Property Market Overview 2nd Quarter 2010

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1 c o l l i e r s i n t e r n at i o n a l p h i l i p p i n e s m a r k e t ov e rv i e w j u ly Property Market Overview 2nd Quarter 2010 Market Indicators OFFICE LUXURY RESIDENTIAL RETAIL trends 1q10 2Q10 EXECUTIVE SUMMARY Property Indicators: Encouraging Macro Numbers GDP grew by an impressive 7.3% during the first quarter of 2010 due to the improvement in investments and government expenditures. Consequently, the government s full-year GDP growth forecast was raised to 5% to 6% from the previous 2.6% to 3.6%.. Implied land values remain broadly unchanged. Expectations point to slight upward adjustments over the second half of the year due to continuing demand for well located development properties. Tracking the decline in project launches last year, HLURB Licenses to Sell continue to underwhelm, with total number of issued licenses down by 35.4% during the first four months of this year. Office: Better Days Ahead A total of 150,000 sq m of office space is expected to complete this year; none in. While the development pipeline remains thin for the next couple of years, developers have re-commenced construction in various locations. Rents have remained generally stable over the past three months. With significant demand for office space from the O&O industry, rents are expected to trend upwards over the next six months. The is expected to lag in the office sector s recovery with vacancy rates in prime office buildings significantly higher than the overall market average. Demand from the BPO industry is focused on alternative office precincts. Residential: Rental Market Under Pressure? In the next four years, over 6,000 new condominium units will complete in alone. The stock is forecast to double its size in the next few years. As of 2Q10, overall vacancy of residential condominiums in increased to 7.8% from 6.9% in the previous quarter. Demand for luxury 3BRs is primarily coming from the expatriate market. Average rents for luxury 3BR units Makati CBD, Rockwell Center, and Bonifacio Global City are steady as demand for big units remains strong while there is limited new supply. Expect rental rates for these large units to be maintained at current levels despite more condominiums completing.

2 Retail: Space is Scarce Both the commercial and the residential segments performed well over the past six months. Office leasing got a boost from renewed expansion demand from the BPO sector while residential condominium sales continue to improve behind affordable payment terms. Confidence in the property market should continue over the next twelve months behind a stronger economic backdrop. With limited opportunity for regional scale mall development in Metro Manila, mall developers are looking into the provinces for expansion. Nevertheless, communitytype malls are expected to be developed in various locations in Metro Manila. As of 2Q10, vacancy declined from 8.9% to 8.3%. With consumer spending poised to rebound this year and only limited new supply, vacancy is expected to decline further. Spending indicators are encouraging. Vehicle sales improved by 37% year-onyear and CAMPI expects full-year sales to increase by 11%. Remittances grew by 6.6% during the first four months of this year as confidence improved in economies overseas. economic indicators Gross National Product Gross Domestic Product Personal Consumption Expenditure Gov t. Expenditure Investments Exports Imports Agriculture Industry Services Inflation Budget Deficit (billion Pesos) P:US$ (Average) Average 91-Day T-Bill Rates Q09 1Q10 5.6% 5.0% 4.9% 4.0% -6.0% 4.2% 2.4% 1.8% 4.9% 6.4% 7.6% P146.8 P % 6.1% 5.4% 5.5% 6.1% 2.7% 11.2% 1.9% 3.8% 4.5% 6.7% 6.2% P62.2 P % 7.8% 7.3% 6.0% 10.0% 9.3% 3.1% -5.4% 5.1% 6.6% 8.7% 2.8% P12.4 P % 6.2% 3.8% 4.7% 3.2% 1.7% -1.9% 2.4% 3.2% 4.9% 3.3% 9.3% P68.1 P % 3.0% 0.9% 3.8% 8.5% -9.9% -14.2% -5.8% 0.1% -2.0% 3.2% 3.2% P270 P % 4.0% 1.1% 4.1% 10.9% -5.7% -13.4% -1.9% 0.0% -0.9% 2.8% 6.4% P112 P % 9.5% 7.3% 5.9% 18.5% 24.3% 17.9% 20.3% -2.5% -15.7% 6.1% 4.4% P132 P % Source: National Statistical Coordination Board 2 Colliers International

