Colliers Philippines expects downturn in office property market

Property consulting firm Colliers Philippines has warned of an expected downturn in the local office property market, with a slowing business process outsourcing sector and concerns over the stability of the country’s recently burgeoning offshore gaming industry cited as major factors.

As supply rates in the Filipino office property market reach a record high in 2017 – with roughly 850,000m2 of space completed across Metropolitan Manila for the calendar year, and a further  900,000m2 in the annual pipeline until 2020 – Colliers Philippines has warned of expected ‘headwinds’ for the market in upcoming years.

In its latest Office Report for 2017, authored by Senior Research Manager Dinbo Macaranas, the property consulting firm predicts that office vacancy rates – currently sitting at a seven-year high of 5.6% (up from 4.5% in the previous quarter) – will rise to 8% in 2018, and by as much as mid-teen levels in 2019/20, should developers not take corrective measures.

While a potential boon for tenants, Colliers expects that developers will respond to falling demand by deferring completions beyond 2018, paring back supply on current rates by as much as 50%, as was the case during the Asian Financial Crisis from 1997-2002. The firm believes that such measures should see vacancy rates stabilise at a healthy 7%, contending in its report that the persistent 3% rate since 2012 is “symptomatic of a market that is not functioning adequately and where the supply and demand balance is severely skewed in favour of landlords.”

The report states; “At 3% vacancy, businesses are constrained in expansion as they are provided with limited options. Consequently, relocation decisions are postponed or compromised in terms of location, size, or building quality. We therefore see the jump in vacancy as a welcome development.”

Although the market remains robust for 2017, signs of a slowing business process outsourcing industry (BPOs) – comprising 36% of market transactions for 2017 to date – and an unpredictable and precarious future in the Philippine Offshore Gaming Operators (POGOs) sector (contributing a further 25% of transactions) are predicted to impact demand by as early as next year.

The recent slowdown in the BPOs market is believed to be due to several converging factors, specifically issues with Philippine Economic Zone Authority (PEZA) delays, local concerns over peace and order, and protectionist US posturing. Meanwhile, the exploding POGO marketplace, which provides backroom support for offshore clients, faces a particularly uncertain future, with recent challenges mounted in the Supreme Court to examine their legality along with potential crackdowns in client-hubs such as China and Korea.

Further to this, the report cautions that although the current BPO market percentage of 36% appears healthy, having improved from 21% in the first quarter, the figure is well short of the sector’s previous share of 60-70%, and is presently being bolstered chiefly through higher-valued knowledge process outsourcing (KPOs), such as with Big Four professional services firm EY’s largest KPO transaction of the quarter at 17,000m² .

For the time being, Colliers advises local landlords to focus on the traditional companies which currently account for 40% of the market, and to capatalise on the volatile POGOs despite their tentative future.