The Philippines saw a record demand for office space last year, as the country continued its transition into a service economy, led by the growth of the business process outsourcing sector,a real estate consulting company said Wednesday.
“2015 saw net take-up for premium and grade A office spaces totaling 459,000 square meters, which is the highest that we’ve recorded,” KMC Mag Group co-founder and managing director Michael McCullough said.
“Within the past three decades, the Philippines has started its transformation from a highly agricultural economy to a service-based one, almost entirely disregarding industrialization that is common to most economies,” McCullough said.
He said private services accounted for roughly half of the gross domestic production, making it the biggest sector of the economy.
“While primary production, which are agriculture, hunting, forestry, fishing and the industrial sector have continuously decreased, services increased its share to 57 percent of gross domestic product in 2015,” he said.
McCullough said the shift had contributed to the high economic performance of the country.
Economic growth since 2010 averaged 6.2 percent annually, the highest average since the 1970s.
McCullough said the growth of outsourcing and offshoring companies in the country resulted in a remarkable demand for Metro Manila’s office space.
“Makati’s central business district maintains its position as the most premium CBD in Metro Manila, while the Bay Area and Quezon City are expected to continue outperforming other Metro Manila sub-markets given the supply and demand dynamics within these markets,” he said.
He said amid the strong demand for office space in the area, Makati CBD now had an average rental rate of P980.8 per square meter a month, the highest in Metro Manila.
Vacancies in Metro Manila are likely to increase in the next three years even with strong pre-leasing activity due to the entry of some 1.8 million square meters of office space, most of which are in Makati CBD, Bonifacio Global City, Alabang, Quezon City and the Bay Area.
The entry of these supplies is expected to ease the rental growth in most sub-markets in the coming years, according to KMC Mag.
“Looking at it from a global perspective, the Philippines and Asian real estate in general have enjoyed a strong run over recent years,” said McCullough.
“In the fourth quarter of 2015, Asian markets were able to put US interest rate worries behind them as the US Federal Reserve increased the base rate by 25 basis points, with little immediate fallout,” he said.
According to Savills’ World Office Yield Spectrum, Manila has the fourth highest grade A market yield at 8 percent in December 2015, next to Hanoi, Ho Chi Minh and Adelaide.
Market yield is derived by capitalizing current market rents, which includes the rent payable by the tenant and the value of any incentive paid to the tenant, against current capital values for office buildings.
In terms of grade A effective yields, Manila placed third globally with an effective yield of 7.5 percent, with Hanoi being the highest followed by Ho Chi Minh. Effective Yields are derived by capitalizing current market rents, which includes the rent payable by the tenant and excludes the value of any incentive paid to the tenant, against current capital values for office buildings.
“Globally, much of what happens in 2016 will be dependent on the course the US Federal Reserve takes with regards to interest rates. The movement of US interest rates will determine how currencies behave, how trade flows, and how capital moves around the world,” said McCullough.
“Risk premiums of between 2 percent and 3 percent in most office investment markets around the world continue to look like fair value, so we anticipate ongoing strong international demand in office property in 2016,” he said.