3 ECONOMY President Noynoy Aquino stepped into power with most economic indicators on a positive note. Gross Domestic Product (GDP) grew by 7.3% during the first quarter of 2010, the highest GDP growth since 2Q07, primarily driven by improvement in investments and government expenditures. On the other hand, despite volatility in world oil prices, inflation rate averaged 4.3% over the first five months of 2010, well within the Central Bank s (BSP) target of 3.5% to 5.5% for the year. This inflation trend will likely prolong BSP s stance to maintain interest rates. The Economist Intelligence Unit (EIU) expects the Philippine economy to grow by an average of 4.3% for both 2010 and 2011 after slowing down to 0.9% in The government s official GDP target was recently raised to 5% to 6% but there is still concern about the budget shortfall set at around 3.5% of the GDP or P295 billion. Supported by robust performances from the manufacturing and services sectors, as well as the rebound in personal consumption and government spending plus the promising new administration under President Aquino, confidence is likely to continue to improve over the next quarter. LAND VALUES For 2Q10, implied land values marginally declined to an average of P265,000 per square meter. As a result, accommodation values are at an average of P16,600 per developable sq m. While commercial values have bottomed out, implied land values are expected to remain stable towards the end of the year. Interest for prime properties in the CBD has started to pick up as demand for property development, both office and residential, also intensifies. Outside the land values are flat at P120,000 per sq m in the Ortigas Center and at P140,000 to P160,000 in Bonifacio Global City (BGC). and Ortigas Center Average Land Value comparative land values Peso/sq m 2Q10 1Q10 % Change 2Q11F % Change makati cbd 255, , , , % 260, , % ortigas center 90, ,000 91, , % 92, , % Colliers International 3

4 hlurb License to Sell (Cumulative) UNITS Jan - apr Jan - APR % Change Socialised Housing Low Cost Housing Mid Income Housing High Rise Residential Commercial Condominium Farmlot Memorial Park Industrial Subdivision Commercial Subdivision Total (Philippines) 14,967 19,746 11,958 11, , ,916 16, ,371 18,033 14,318 1, , , % 20.6% -33.7% -21.2% -82.5% 25.5% -53.5% 0.0% 12.4% -35.4% Source: Housing and Land Use Regulatory Board LICENSE TO SELL The number of HLURB licenses issued during the first four months of this year declined significantly by 35.4% YoY to a total of 96,916 units. This is in part because fewer property projects were launched last year. The fall off in licenses issued will be seen in the full-year figure as it reflects the cautious stance of developers last year. There was a marked decline in licenses to sell in commercial condominium, mid-income residential and high-rise residential segments. Nevertheless, with developers much more aggressive in project launches this year, improvements in the number of licenses to sell issued should be expected in the near term. HLURB License to Sell 12-Month Moving Average The number of high rise residential condominium projects granted with HLURB licenses this year is significantly lower at 11,283 units compared to 14,318 units last year. Some of the notable projects during this period include Park Terraces (ALI), Arya Residences (ALCO), and Beaufort West (FLI). As of April 2010, HLURB issued licenses to 14,967 units for the socialized housing segment and to 19,746 units for the low cost housing segment. Projects in this segment include Portobello Homes with 351 units in Cabuyao, Laguna, Villa San Mateo 5 with 318 units in Laguna, and Estrella Heights with 138 units in Gen. Trias, Cavite. Source: Housing and Land Use Regulatory Board OFFICE SECTOR Supply As of 2Q10, has an office stock of 2.7 million square meters, accounting for roughly 50% of the office space in Metro Manila. The Zuellig Building along Makati Avenue is the only office building currently under construction in (completion in 2012). In the wider Metro Manila market some 150,000 sq m is expected to complete this year and, at this stage, the development pipeline looks similarly muted for The bulk of the 500,000 sq m of office space that was vacant at end 2009 will be absorbed by mid 2011 and this is encouraging a wave of new development, notable projects including Two E-Com Center (SM Land) in the Mall of Asia complex, Net Lima (Net Group) in BGC and additional supply at McKinley Hill. forecast office supply Location End Makati cbd 2,699,696 57,353 ortigas 1,095,623 45,396 Fort bonifacio 413,020 72,673 83,793 49,920 eastwood 220,103 32,876 39,840 35,765 alabang 234,305 27,701 OTHERs* 657,012 60,000 total 5,319, , , ,038 *Manila, Pasay, Mandaluyong, Quezon City 4 Colliers International

