Office: Relatively Cheap in the Region

• Given the dearth of new supply in the CBD, developers with an ample landbank in Fort Bonifacio have been taking advantage. The Net Group has built nearly 30,000 square meters of useable space in two projects. The third instalment in the series has been pre-committed before topping off. Megaworld is also a dominant player with its 50-hectare McKinley Hills project. Approximately 60,000 square meters of useable space in four buildings are under construction and a further 145,000 square meters in ten buildings are planned.
• CBD-wide vacancy further eased to 3.7% from the previous quarter’s 3.9%. Declines in the vacancy rates have been minimal as vacancy is now at 5% - a level wherein quarterly vacancy is merely structural in nature. End-2007 vacancy is expected at around 3% as demand for BPO space continues to drive the segment.
• Rental levels are now approximating mid 1997 levels in peso terms. Take note, however, that rents remain at a 40% discount in US dollar terms. In fact, rents in Manila are at a 25% discount from Bangkok and Kuala Lumpur. Relative to Hong Kong and Singapore, Manila office space is only 16% of rents in these major cities.
• The Premium Grade segment escalated by nearly 7% QoQ to an average of P908 per sq.m. per month. Expectations are for rents to further increase by nearly 20% in the course of 2007 to an average of P1,023 per sq.m. per month.
• Office prices are up by nearly 6% in the first three months of the year. We believe that there will be more room for asset reflation this year given that yields could be compressed in light of increasing rents and declining key interest rates.

Residential: Mortgage Rates Falling to All-Time Low

• Similar to the trend in the office segment, residential projects under construction are at a much higher quantum in Fort Bonifacio as compared to the CBD. In the next five years, 3,015 units are slated to complete in the Makati CBD while there are 8,593 units in Fort Bonifacio in the same period. In fact, Fort Bonifacio will only be 20% less than the stock of the CBD by the end of 2011.
• Residential vacancy in the Makati CBD eased to 9.3% from 10% at the close of 2006. Expectations are for vacancies to further ease to 7% by the end of 2007 due to the easing supply pressure as Columns Tower 2 is the only project slated for completion during the year.
• Rents for luxury 3-BR units in the Makati CBD escalated by nearly 4% QoQ to an average of P490 per sq.m. per month or P127,500 per unit. We expect rents to further escalate by 10% in 2007 to an average of P520 per sq.m. per month or P135,135 per unit. Residential lease rates are now approximately late 1996 levels.
• Primary market pre-selling prices are now in excess of P95,000 per sq.m. In fact, high-end developments in the Greenbelt Ayala Center area are at the P100,000 per sq.m. mark.
• The secondary market will be more active with the introduction of longer amortization period (up to 20 years) at fixed rates. Competition in the banking industry has spurred mortgage rates to fall to 5.5% per annum fixed for five years.

Retail: Seeing Signs of Election-Related Spending

• The stock of retail space in Metro Manila remains at 4.33 million square meters. In the course of 2007, the stock is forecast to expand by 7% with the addition of 310,350 square meters from five developments.
• Effective rents in Ayala Center escalated by 1.4% QoQ to P1,200 per sq.m. per month. In the next 12 months, our forecast points to an expansion of 7%. We are anticipating that election- related spending will filter through effective rents.
• Election-related spending is finally starting to be reflected in mall retail performance. Same-store sales in Ayala Center in 1Q07 were up by 1%. Likewise, retail sales improved by 2% YoY in the first three months of the year.
• The Bangko Sentral ng Pilipinas has increased its forecast for OFW remittances this year to $14.74 billion - 5% higher than its previous forecast of $14 billion.

Economy

The Philippine economy’s performance is now at its best in ten years. GDP growth last year was at 5.4% with analysts expecting the 2007 performance at 6.0% to 6.5%. Private consumption has been critical to this performance as it accounts for more than 75% of the local economy. Lending support is the OFW remittance which was up by 18% in 2006 at $12.8 billion. The Bangko Sentral expects this to expand by 16% to $14.74 billion. As of February, remittance inflows grew by a robust 23% YoY to $2.2 billion.

Inflationary pressures have significantly eased. For the first three months, average inflation in the Philippines has been recorded at 2.9%. From the average of 6.2% in 2006, inflation has fallen to a
historical low of 2.2% in March 2007. While the Bangko Sentral forecasts inflation at 4% to 5% this year, analysts are expecting 2% to 3%.

Local yields have likewise eased to historical lows with the 91-day Treasury bill rate falling to a low of 2.86% in March. In effect, home mortgage rates have now gone down to as low as 5.5% per annum. The increased liquidity and low interest rate environment has led the resurgence in the stock market, which is now testing the 3,300 PHISIX level. Furthermore, there has been a marked increase in take-up for property. In fact, domestic cement consumption is up by 14% YoY in 1Q07 - the first time since 2001 that the industry witnessed annual volume growth.

