DVISOR. The. Property Sector. July 9, 2012

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1 The DVISOR Property Sector Property Sector Performance YOY Source: Technistock Abbygayle M. Estrella Equities Analyst AB Capital Securities, Inc. 14F Tower One and Exchange Plaza Ayala Triangle, Ayala Avenue Makati City, Philippines Tel.: Fax No.: website: July 9, 2012 Property Sector: Canvas of Economic Growth In a country where people prefer to invest in real estate than trade in the equities market, the Property sector emerges as an immediate indicator of economic growth in the Philippines. The industry was dramatically hit by the 1997 Asian financial crisis and the 2009 global recession but it bounced back in the recovering economy. Influx of tourists and business process outsourcing companies, plus the continuous injections of OFW remittances, were the lifeblood of the industry. More than a facelift, the erection of new buildings and developments transformed the Philippines to an emerging business haven in Asia, and more noticeably, in the world. Market Outlook Overall, the property sector will be continually propelled by favorable fundamentals and pleased business sentiment in the country. Demand for all segments trigger supply pressure particularly for residences and offices. Expatriates will further accelerate demand in the luxury residential segment while developers will remain nested on the middle-income segment for new projects. The entrance of international brands and new establishments drives demand in the shopping malls backed by improving consumer sentiments. Successful promotional campaigns by the public and private sectors do not only increase revenues for the tourism industry but also the leisure and hotels and resorts segments of the property sector. Despite the bullish trend in the property sector, investors should consider the companies' revenue composition to segregate those who can deliver better bottom line accounts. Malls provide a more stable position in terms of revenue generation since the Philippines is a consumption-driven country. As compared to the residential projects, property developers of shopping centers and retail districts are more resilient during economic distress because the former is more likely to be hit by higher interest rates and lower consumer confidence in purchasing illiquid assets. The offices segment is also a potential resource of recurring income because of the ongoing demands for office spaces. Lease rates are also negotiable among the tenants. Revenues from hotels and resorts are seasonal in nature and will depend on the sentiment of the tourism industry. Pro-cyclical Industry The property sector coincides with the economy on a pro-cyclical pattern. High volume of business permit issuance, strong housing demand with sustainable housing supply, flourishing tourism, growing business confidence, and downpour of foreign direct investments by the offshoring and outsourcing (O&O) industry are signs of a booming property market. *at current prices; RERBA = Real Estate, Renting, and other Business Activities Source: National Statistics Coordinating Board The information contained herein is based on sources which we believe are reliable, but is not guaranteed by us and is not to be considered all inclusive. It is not to be construed as an offer or solicitation of an offer to sell or buy the securities herein mentioned. This firm and its Directors and Officers and/ or members of their families may have a position in the securities herein mentioned and may make purchases and/or sales of the securities from time to time in the open-market and otherwise.

2 July 9, 2012 The DVISOR Page 2 IMF Forecasted Economic Growth Rate Source: World Bank Real GDP 2012Q1 Economy at a Glance Domestic fundamentals kicked-off ahead the Asian region as the Philippines recorded a 6.4% Gross Domestic Product on 2012Q1, trailing China at 8.1%. Other Services, Transportation, Storage, and Communication, and Trade charged the Services sector as the main driver at 8.5%. Lower prices of staples slowed down inflation to 3.1%, edging to the 4.0% + 1.0% target range. Prime lending rates also curbed down to 7.7% from 8.6% last 2011Q4. Congenial economic factors identified the Philippines as a breakout nation alongside Turkey and Indonesia more popularly known as the TIP economies who are seen to outperform economic expectations. While OFW remittances chipped in USD billion to spur 5.3% growth against last year, foreign exchange, currently pegged at , is cautioned to depreciate at 45 PHP/USD at year-end due to looming economic crises in the United States and the Euro zone. Trends in the Real Estate Industry From rent-seekers to home-owners The striving local economy enables Filipinos to purchase houses that would suit their preferences. Lower interest rates and easier financing scheme encourage people to move out from rents and seek permanent housing. In the Philippines, real estate is perceived as a more conservative investment than the stock market. Home-owners opt to enjoy appreciation of land value or profitability by setting up rents. Comparative OFW Remittances 2011 vs in thousand US dolars Source: Bangko Sentral ng Pilipinas Urbanization the Blueprint of the Property Sector Property developers position its projects in the heart of commercial centers, healthcare, educational and religious institutions. These plot a potential location since consumers heavily consider residences that offer them a balance of live, work, and play. Alabang is to be the first town to enliven the three-way concept. Aside from the National Capital Region, developers are cultivating their prospects in the growing business centers on the main provinces such as Laguna, Batangas, Cebu, Pampanga, and Davao. Green Construction for Golden Profits Aside from the location, sustainability is promoted in the property sector through the usage of environmentally-friendly materials and procedures in construction. In commercial developments, foreign and local companies are more keen to settle in green buildings while people are becoming more conscious of environmental-living, particularly on their lifestyle and furnishings, in the residential segment. Consequently, these green initiatives is expected to generate returns.