5 Office Supply and Demand vs metro manila Office STOCK 270,000 20% 220, , ,000 70,000 20,000 (30,000) 15% 10% 5% 0% (80,000) -5% in sq.m F 2011F N ew Sup p ly D uring Year T ak e-u p D uring Year Vac an c y at Year En d (R H S) Demand Office buildings outside the are experiencing strong demand from the Outsourcing & Off-shoring (O&O) industry. However, in the, although overall vacancy declined marginally over 2Q10, vacancy rates increased significantly in both the Premium and Grade A segments. While there is some upgrading demand from traditional office users this is not offsetting decentralization pressures (both HQs and back office functions), with Bonifacio being the primary beneficiary. Rents rents were generally steady during 2Q10 with only a modest up-tick in the Grade B market. As of 2Q10, the average rent for Premium Grade office space was unchanged at P795 per sq m monthly (per net useable area). Average rent for Grade A buildings was also steady at P630 per sq m. On the other hand, Grade B office rents increased marginally to an average of P420 per sq m from P415 per sq m in 1Q10. Outside Makati, because of expanding demand the incentives given by landlords to tenants last year have been steadily reduced and rental rates are expected to increase by 5% to 10% through to end Makati will lag such growth. Office VACANCY RATES Office RENTS (based on net usable area) Comparative Office Vacancy Rates 2Q10 1Q10 2q11F Premium 12.9% 11.6% Grade A 9.9% 7.1% Grade B & Below 5.1% 6.2% All Grades 6.9% 7.1% 4.8% Colliers International 5

6 NOTABLE LEASING DEALS BUILDING AREA TENANT SIZE (SQ m) Commerce & Industry Plaza One World Square RCBC Plaza 8/10 Upper McKinley McKinley Hill McKinley HIll Makati McKinley Hill Factset (Software-IT) Shore Solutions (BPO) Vestas (Software-IT) Cognizant (IT-BPO) 1, ,612 Comparative Office Rental Rates (based on net useable AREA) PESO / sq m / MONTH 2Q10 1Q10 % Change 2Q11F % Change Premium % % Grade A % % Grade B % % Capital Values Capital values in office buildings were unchanged, tracking movements in the rental rates over the past six months. Premium Grade offices are currently priced at an average of P98,000 per sq m with an upper limit of P106,000 per sq m. Grade A office capital values stood at P75,000 per sq m while Grade B capital values remained at P52,000 per sq m. Office CAPITAL VALUES Comparative Office capital values (based on net useable AREA) PESO / sq m 2Q10 1Q10 % Change 2Q11F % Change Premium 89, ,261 89, , % 92, , % Grade A 63,000-87,000 63,000-85, % 66,000-91, % Grade B 44,000-60,000 44,000-60, % 46,000-62, % 6 Colliers International

7 Residential Condominium Stock Residential Supply and Demand RESIDENTIAL SECTOR Supply There is a significant supply pipeline for residential condominiums in Metro Manila. In the five business districts alone, more than 20,000 units will be completed in the next five years. In, four residential condominiums are scheduled to complete this year. These completions will bring the total stock of condominium units to 13,076. In the next four years, over 6,000 new condominium units will complete in alone - most notable are the ultra-luxury projects Raffles Residences (2011) and Discovery Primea (2013). Elsewhere the pipeline of residential developments is even stronger, particularly at Bonifacio. The supply situation in the next few years may not bode well for the rental market, particularly at the lower end and for smaller unit sizes where attractive payment terms are supporting affordability and there are simply too many units available to rent. Rents Average rental rates for luxury 3BR units in remain unchanged at P540 per sq m despite movements in the secondary market. This translates to about P135,000 monthly for a 250 sq m unit in the. The 3BR segment of the market in Makati, Rockwell and Bonifacio remains strong and will probably withstand supply pressures in the coming years because most new residential condominiums do not offer big units to satisfy expatriate demand. Residential Vacancy Rates Demand As of 2Q10, overall vacancy of residential condominiums in Makati CBD increased to 7.8% from 6.9% in the prior quarter, pointing to the anticipated trend of rising vacancy in most locations in Metro Manila, particularly for studio and one bedroom units that are targeting young professionals and start-up families. By contrast there remains a shortage of expatriate quality two bedroom and three bedroom units. Residential Condominium Stock units 2Q10 1Q10 % Change 2Q11F % Change Luxury 5,420 5, % 7, % Others 6,595 6, % 6, % All Grades 12,015 12, % 14, % Colliers International 7

