The first cut is the deepest
With positive ripple effects to the Philippine economy and property fully kicking in and with more interest rate cutting in the offing, this initial policy rate easing definitely fosters much needed confidence for Filipino developers and investors
The Bangko Sentral ng Pilipinas’ decision to cut basic policy rate is a step in the right direction as it is likely to stoke a personal consumption-driven Philippine economy.
With a core inflation of 2.9 percent in July and with personal consumption slowing to 4.6 percent in the first half from 6 percent a year ago, an easing of monetary policy is essential in pump-priming the Philippine economy for the rest of 2024. Analysts are projecting further easing of policy rates up to 2026 which should support our projected rebound of the Philippine property market over the next 24 to 30 months.
Overall, we remain cautious in trumpeting the perceived positive impacts of the rate cut, with analysts saying that the 25 basis-point cut is not likely to have an immediate impact due to the lag between the BSP’s policy rate and Philippine banks’ actual interest rates. Its impact on firms’ capital raising activities is likely to fully trickle in by early 2025. Credit rating firms are estimating more cuts beyond 2025 and this should support firms’ expansion.
While the Philippines remains one of the fastest growing economies in Southeast Asia, a slower growth in personal consumption is likely to impede overall economic growth in the near term. This will be a challenge moving forward that’s why a recent interest rate cut is likely to stimulate personal consumption and ensure a more sustained expansion.
Revivifying pre-selling market
The Metro Manila pre-selling condominium market continues to see challenges. In 2023, only 23,400 condo units were sold while about 25,500 units were launched. In H1 2024, only 5,200 units were launched, and 6,200 units were pre-sold.
Given the pre-selling figures, we are likely to post record low launches and take-up this year. The lengthened remaining inventory life—estimated to be five years’ worth, much longer than the average of 12 months annually from 2017 to 2019—is worsened by elevated mortgage rates, high prices of construction materials, and surging land values in major business districts.
Colliers believes that the rate cut should play a key role in infusing much needed confidence into the Metro Manila pre-selling sector.
At present, there are about 70,000 unsold condominium units in Metro Manila, 21,000 of which are ready for occupancy (RFO). Of the unsold RFOs, about two-thirds are from the mid-income segment (from P3.2 million to P12 million per unit). This means that two of every three unsold RFOs are from the mid-income segment, which is highly sensitive to high interest and mortgage rates.
This is also considered a sweet spot for the residential requirements of overseas Filipino workers (OFWs). While cash remittances continue to increase, some OFW households are likely to hold off purchase of units as they continue to bear the brunt of elevated interest and mortgage rates. A BSP survey showed that 90 percent of OFW households spend remittances on food and beverage, which means setting aside funds for residential purchase might be a challenge.
Industrial expansion
Colliers Philippines believes that a rate cut will be instrumental for industrial players’ expansion, leading to greater absorption of industrial land warehouses.
As of end June, industrial vacancy in the Cavite-Laguna-Batangas (CALABA) corridor stood at 7 percent, up from 5.5 percent in 2023 due to new supply.
We see greater absorption in the next 12 to 24 months, driven by new foreign investments taking up industrial space and by local manufacturers encouraged by the rate cut to expand operations. With greater take-up, we see industrial land leasehold and warehouse lease rates rising by about 8 percent by end 2024.
More to explore for hotel players
Lower interest rates should be beneficial to the leisure sector especially as the traditionally strong Q4 approaches. As of H1 2024, Colliers recorded an average occupancy of 63 percent for Metro Manila hotels while average daily rates increased by 1.3 percent. The Philippine peso depreciation makes Metro Manila hotel rates relatively cheaper to foreign travelers.
Lower interest rates are a plus for domestic travelers and this should partly fuel demand for three and four-star hotels especially in Metro Manila, which recorded healthy occupancies of up to about 63 percent in H1 2024.
From 2023 to 2026, an estimated 38 percent of new hotel keys in Metro Manila will be foreign branded. With more interest rate cuts in the offing and further enhancement of the tourism sector, Colliers believes that both are likely to play crucial roles in enticing more foreign hotel operators to establish or expand presence in the country.
Retail innovation to quell extinction
Lower interest rates should entice more Filipinos to spend.
Colliers data as of Q1 2023 showed that Metro Manila malls recorded an average vacancy of 15.5 percent higher than the pre-pandemic average of 9 percent. This increase is due to new leasable retail supply in the capital region. Overall, lease rates have been stabilizing, with some mall operators reporting that footfall is now better than pre-pandemic level.
Lower interest rates should prop up the Philippine retail sector due to a revival in demand from consumers. Hopefully, this results in more foreign retailers occupying brick-and-mortar space in the country, which should benefit developers with massive retail footprint.
Filling the void left by POGOs
As of end Q2 2024, office vacancy in Metro Manila reached 18.3 percent, an improvement from the 19 percent posted in Q1 2024 due to sustained transactions and slowdown of space surrenders. This has resulted in net take-up reaching 172,800 sqm up 26 percent from the 137,000 sqm a year ago. However, the potential impact of the Philippine offshore gaming operators (POGO) ban and the upcoming US elections is projected to partly tame demand as occupiers will likely be cautious with their expansion plans.
We expect new supply to reach 494,700 sqm in 2024, lower than our previous forecast of 553,200 sqm as developers continue to be cautious of the high vacancy. From 2024 to 2028, we expect the annual average delivery of 384,000 sqm of new supply, lower than the 443,100 sqm during the pre-POGO period (2012 to 2015).
With lower interest rates, traditional firms should be enticed to expand operations, and this should compel them to lease out more office space within and outside Metro Manila.
Philippine property with lower interest rates
The policy rate cut signals a shift from the restrictive monetary policy previously implemented by the BSP.
With positive ripple effects to the Philippine economy and property fully kicking in and with more interest rate cutting in the offing, this initial policy rate easing definitely fosters much needed confidence for Filipino developers and investors. We see it reigniting interest in a still-reviving Philippine property market.
Indeed, the first cut (after nearly four years) is the deepest.
For feedback, email joey.bondoc@colliers.com