3 July 9, 2012 The Next Wave Cities Source: Business Processing Associations Philippines, Department of Science and Technology-Information and Communication Technology Distribution of BPO Activities (2008) Number of Construction Type per Project 2012Q1 2011Q1 Business Permit Issuances 29,585 28, % Residential Construction 21,424 20, % Non-residential Construction 4,085 3, % Additions, Alterations/Repair 4,076 4, % Source: National Statistics Office The DVISOR Page 3 Proliferation of Offshoring and Outsourcing Industry Amid the dark cloud hovering the American and European markets, the Philippines becomes a nest for offshoring and outsourcing activities. This flight to quality, in order to subsist foreign companies, demands office spaces and drives up vacancy rates. It further attracts developers to build residential condominiums and retail centers near offices, creating a triangle of sustainability in a given location. Demographics & Psychographics: Keys to Residential Profiling The highly-competitive residential segment of the real estate industry caters to a broad, diversified market that has a common denominator purchasing a convenient and affordable house. Developers mix-and-match various architectural designs, amenities, location, and financing schemes to demographics. Consumers in the property sector can be segmented to the young professionals (known as yuppies), the start-up families (those in the beginning of establishing their families e.g. newly-weds), the retirees (those who wants to settle down after ending their work, e.g. former employees and overseas workers), and the expatriates (foreigners who are assigned to manage businesses in the country, particularly for outsourcing and offshore industry). Another means of classification is psychographics in which residential developments are tailorfitted according to its respective target market s lifestyle, personality, preferences, interests, and values. Current Issues The Philippines follows the Torrens System of land registration in which the conferment of land ownership is binding on all persons, including the government. Department of Housing Bill Already pending in the Senate is the act that will create a Housing Department that will have the authority, funding, and jurisdiction in tackling housing problems. Currently, the Philippines recorded a 3.7 million housing backlog that could be resolved through the said department alongside negotiations with the real estate companies. The Housing Department could drive demand in the socialized residential segment. Real estate companies will also enjoy a tax-exempt status in socialized housing projects priced at Php 400,000. Property developers will also be enticed to offer new developments or expand to the socialized segment given the stable demand backed by the government.

4 July 9, 2012 The DVISOR Page 4 Real Estate Investment Trusts (REITS) The implementation of REITS in the Philippines was stalled because real estate companies such as Ayala Land Inc., and SM Prime Holdings balked out due to rigid public ownership requirements and imposition of value-added tax on transfer of property assets. Its revival is foreseen to inject investments worth $2.4 billion in the country. The law is still viable for amendments to reconcile preferences of the business sector and the government institutions. Upon issuing REITS, companies may enjoy its taxexempt consequences but caveat remains to the property sector if REITS will directly affect the marketability of its securities. Investors could only reap returns if the such instrument underlays its value on projects with recurring income shopping centers and offices (residential developments imposes a more volatile revenue due to its vulnerability to the twists and turns of the economy). There are only few. established developers of large retail areas in the country while growth in the outsourcing industry may in one day, burst into bubble. Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate As of 2012Q1 financial reports, property companies have not yet implemented the new accounting policy regarding the recognition of real estate revenues through the completion method. The Securities and Exchanged Commission (SEC) and the Financial Reporting Standards Council (FRSC) postponed the IFRIC 15 in order to address varying revenue recognition issues with real estate organizations. The new accounting policy aims to standardize the reporting of real estate sales. Currently, companies perform the norm in the industry which is the percentage of completion method. The implementation of IFRIC 15 will significantly affect the top and bottom line accounts, including the costs, receivables, deferred tax liabilities, and retained earnings. Property developers will be pressured to finish their projects and to hasten payments from customers in order to recognize revenues on a year-to-year basis. Property Sector Segments The Property Sector covers four segments: the residential, commercial (malls and offices), and hotels and resorts. While some real estate companies singularly pertain the Offices and Malls segments as Commercial because of same procedures in leasing and more stable revenues (regardless of the current economic situation, unlike the residential segment), they cater to separate industries (O&O industry and the retail sector, respectively).