8 forecast Residential new supply LOCATION Total Makati cbd - 1,451 2, ,141 5,999 rockwell - 1, ,971 fort bonifacio 1,964 1,823 3,154 1, ,201 Ortigas 1, , ,692 eastwood ,694 total 3,452 5,626 7, ,557 As of 2Q10, average rents in Rockwell Center moved slightly higher to P690 per sq m or P155,250 per month for a 225-sq m unit because of improving demand from expatriates. On the other hand, average rents for luxury 3BRs in Bonifacio Global City remained unchanged at P615 per sq m or P178,350 a month for a 290-sq m unit. Capital Values Secondary market sales in the average P100,125 per sq m. In contrast, new pre-selling condominiums in the area are selling at a high of P150,000 per sq m, even higher for ultraluxury developments selling at a high of P250,000 per sq m for some units. Expect capital values to increase by 5% to 10% in the next 18 months. At Rockwell, where the One Rockwell complex will be completed by end 2011, prices average P105,000 per sq m with a high of P125,000 per sq m for existing projects. Rockwell s preselling project Edades currently sells for at least P130,000 per sq m. Expect capital values in the Rockwell Center to inch up further after the completion of One Rockwell. This area remains one of the most sought-after luxury mixed-use developments in Metro Manila. Comparative Residential Vacancy Rates 2Q10 1Q10 2Q11F Luxury 4.8% 4.4% Others 10.3% 8.9% All Grades 7.8% 6.9% 8.1%, rockwell, bonifacio global city Prime 3BR Rents metro manila Comparative luxury 3BR Rental Rates PESO / sq m / MONTH 2Q10 1Q10 % Change 2Q11F % Change Makati cbd % % rockwell % % bgc % % 8 Colliers International

9 Comparative Residential Lease Rates Three-Bedroom, Semi-furnished Apartment Ridge / Roxas Triangle Rental Range Average Size Salcedo Village Rental Range Average Size Legaspi Village Rental Range Average Size Rockwell Rental Range Average Size Fort Bonifacio Rental Range Average Size minimum average maximum % Change (YTD) 50, , , , , , , , , , , , , , , % 0.93% 2.92% 2.03% 1.30% Average prices for existing residential condominiums in Bonifacio Global City stand at P102,400 per sq m, up from P101,600 in the last quarter as new developments complete and enter the resale market. The strong supply pipeline in BGC for the next decade should temper increases in capital values of existing condominiums in the area., rockwell, bonifacio global city luxury 3BR CAPITAL VALUES Overall demand for pre-selling condominiums in Metro Manila is still strong considering that payment terms have made new condominium units affordable. There are glaring differences in the interest rates, duration of payments, down payment amount, monthly amortizations, and reservation fees compared to only a decade ago. More relaxed payment terms and reduced monthly installments have been the demand drivers behind brisk sales of new condominium projects. Metro manila Prime 3BR Capital Values PESO / sq m 2Q10 1Q10 % Change 2Q11F % Change makati cbd 69, ,469 67, , % 72, , % rockwell 91, ,817 90, , % 92, , % bgc 85, ,752 84, , % 87, , % Colliers International 9