Land Values
We have tempered our estimates for land value appreciation in the first quarter of the year. Values remain at the same level as end-2006. Developable land in the CBD stands at an average of P222,500 per sq.m. Accommodation value is roughly at P14,000 per developable sq.m. In the alternative business district of Ortigas, average land value is estimated at P107,500 per sq.m.

In the course of 2007, we expect land values to further increase by 10% as investment interest in prime development areas strengthen. It should be noted that investment interest appeared to be nil just 12 months ago. However, strong interest was seen in the last six months as evidenced by the following deals:

License to Sell
For the whole of 2006, licenses approved by the HLURB registered a 20% YoY increase to 358,893 units from 298,002 units in 2005. Registration was particularly strong in the third quarter with 133,341 units lodged with the HLURB – accounting for nearly 40% of registrations last year. Sectoral highlights are:

Office Sector

Supply
The stock of office accommodation in the CBD remains at 2.647 million square meters. The supply is expected to remain tight in the course of 2007 as no new supply is expected in the CBD.

New supply will only come on line by 2008 with the completion of the Ayala Center Building (7,500 square meters in 1Q08) and Dela Rosa e-Services (41,471 square meters in 2Q08). Total useable for next year is merely 48,971 square meters or 30% below the ten year new supply average in the CBD at 67,853 square meters.

Given the dearth of new supply in the CBD, developers with an ample landbank in Fort Bonifacio have been taking advantage. The Net Group has built nearly 30,000 square meters of useable space in two projects. The third instalment in the series has been pre-committed before topping off. Megaworld is also a dominant player with its 50-hectare McKinley Hills project. Approximately 60,000 square meters of useable space in four buildings are under construction and a further 145,000 square meters in ten buildings are planned.

Demand
CBD-wide vacancy further eased to 3.7% from the previous quarter’s 3.9%. Declines in the vacancy rates have been minimal as vacancy is now at 5% - a level wherein quarterly vacancy is merely structural in nature. Absorption for 2007 is forecast at 27,000 square meters or 70% below what was achieved last year. End-2007 vacancy is expected at around 3% as demand for BPO space continues to drive the segment.

Premium grade vacancy has now breached the 1% mark as at end-March. Expectations are for vacancies to remain at the current level given the dearth of office accommodation that could be let in this segment.

Vacancy in the Grade A segment slightly increased to 2.9% from 2.5% in 4Q06.

Given the dearth of options in better-quality buildings, vacancy in the Grade B segment continues to head south as tenants are left with no choice but to retrofit older buildings. The Grade B segment posted a vacancy of 4.4% from 4.6% in 4Q06. Vacancy should further ease to 3% at the close of 2007.

Rents
Rental levels are now approximating mid 1997 levels in peso terms. Take note, however, that rents remain at a 40% discount in US dollar terms. In fact, rents in Manila are at a 25% discount from
Bangkok and Kuala Lumpur. Relative to Hong Kong and Singapore, Manila office space is only 16% of rents in these major cities.

The Premium Grade segment escalated by nearly 7% QoQ to an average of P908 per sq.m. per month. Expectations are for rents to further increase by nearly 20% in the course of 2007 to an average of P1,023 per sq.m. per month.

The Grade A segment was up by nearly 14% QoQ to an average of P688 per sq.m. per month. Rents are expected to increase by 20% in the course of 2007 to an average of P732 per sq.m. per month.

After the 33% escalation in the Grade B segment in 2006, rents remained at an average of P440 per sq.m. per month in 1Q07. Expectations are for rents to further escalate by 20% in the course of 2007 to an average of P528 per sq.m. per month.

Capital Values
Office prices are up by nearly 6% in the first three months of the year. We believe that there will be more room for asset reflation this year given that yields could be compressed in light of increasing rents and declining key interest rates.

Premium Grade office capital values are up by 6% QoQ to an average of P102,500 per sq m. from the previous year’s P96,500 per sq.m. Office prices are expected to increase by 20% in the course of 2007 to an average of P115,800 per sq.m.

We have further increased our Grade A office valuation by 6% QoQ to an average of P73,500 per sq.m. Our end-2007 forecast for this segment is P83,400 per sq.m. – an appreciation of 20% YoY.
Grade B capital values remain at an average P47,250 per sq.m. In the course of 2007, values are expected to increase by 20% to P56,700 per sq.m.

Residential Sector

Supply
The stock of residential condominiums in the Makati CBD expanded by nearly 3% QoQ to 11,170 units due to the addition of 284 units from Columns Tower 2. No other project completion is expected in the CBD in the course of 2007.

Similar to the trend in the office segment, residential projects under construction are at a much higher quantum in Fort Bonifacio as compared to the CBD. In the next five years, 3,015 units are slated to complete in the Makati CBD while there are 8,593 units in Fort Bonifacio in the same period. In fact, Fort Bonifacio will only be 20% less than the stock of the CBD by the end of 2011.

