HIGHLIGHTS
- Estimated average office (gross) rental yields in Q3 2023 remained unchanged from its Q2 2023 level at 6.90%. Year-on-year (YoY), however, the rental yields increased by about 70 bps from its level in Q3 2022. C&W Research estimates rental yields to remain unchanged in the short-term, even as the Bangko Sentral ng Pilipinas (BSP) decided to take off-cycle hike in the target reverse repurchase rate in October 2023 to further address inflation concerns.
- After a downtrend for six straight months to 4.7% in July, inflation quickened in the last two months of Q3 2023, reaching 6.1% in September from 5.3%the month prior, whilst below the recorded 6.9% in the same month last year. In October 2023, inflation dropped to 4.9% attributable to the slower growth in food prices. Meanwhile, the Banko Sentral ng Pilipinas (BSP) made an upward revision to the average inflation forecast, which is now at 5.8% in 2023 from 5.6% previously, while the forecast for 2024 is now at 3.5% from 3.3%. The year-to-date inflation stood at 6.4% while the central bank maintains the possibility of inflation rate reverting to the 2-4% target range by the end of the year. With the elevated inflation risks which include the soaring food prices attributable to the rising cost of rice, looming fare and wage hikes, and the upcoming holiday season which could also raise the price of basic goods, the BSP could be prompted to resume monetary policy tightening for the remainder of 2023.
- The Foreign Direct Investment (FDI) inflow in 2023 remained weak with net FDI inflows in the first seven months of 2023 only at USD 4.66 billion, a 15%decline from the USD 5.47 billion in the same period in 2022. Out of 22 industries reported by the BSP, only seven posted growths, which include mining and quarrying (746%), transportation and storage (213%), and manufacturing (76%). Meanwhile, investments in construction and real estate activities declined by 93% and 49%, respectively. Nonetheless, a rising trend was observed in approved foreign investments which are at PHP 467.29 billion in H1 2023, already more than double the full-year 2022 figure of PHP 241.89 billion, signaling the country’s positive long-term investment prospects.
ECONOMIC OVERVIEW
- Whilst the renewed geopolitical conflict in the Middle East may shake global investor sentiment, overseas Filipino (OF) remittances is seen to continue its momentum as cash remittances from Israel is only a small percentage of the country’s total remittances inflow. Personal remittances reached USD 24.01 billion in the first eight months of the year, a growth of 2.9% from USD 23.34 billion in the same period in 2022. Similarly, the cumulative cash remittances of USD 21.58 billion in August this year is also 2.8% higher than in the same period a year ago.
- The unemployment rate was recorded at 4.5% in September 2023, a mild increase from 4.4% in the previous month, whilst a decline from 5.0% in the same period last year. The relatively lower rate of joblessness is attributable to the increased employment opportunities after the lifting of the Philippines' COVID-19 emergency status in July. Whilst the economic growth is tamer at 5.9% in Q3 2023 due to slower growth of consumer spending which is battered by inflation, it is still an improvement from an economic growth of 4.3% in Q2 2023. The latest economic outlook by the International Monetary Fund (IMF) positioned the country as the fastest growing among the ASEAN-5 economies in 2023 and 2024. The Philippine economy is buoyed by the increased level of employment, tourism-related spending, and other activities in the service sector such as transport and storage.
- Due to a decline in overall demand, elevated inflation and interest rates, and the weakening local currency, businesses are less optimistic in Q3 2023 with the overall confidence index (CI) declining to 35.8% from 40.8% last quarter. Nonetheless, businesses express more optimism for the next quarter and the next 12 months with the anticipated improvements in demand as a result of the upcoming holiday season, eased inflation, and increased business opportunities.
MARKET OUTLOOK
- Global economic headwinds such as persistently elevated inflation and the resulting high-interest rate environment, coupled with intensifying global conflict, particularly the on-going Russia-Ukraine war and Israel-Palestinian conflict, create further market jitters which could dampen the recovery of various demand sources. Revenge spending on durable goods and services will likely take a backseat in the short- to medium-term and will temper growth in domestic tourism, improvement in shopping centers' footfall, and recovery of retail sales, as long-term effects of elevated inflation levels kick in.
- Lingering prospects of slower economic growth and the high-interest rate environment challenge the expansion of the Philippine REIT market. The onset of a hybrid work scheme, early exit of POGO companies, and ongoing office space rationalization of corporate occupiers generally weigh on expectations of the future growth of office space demand.
- Net zero targets continue to influence investment market decisions exerting redevelopment pressures for old and low-quality developments. However, the challenging investment environment is likely to limit financing options and capital-raising activities. C&W Research expects significant transactions as the gap between buyers’ and sellers’ expectations, as well as the differential rate between the key yield rates and interest rates, narrow once market recovery sets in.
SECTORAL UPDATE
OFFICE Overall vacancies marginally improved along with a slight increase in headline rates due to the continued return to office space by occupiers. Nonetheless, a number of developments in major CBDs have kept rental rates steady as options for quality spaces are becoming limited.
RETAIL The increased leisure activities and normalizing operations among businesses are revitalizing the demand for retail space, whilst several freed spaces at the height of the COVID-19 crisis remained vacant, particularly in retail establishments that opened just before the pandemic onset and those in fringe locations.
INDUSTRIAL The fast-tracked evolution of e-commerce, propelled by a growing demand for easier access goods and services by the growing population, along with increased internet penetration, bolstered the demand for warehouse facilities and last mile logistics, whilst strong interest from investors buoyed the demand for lots in industrial estates near Metro Manila. Meanwhile, the manufacturing sector remained lackluster due to headwinds from surging inflation and a high-interest rate environment that dampened global demand.
RESIDENTIAL Growth in provincial areas in terms of new developments and prices have remained competitive in established markets in Metro Manila as these new growth areas have gained significant attention due to an increase in public infrastructure investments. The long-term impacts of these transport infrastructure developments will continue to support the growth momentum of the provincial residential market.
HOTEL The hospitality segment is showing strong signs of rebound amidst the recovery in visitor arrivals, while the upcoming holiday season has raised optimism in the hotel segment, which is expected to boost occupancy levels and rates to pre-pandemic levels. The hotel segment made a significant recovery in terms of new supply and project launches due to anticipated recovery of international arrivals and the MICE industry, despite the drawbacks resulting from factors which include high inflation and staffing shortage.