10 RETAIL SECTOR Supply As of 2Q10, Metro Manila retail mall stock was unchanged at 5 million sq m spread over more than 70 malls. SM Novaliches is the lone mall project in Metro Manila expected for completion this year, with most activity in the provinces. Robinsons Land has three projects slated for completion this year (Dumaguete, Ilocos Norte, and Cebu) as has SM Prime (Calamba, Tarlac, and San Pablo). Metro Manila Retail Supply and Demand The direction of mall developers in Metro Manila is to expand through small-scale community malls. This, in addition to retrofitting and expansion of existing malls, will be the supply trend for Metro Manila in the next few years. Metro Manila Retail Vacancy 2Q10 1Q10 2Q09 metro manila 8.3% 8.9% 10.7% Demand With limited mall expansions expected in the future, Metro Manila malls are expected to have single-digit vacancies. As of 2Q10, vacancy further declined from 8.9% to 8.3%. With consumer spending poised to rebound this year, sales volumes and foot traffic are expected to improve. Mall occupancy is also being boosted by the expansion of clinics, activities and lifestyle services. International retail brands have also resumed expansion plans to developing countries like the Philippines. Specialty stores have been constantly increasing its reach to other parts of Metro Manila. All of these developments will contribute to retail vacancy declining to sub 7% over the next 12 months. Metro Manila Retail Stock Metro Manila Retail Vacancy Rates Retail Stock Metro Manila sq m 2Q10 1Q10 % Change 2Q11F % Change Super Regional 2,938,562 2,938, % 2,938, % Regional 1,010,294 1,010, % 1,065, % District/Neighborhood 1,050,331 1,050, % 1,050, % All Malls 4,999,187 4,999, % 5,054, % 10 Colliers International

11 Comparative Effective Retail Rents PESO / sq m / MONTH 2Q10 1Q10 % Change 2Q11F % Change ayala center 1,150 1, % 1, % ortigas 1,035 1, % 1, % Rents As of 2Q10, rents for retail spaces in Ayala Center () are at an average of P1,150 per sq m, up by 2.7% from P1,120 in the last quarter. In Ortigas Center, however, rents for retail spaces are virtually unchanged at P1,035 per sq m monthly. Because of anticipated strong sales of retail tenants in malls, effective rents are expected to increase by 3% to 5% over the next twelve months. OFW Remittances Spending Indicators Five months into 2010, the Chamber of the Automotive Manufacturers of the Philippines (CAMPI) reported that vehicle sales grew by 37%. From January-May, the industry sold 66,958 units compared to 49,001 units during the same period last year. In particular, the industry sold 44,208 commercial vehicles which include SUVs, AUVs, and hauling vehicles, 40% more than was sold as of May This is further evidence that consumers are more confident this year. CAMPI expects full-year vehicle sales to increase by 11%, upgraded from the originally set 4% growth, but at this point their forecast appears very modest. Overseas Filipino Worker (OFW) remittances grew by 6.6% during the first four months of this year to settle at US$5.9 billion compared to US$5.5 billion in the same period last year. Remittance flows were supported by the steady demand for Filipino workers abroad, currently at 1.4 million workers. The compounded annual growth rate (CAGR) of OFWs deployed over the *As of April 2010 Source: Banko Sentral ng Pilipinas past 20 years is 5.4%, which suggests that by the end of this year there will be more than 1.5 million OFWs deployed in various countries. In light of stronger demand for Filipino workers abroad in the coming years, remittances figure should improve further by double digits. Quarterly Vehicle sales OFW Deployment Source: Chamber of Automotive Manufacturers of the Philippines Inc. Source: Philippine Overseas Employment Agency, National Statistical Coordination Board For more information about this topic please contact our Research or Consultancy and Valuation. You may log on to our website at Colliers International 11

12 Notes: 294 offices in 61 countries on 6 continents USA 94 Canada 22 Latin America 17 Asia Pacific 64 EMEA 97 Revenue in 2008 Over US$1.6 billion Property Management 1.1 billion sq ft 12,700 Professionals Contact information philippines: Ramon Jose E. Aguirre Research Manager 10F Tower 2 RCBC Plaza Ayala Ave. Makati City, Philippines 1226 Tel: ext rj.aguirre@colliers.com David A. Young Managing Director 10F Tower 2 RCBC Plaza Ayala Ave. Makati City, Philippines 1226 Tel ext david.a.young@colliers.com This report and other research materials may be found on our website at Questions related to information herein should be directed to the Research Department at the number indicated above. This document has been prepared by Colliers International for advertising and general information only. Colliers International makes no guarantees, representations or warranties of any kind, expressed or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. Colliers International is a worldwide affiliation of independently owned and operated companies.