Demand
Residential vacancy in the Makati CBD eased to 9.3% from 10% at the close of 2006. Expectations are for vacancies to further ease to 7% by the end of 2007 due to the easing supply pressure as
Columns Tower 2 is the only project slated for completion during the year. Net take-up for residential condominiums in the Makati CBD for 2007 is forecast at 550 units.

Occupancy in the luxury segment declined to 5.0% from 5.8% in 4Q06. Meanwhile, the Grade B segment vacancy slightly eased to 12.7% from 13.1% in 4Q06.

Rents
Rents for luxury 3-BR units in the Makati CBD escalated by nearly 4% QoQ to an average of P490 per sq.m. per month or P127,500 per unit. We expect rents to further escalate by 10% in 2007 to an average of P520 per sq.m. per month or P135,135 per unit. Residential lease rates are now approximating late 1996 levels. By the end of 2007, rents would have moved to pre-crisis 1997 level.

Rents for 3BR units in Rockwell were up by nearly 3% QoQ to an average of P622 per sq.m. per month or P140,000 per unit. In the course of 2007, we expect rents to increase by 5% YoY to an average of P639 per sq.m. per month or P143,719 per unit. Rockwell maintains its rental premium over Fort Bonifacio and the Makati CBD. Relative to the CBD, rents are 27% higher while the premium compared to Fort Bonifacio is 11%.

Fort Bonifacio residential rents were nearly static at an average of P559 per sq.m. per month or P162,000 per unit. This comes from the previous quarter’s P553 per sq.m. per month or P160,225 per unit . Our end-2007 forecast is P580 per sq.m. per month or P168,236 per unit. Expectations are for rents to be less bullish relative to the Makati CBD given the tremendous supply this year.

Capital Values
Makati CBD residential prices appreciated by 4% in the first three months of 2007 to an average of P86,000 per sq.m. This comes from the valuation of P82,500 per sq.m. in 4Q06. Our 2007 forecast
points to capital value appreciation of 10%. We believe that prices will be strengthened by:

Residential prices in Rockwell expanded by nearly 2% QoQ to an average of P92,500 per sq.m. In the course of 2007, we expect values to be pegged at an average of P95,288 per sq.m. Pre-selling prices for One Rockwell is currently pegged at P103,000 per sq.m.

Fort Bonifacio residential capital values were nearly static during the quarter at an average of P83,375 per sq.m. This comes from end-2006 price average of P82,500 per sq.m. In the course of 2007, the upside may be limited to an average of P86,625 per sq.m. due to the upsurge in supply.

Retail Sector

Supply
The stock of retail space in Metro Manila remains at 4.33 million square meters. In the course of 2007, the stock is forecast to expand by 7% with the addition of 310,350 square meters from five developments. The most notable would be Ayala Land’s TriNoMa (Triangle North of Manila). The 200,000-square meter development slated to complete towards the end of the year is more than 90% leased. It will house nearly 600 tenants including Zara, Lacoste, Topshop and Mango. The mall will also offer fine dining restaurants. Landmark, which has been in Ayala Center Makati, will be the anchor department store and supermarket. TriNoMa will also provide an intermodal transport hub for various modes of public transportation and a 3,500 parking area. Ayala Land is also considering the development of office and hotel components in the area.

Demand
At the close of March, Manila-wide retail vacancy rate was nearly unchanged at 15% as more than 400,000 square meters completed in 2006. This compares with the 10-year average new supply of 173,000 square meters in Metro Manila.

Moving forward, we expect vacancies to remain at 15% in 2007 with more than 300,000 square meters completing in the next 12 months.

Rents
Effective rents in Ayala Center escalated by 1.4% QoQ to P1,200 per sq.m. per month. Over at Ortigas, effective rents were up by nearly the same magnitude during the quarter at P980 per sq.m. per month.

In the next 12 months, our forecast points to an expansion of 7%. We are anticipating that election-related spending will filter through effective rents.

Spending Indicators

Motor vehicle sales in January declined by 3% YoY to 10,099 units due to the high base last year as sales surged before the implementation of the two-percentage point increase in VAT. The industry is expecting a 3% growth this year due to:

Meanwhile, appliance sales continue to disappoint. For the whole 2006, sales fell by 17% YoY to 4.737 million units as compared to 5.732 million units in the same period in 2005.

Election-related spending is finally starting to be reflected in mall retail performance. Same-store sales in Ayala Center in 1Q07 were up by 1%. Likewise, retail sales improved by 2% YoY in the first three months of the year.

The Bangko Sentral ng Pilipinas has increased its forecast for OFW remittances this year to $14.74 billion - 5% higher than its previous forecast of $14 billion. This implies a 16% growth in 2007 from $12.76 billion in 2006. As of February, remittance inflows grew by a robust 23% YoY to $2.2 billion. This is the tenth consecutive month that remittances have breached the $1 billion level. Surprisingly, a doubledigit growth was registered despite the 12% drop in the number of OFW deployed as current deployment reflects an increasing number of higher-skilled workers.

This is a Colliers International Quarterly Research Report on the Philippines for April 2007.

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