Rising interest rates expected to dampen property recovery

Published July 28, 2022, 4:59 PM

by Bernie Cahiles-Magkilat

Demand across all property segments in the country are improving, but the rising interest rate is going to tame growth as some companies are expected to hold off expansion plans in the industrial sector and flattening growth in land values in the residential sector, according to a leading property and management consultancy firm.

During their Q2 2022 Philippine Property Market Briefing on Thursday, July 28, Colliers Philippines data showed encouraging growth in demand as of the first semester this year. Increased foreign direct investments, particularly in data centers, should also push new developments in the industrial, manufacturing, retail, and residential sectors.

Colliers urged for full steam ahead for industrial space developers and take advantage of new demand drivers.

In the office sector alone, Colliers data showed that total office supply in Metro Manila was placed at 808,500 sqm in 2022, going down to 653,400 sqm in 2023 and 544,800 sqm in 2024. Supply will further reduce to 459,200 sqm in 2025 to 414,100 sqm in 2026 as new supply tapers off.

The IT-business process management (IT-BPM) industry and traditional companies continued to be the main drivers in office supply. Transactions in the first half this year went up by 62 percent to 325,000 sqm from 203,000 sqm in the second half of 2021.

Although still a far cry before the pandemic, the POGO (Philippine Offshore Gaming Operators) scene showed 11,000 sqm of additional committed spaces or total committed spaces in Q2 2022 of 677,000 sqm and vacated spaces of 628,000 sqm in the same period this year.

Amid this slow, but steady improvement, Joey Roi Bondoc, Colliers Philippines associate director for research, said the “high interest rate will not just affect property developers but all businesses across the street.”

The Bangko Sentral ng Pilipinas has raised the policy rate from two percent to 3.25 percent since May 19. But analysts predict BSP to raise key rate above 4 percent by end of 2022.

“You have companies that are likely to hold off expansion because of rising interest rates, that is likely to temper their expansion plans and that will also affect their absorption of office spaces. Even for manufacturing activities. Higher interest rates will also temper the expansion plans moving forward so that again will affect the take up of industrial spaces or warehouses and even for retail,” said Bondoc.

Because of the high interest rate and inflation, there have not been substantial market activities in terms of acquisition or purchase of developable land across Metro Manila.

Paul Ramirez, Colliers Philippines senior director for valuation services, said that because of rising interest rate there could be depressed property demand.

Ramirez, however, said that the end result would also depend on the improvements of KPIs (key performance indicators) like how the rents are doing, how vacancies are moving. He said these factors will determine if they can temper the rising interest rate.

In the office sector alone where demand was driven by POGO locators before the pandemic, Dom Frederick Andaya of Colliers Philippines, said noted of improvements. “The only question in our mind right now is that how aggressive their comeback be, especially from the Chinese,” said Andaya.

Kevin Jara, Colliers Philippines associated director for offices, noted that the Bay Area office buildings used to dominate the POGO market. These office spaces have also reduced their rental rate during the pandemic by as much as 30 percent as supply has been approaching 87 percent. This means, those returning and new firms such as BPO companies would be taking advantage of the rental reduction.

Demand for office space, he said, is projected to recover in 2022 to 350,000 square meters from 273,100 in 2021. But new supply is also projected to hit 808,900 sqm this year alone. From 2023 to 2025, Jara projected new office space completion to revert to pre-POGO level.

Average rent also continued to drop although at a slower pace as of second quarter this and is expected to start covering in 2023 year on the back of greater office space absorption from traditional and outsourcing firms.

Vacancy has somehow stabilized in the second quarter this year but because of the new supply, vacancy rates should continue to push vacancy beyond 18 percent by the end of 2022.

In terms of rents, Jara said that decline in rate slowed down to 2.6 percent average in Metro Manila in the second quarter from 3.1 percent in Q1. Overall, Colliers forecasts rents to drop at a much slower pace of 7 percent this year compared to 12 percent correction in 2021.