US risk to BPO fails to tarnish property sheen

By Krista Angela M. Montealegre, published in BusinessWorld.

February 14, 2017

Property developers continue to bet big on the office market in this period of uncertainty, as United States President Donald J. Trump brings to life his anti-outsourcing talk. 

A total of 1.3 million square meters (sq.m.) of office space will be completed this year, 460,000 sq.m. of which has been taken up to date. 

Demand from BPO companies is expected to push take-up of new supply to as much as 750,000 sq.m., topping last year's record of 630,000 sq.m.

So far, existing locators have been "active" in taking up new supply, while a slowdown in demand has been observed from the "new guys," said Carlos S. Rufino, president of The Net Group, the big-gest office developer in the Bonifacio Global City.

"For existing locators, I don't think it will be a problem. For new entrants, we've had longer due diligence. Our staff are now getting questions for particular companies who still went on to establish themselves despite [Philippine President Rodrigo R. Duterte's] rhetoric and [Mr.] Trump's pronouncements. Some clients are asking questions that weren't asked previously to understand the current market," said Randwil Dinbo U. Macaranas, senior research manager at Colliers International Philippines.

Capitalizing on the robust demand from BPOs, real estate firms have turned to office projects for growth, as they build their recurring income stream to cushion the impact of any slowdown in residential sales. The BPO sector and remittances from overseas Filipinos have helped boost consumer spending, which accounts for two-thirds of Philippine economic output.

With the US' move towards greater protectionism still taking shape, it may be "too early" to gauge its impact on the local office market since majority of the current pipeline is being constructed on the back of projected demand.

"The decision tree is normally disrupted around the planning stages or the market feasibility phase. Majority of these developments were decided to be built some one or two years prior to actual construction. Hence, we can likely see the effects, if there are any, on the development launches by 2018, at the earliest," said Claro dG. Cordero, Jr., head of Jones Lang Lasalle (JLL) Philippines' research, consulting and valuation advisory services.

So far, the listed property firms are putting on a brave face amid uncertainty.

"We are not changing our plans. So far, we haven't gotten any firm indication to do otherwise," Filinvest Land, Inc. Treasurer and Deputy Chief Financial Officer Ana Venus A. Mejia said.

Gotianun-owned Filinvest Land, which is tripling its recurring income base by 2019, plans to launch two projects this year with a combined gross leasable area (GLA) of 67,000 sq.m. before accelerating this to 128,000 square meters across six buildings in the following year.

Likewise, property giant Ayala Land, Inc. is keeping its targeting to double its office footprint to 1.5 million sq.m. by 2020, as BPO demand continues to be "bullish," said Carol T. Mills, head of Ayala Land Offices.

"We have US-based clients who are continuing with their expansion and negotiations are still on the table. These are a combination of mostly existing and new locators in the country," said Catherine Nicole C. Cancio, investor relations officer at Robinsons Land Corp.

The real estate industry is banking on the attractiveness of the Philippines as an outsourcing hub for its relatively optimistic outlook on the office market, offering cost savings of as much as 50% compared to if they were to operate in the United States, said Michael McCullough, managing director at KMC Savills.

"Investors choose the Philippines because of the government's full support for the IT/BPO sector and the Filipino's compatibility with the western culture and fluency in English, excellent work ethics, people skills and low cost of labor. None of these factors has been in any way negatively impacted by the election of President Trump," said Jan D. Custodio, senior director for research and consultancy at Santos Knight Frank.

New office launches will peak this year before easing to 880,000 sq.m. next year, 290,000 sq.m. in 2019 and 180,000 sq.m. in 2020, Mr. Custodio said.

Construction delays have bloated Metro Manila's pipeline in 2017 and 2018, but KMC Savills' Mr. McCullough said it is not discounting the possibility that completions will be moved to later quarters, translating to a softer decline until 2021.

"[We have] completed plans for the [new] building, but [we have] not pushed the button to start," The Net Group's Mr. Rufino said.

Should Mr. Trump's protectionist policy have any effect on BPOs, the office market has started looking beyond the outsourcing sector for growth. Online gaming companies from China gobbled up office space to the tune of as much as 100,000 sq.m. last year, mostly in the Bay Area.

The Philippines is adopting an independent foreign policy under Mr. Duterte, whose recent trips to China and Japan last year yielded billions in investments pledges.

Likewise, technology giant Google, Inc.'s decision to open a full-scale headquarters here will put a stamp of credibility on the Philippines as an emerging player in the tech space.

The country's strong growth momentum will continue to make heads turn in the global arena, fueling demand for more headquarter-type developments from foreign investors setting up shop here and local companies pursuing aggressive expansion.

"We are confident that the office market will remain a strong as ever, regardless of any change in US policy," Santos Knight Frank Chairman Rick M. Santos said.


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