real estate and tourism sectors.Compact household expenditure has been supported bythe growing inflow of remittances and the well-anchored inflation forecasts.

The quarter saw the entry and expansion of new andexisting global brands in different retail core sites.Newly-opened SM Aura in Taguig has offered a varietyof the latest brands in the quarter such as TMLewin, Miss Selfridge, Suiteblanco, Stefanel, BBDakota, Yves Rocher, J Lindberg, Farah Vintage, PaulBoulangerie, NBA Caf, and Todd English Food Hall.Other international brands have also located inselected prime, suburban and secondary retail areas.These brands have settled in the new Shangri-La Eastwing, Robinsons Magnolia, Glorietta and Greenbelt.For Q2 2013, an approximate of 7,579 sqms. ofleasable space has been taken up by theseinternationally brands.

BPO-retail integrated facilities continue to create wavesin the business districts via convenience storeexpansions. Family Mart, a Japanese conveniencestore chain owned by the Rustan's Group and Itochu isone of the new establishments with 24/7 servicescatering to BPO and middle class employees. Theincreased income of the labor force in businesscenters, specially those in the BPO sector, sustained theexpansion of convenience stores near offices whileconcurrently strengthening ground floor retail trend.

Rents edge further as international brands locate in primeretail establishments. High demand for global brandsheightened the competition for the limited retail spacestherefore pushing rents up. Low vacancy rating wassustained, hovering at the 5% level. This 2013, the expectedcompletion of approximately 432,000 square meters ofadditional gross leasable area will ease supply pressure.

Retail market businesses will remain profitable for theremainder of the year due to a strengthening Philippineeconomy driven by the growing BPO industry, OFWremittances, and strengthening middle market that cansustain the operations of retail establishments.

Retail supply space continue to increase

Luxury vehicle brands have also seen the potential in thePhilippine retail market. The entry of British luxury vehiclebrand Rolls-Royce in the country stems from the spendingpatterns of Filipinos. The Chamber of AutomotiveManufacturers of the Philippines (CAMPI) has affirmed thecountrys strong consumer-based market. Automobile salesincreased by 20% with 87,226 sold units in the 1H2013, up from 72,871 units in the same period last year.The entry of luxurious brands and products has signified thegrowing size of the affluent and increased purchasing powerof the Filipino community.

Global brands set up shop in the country

HH Final Consumption Expenditure Q1 2013

Source: NSCB

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OFFICE

In Alabang, vacancy rates remained at 1.31% for the firstand second quarter of 2013. The business districtcontinues to encourage BPOs to locate in the area.Average rents slightly increased to PhP 587.41 for thesecond quarter of 2013 from PhP 584.89 in the previousquarter. For the remaining quarters of 2013, Filinvest OneBuilding and Plaz@E will add new supply to the pipelinewith a combined total 34,783 sqm of gross leasable area.

Outlook for the office market remains optimistic for therest of the year. Supporting tailwinds from an increasingoffice space demand from multinational and BPOcompanies shall sustain the office market. Average rent isexpected to increase due to upcoming supply renderingquality alternative spaces for new tenants. Total upcomingoffice supply in Metro Manila for the year amount to anapproximate 548,689 square meters. Vacancy rates inemerging business districts will decrease as more cost-sensitive BPO firms are anticipated to take up space in thearea. Philippine economic growth signifies encouragingpossibilities for the office market. BPO opportunities areexpected to diversify into other skilled and knowledge-based fields such as finance, accounting, softwaredevelopment, IT and other high-value services.

COVER STORY

Office market remains optimistic

However, the residential market has a threshold for rentper segment, pricing beyond the threshold would decreasechances of leasing it out and in effect such an investmentwill be recovered later than expected and becomes lesssaleable. Currently, most of the buyers of residentialdevelopments are end-users. With an end-usermarket, there is no immediate need to gain yields fromtheir disbursements. This would mean less transactionvolume and hence, no price hikes.

Likewise, rent is the primary source of revenue for propertyinvestors in the office market. The office market isdominated by BPO demand composing 80% of yearlytake-up and BPO companies prefer to locate in qualityoffices with low rents in order to save costs.However, property investors in the office segment expect acertain level of return from their investment and if themarket cannot sustain target rent, they would be at a loss.In addressing BPO market demand and investorconcerns, developers in the country have been offeringprojects with competitively low rents suited for BPOoccupiers to maintain its high occupancy. Offeringexcessively high rents would drop renewals and occupancyin the office segment. This business environment currentlyfuels the office expansion of BPO companies in MetroManila and even in the countryside.

The central bank is also doing its part enforcing financialprudence in the banking sector to avoid a propertybubble. Price hikes are prevented by the 20% real estateexposure regulatory limit set by the Bangko Sentral ngPilipinas. By limiting investments of banks in realestate, volume transaction is also expected todecrease, preventing price hikes from speculation.

The end-user demand for the residential segment and thehighly cost sensitive BPOs for the office segment are thestrongest factors preventing price hikes in the real estatemarket. External influences on real estate prices are merelyknee-jerk reactions on the market. Real demandnotspeculation is what keeps prices at a stable growthpattern.

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CONTACTS

Manila Office

10th Floor, Ayala Tower One &Exchange PlazaAyala Avenue, Makati City 1226t:(632) 752-2580/848-7388f: (632) 752-2571e: ricksantosteam@cbre.com.phw: www.cbre.com.ph

For more information, please contact:

Cebu Office

Unit 1505, Ayala Life-FGU CenterMindanao Avenue corner Biliran Road,Cebu Business ParkCebu City 6000t:(6332) 318-0070/236-0462

Rick SantosChairmanRick.Santos@cbre.com.ph

Joey RadovanVice ChairmanGlobal Corporate ServicesJoey.Radovan@cbre.com.ph

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Global Research and Consulting

This report was prepared by the CBRE Philippines Research Team which forms part of CBRE Global Research and Consulting a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe.

Disclaimer

2013 CBRE Philippines. Part of the CBRE Affiliate Network. CBRE Philippines confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

Jan Custodio/ Alvin FernandezSenior Director/ DirectorGlobal Research and ConsultancyJan.Custodio@cbre.com.phAlvin.Fernandez@cbre.com.ph

Calvin JaviniarSenior DirectorInvestments and Capital MarketsCarlo.Javiniar@cbre.com.ph

Mabel LunaDirector Valuation and Advisory ServicesMabel.Luna@cbre.com.ph

Edwin SamaristaExecutive DirectorProperty ManagementEdwin.Samarista@cbre.com.ph

Nelson Del MundoVice PresidentFacilities ManagementNelson.Delmundo@cbre.com.ph

Allan NapolesExecutive DirectorProject ManagementAllan.Napoles@cbre.com.ph

Yvette AcebedoDirectorResidential ServicesYvette.Acebedo@cbre.com.ph

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