Real estate scenarios during pandemic

Published October 30, 2020, 6:35 AM

by Dr. Bernardo M. Villegas


(Part III)

Dr. Bernardo M. Villegas

At this juncture, I would like to refer to a detailed report from the country’s top real estate adviser, David Leechiu (who I am proud to say was one of our first students  when the University of Asia and the Pacific was  just a fledgling College of Arts and Sciences in the late 1980s). David is the founder of Leechiu Property Consultant.  He projects that the BPO sector will resurge in 2021 because by then both the USA—our biggest market—and the Philippines would have adapted to a new normal.  According to him even at the height of the pandemic this year, one of the biggest brands clients gave his firm a requirement of 4,000 seats to be concluded before September 2020.  Such a demand would imply space of anywhere from 20,000 to 30,000 square meters. He confirms my view that as the developed world struggles to recover from the Great Depression, many of the large corporations will be compelled to offshore even more jobs to countries like India and the Philippines.  An encouraging detail is that despite some BPO offices not being used during the strictest periods of the lockdowns, 95 percent of rents were still being collected.  Most office landlord gave rent deferment only while a few gave rent discounts and fewer still partial waiver. 

On the negative side, David estimates that more than half of restaurants will not survive, especially those outside malls. This will lead to a decline in  the ground floor rents. The bright side, though, is that this will open up more opportunities for other brands to emerge and other players who could not get space before the pandemic.  In his opinion, the lower-middle-income consumers will repopulate the malls while the middle-middle-income and high-income ones will resort to online transactions.   I agree that the lower-middle-income consumers have little choice in spending their leisure time in more expensive places like mountain or beach resorts.  They use commercial malls as air-conditioned public parks in which they can spend their weekends with their families.  I expect, though, that there will always be need for physical distancing and the wearing of masks and face shields.

I am getting conflicting feedbacks from real estate executives about the POGO sector.  David Leechiu opines that POGOs will make a big come back as soon as travel bans are lifted.  He even thinks that there will be an additional market for our POGO operators:  India.  He says that India may come  and enter the market this year but it will not be as large as that from China.  My own gut feel is that the impact of the pandemic will be long lasting on the POGO operators and that the slowdown, if not their total disappearance, will have to be part of our contingency planning for the office and residential sectors.  Although there is an expected slowdown in the business of the POGOs, part of the slack in the demand for office space will be filled by the expansion in the BPO-IT sector, especially post-pandemic.  As pointed out by David, as corporations in the US and Europe struggle to recover from the effects of the pandemic, many of them will actually be motivated to outsource more of their customer and business services to countries like India and the Philippines.    This will keep demand alive for office space, especially in new metropolitan areas in the Philippines like Batangas, Central Luzon (especially the so-called Pampanga triangle of San Fernando, Angeles, and Clark-Subic), Iloilo , Davao, Cagayan de Oro, and even smaller cities like Bacolod, Dumaguete, Puerto Princesa, Laoag, and Roxas City which are beginning to attract BPO-IT locators.

The trend towards working at home that may be continued even after the pandemic will not dampen the demand for office space.  Among other reasons, more space will be needed by those who actually report to the office because of the continuing need for physical distancing.  Also, there are already reports about the toxic effects of working at home which put a lot of pressure on peace and harmony at home.  There are just too many distractions at home, especially since children have to increasingly get used to blended learning even when face-to-face classroom instruction will already be permitted.  In the United States, there are already reports of  increased domestic violence because of these toxic effects of working at home.

This view is shared by David Leechiu.  In his words:  “Work from Home (WFH) is not sustainable in the Philippines for many reasons:  poor telecom connectivity, too many relatives and, therefore, distractions (domestic violence being a major factor).  It is simply too hot because 70 percent of households do not have roof insulation nor air-conditioning nor access to clean water.  Corporate fraud will accelerate significantly because in work from home there is very little supervision and, therefore, more risk for fraud and corruption across all levels….”

David presents another reason for a strong recovery of the demand for office space. He calculates that the physical distancing that will be required for a long time to come will actually lead to more demand for office space.  For example, companies with 1,000 workers use 6,000 square meters of office space.  With lockdown only 40 to 50 percent are on site, another 25 percent work from home (WFH), and the other 25 percent are just on standby because they are unable to work from home.  When lockdown is lifted, many companies will practice physical distancing so they will need 9,000 to 12,000 square meters temporarily as long as distancing is still required (which could be a long time).  This will create more demand for office space.  He estimates that there are only 34,000 square meters of PEZA space entering the market, so that there can be a shortage in this sector.

As mentioned above, the real estate sector that will experience a significant contraction in demand will be retailing.  It will take a long time before Filipino consumers will recover their habit of going to malls and dining out in restaurants.  The COVID-19 threat will be around even if a vaccine is discovered and widely distributed.  The same can be said of real estate related to the travel and tourism sector.  Domestic tourism will be the first to recover but domestic tourists will prefer to stay, not in high-end hotels, but in bed-and-breakfast facilities especially in the major tourism destinations like Palawan, Bohol, Siargao, La Union, Batangas, etc.

Even in an economy such as the Philippines in which domestic consumption of goods and services is the number one engine of growth, the real estate sector is still a major contributor to both employment and income growth.  Except for the sectors mentioned above that will experience a slowdown and even outright disappearance in the demand for real estate, the Philippine real estate sector will be for the next decade or so an attractive choice for investment by both domestic and foreign investors.  The fundamental reasons for such a bullish outlook for the real estate sector are the young and growing population, the transition of the Philippines from a low-middle income economy to a high-middle-income one and the expansion of economic activities away from the National Capital Region to other alternative metropolitan areas that even before the pandemic had already been growing faster in Gross Regional Product than Metro Manila.

For comments, my email address is [email protected]