5 July 9, 2012 Makati CBD Comparative Office Vacancy Rates The DVISOR Page 5 OFFICES Robust growth of the Philippine O&O industry fuel the need for office spaces in the already concentrated (Makati, Ortigas, Quezon City, Cebu) and potential business districts in the country (Davao, Pampanga, Bulacan). On 2012Q1, the shift of local and multinational companies to Prime and Grade A offices recorded a 96% occupancy rate while vacancy rates in both office types declined compared to 2011Q4. In return, Grade B and C vacancy rates rose particularly in Makati CBD. Source: Colliers International Philippines Research HLURB Licenses to Sell Source: Housing and Land Use Regulatory Board Monthly Average Occupancy Rates and Length of Stay RESIDENTIALS Overall residential licenses issued by the Housing and Land Use Regulatory Board dwindled for the third year in a row. Registered licenses last year subsided by 10% to 164,487 against The socialized and economic segment significantly cut down by 32% and 30%, respectively while the middle-income housing slipped by 0.7%. OFW remittances is the main driver in the expansion of residential developments brought by the shift from low-cost to middle-income housing purchases by overseas workers due to higher lease and/or resale value. Contrary to the other segment, the luxury sector rose by 30% due to the increasing number of expatriates in the country. Demand is already catching up with the tight market supply of high-rise condominiums but the condition is expected to abate due to the turnover of new developments at the end of the year (Ayala Land Inc. s Raffle Residences and JTKC Land s Discovery Primea.) This is a growing market since the bulk of this segment s target market is focused to the middle-income families. Source: Department of Tourism MALLS As of 2012Q1, leasable retail area amounted to 5.2 million square meters, higher than 2.11% against the previous quarter due to the completion of new commercial centers, like the Lucky China Town Mall in Binondo, Manila. Despite renovations and revamping of retail center, occupancy rates is still at 99% due to the proliferation of international brands and the strong demand for food and dining. Vacancy rates for 2012Q1 are stable though it slightly increased by 0.07%. HOTELS AND RESORTS The leading indicators visitor arrivals and hotel occupancy rates both contributed to the country s upward economic growth for 2012Q1. Visitors from January to April 2012 increased by 14.61% or 1,497,851 from that of Koreans were the top foreign visitors, composing 22.05% visitor inflow while United States, Japan,and China followed. Hotel rates relatively increased to the stable inflation while occupancy rates for different room types remain favorable for business. Deluxe Rooms posted the highest occupancy rate and length of stay with 72.42% and 3.04 days.

6 July 9, 2012 The DVISOR Page 6 Property Sector Composition Residential Condominium Market Real Estate Developers Share Future ( ) Source: HLURB, Various brokers and developers, JLLL Research & Consulting In the local market, the Property sector is composed of publiclylisted companies involved in the business (construction, selling, leasing, managing) of real estate developments among the broad segments of residential (subdivisions and condominiums), commercial (offices and malls), and recreational facilities (hotels, resorts, golf and country clubs, and casinos) as well as the procurement and management of land bank. Established property developers reign in the diverse and highly-competitive market. For the residential, Ayala Land Premier and Alveo of Ayala Land Inc. (ALI) and Megaworld Corporation (MEG) dominate the luxury and upscale income segment. Robinsons Communities and Homes of Robinsons Land Corporation (RLC), ALI s Avida, and Filinvest Land Corporation (FLI), and Empire East Land Holdings Inc. (ELI) compete in the middle-income and economic segment. The emerging SM Development Corporation (SMDC) bested other developers as the top condominium developer in the Metro Manila while Vista Land and Lifescapes Inc. (VLL) has the widest coverage of the housing market outside the region. SM Prime Holdings (SMPH) grabs the lion-share of the shopping mall developments in the country while ALI catches the high-income segment in its retail centers such as Glorietta, Greenbelt, Marquee Mall, and Trinoma. There is no particular market leader in the Offices and Hotel and Resorts segment due to the numerous local and foreign developers. Both ALI and MEG are large proponents of creating sustainable communities through their growth centers and township developments in NUVALI, Makati Central Business District, Bonifacio Global City, Ortigas City, and Eastwood City. Meanwhile, Belle Corporation and Global-Estate Resorts Inc. are prominent developers of golf clubs and country estates.

7 July 9, 2012 The DVISOR Page 7 Key Performance Indicators *Current P/E and Enterprise Value/EBITDA are at TTM, Estimated P/E at 12/2012 CYBR, IRC, MRC, PHES, and RLT posted losses on fiscal year ETON, GO, MC, PMT, ROCK, and UW have not yet submitted their 2011 annual report. Source: Company data, ABSCI estimates, Bloomberg