KMC Savills | 1

COVID-19 Impact to
Property Sector
May 12, 2020

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Outline

"You must maintain unwavering faith that

Impact to Economy you can and will prevail in the end,
regardless of the difficulties, and at the
same time, have the discipline to confront
Office Sector the most brutal facts of your current
reality, whatever they might be."

Residential Sector - Jim Collins

Outlook and the New Normal

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Impact and Risks to
the Economy
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 The Global Impact of COVID-19 and Policy Responses

Situational Threat Report* Macro Conditions

Highest
Severe global rec es s ionary c ondit ions las t ing for a Impact
10 prolonged period
✓ Global recession in 2020
9 W ides pread c as c ading bus ines s failures imminent or ✓ FDI flows could fall 5% to 15% to their lowest levels
ongoing
since the 2008-2009 global financial crisis
W e are
here as 8 Solvenc y ris k broadly s preading ac ros s ec onomies ✓ Global Air carriers to lose $63B to $113B in 2020
of A pr 30 revenue
S evere mult i-quart er ec onomic impac t s in mult iple ✓ International indices nearing bear market territory
7 mark et s lik ely ✓ Risk of layoffs, consolidation, and bankruptcy looms

6 Mark et s and public in mult iple major nat ions reac t ing
s t rongly

5 S us t ained t rans mis sion lik ely in mult iple t rans miss ion
Sus t ained t rans mis sion oc c urring in mult iple areas in
4 c ount ry of origin
3 S poradic c as es appearing out s ide of region of origin
2 Large-s c ale epidemic in s ingle region
1 Ident ified c ont agion, loc al origin, lit t le informat ion k nown
Government Response
✓ China announced billions in special purpose loans
✓ Federal Reserve cut the policy rate
✓ Other major economies announced financial
measures (Japan $9.6B, South Korea $9.2B, Italy
$4.1B)
✓ IMF and W orld Bank announced availability of
$50B and $12B in financing

All Clear 0 Threat is negligible or has pas s ed

Source: Bain’s Macro Trends Group, WHO, CSIS, Worldmeters KMC Savills | 5
PH economy contracted by 0.2% in 1Q/2020
 Median estimates for 1Q/2020 was 2.9%. Household Consumption Government Expenditure

Capital Formation Net Trade

 Government spending buoyed the YoY Growth Rate
economy during 1Q/2020 – growing by 10.0%
7.1%.
 The worst may yet to come as full
8.0%
implementation of ECQ was done mid-
March. Luzon has been on lockdown for
half of 2Q/2020. Economic managers
preparing for the country’s first recession 6.0%

since 1997.

4.0%

2.0%

0.0%

-2.0%

Source: BSP, PSA, PDEx, KMC Savills Research 1Q 2020 KMC Savills | 6
3 Pillars of PH Economy
OFW Remittance

35,000 OFW Remittance Potential Loss % to GDP 14%

30,000 12%
25,000 10%

(In USD Millions)

Tourism Gross Value Added 20,000 8%
15,000 6%

3,500,000 14% 10,000 4%

Tourism GVA Potential Loss % to GDP
5,000 2%
3,000,000 12% - 0%
2012 2013 2014 2015 2016 2017 2018 2019 F 2020 F
2,500,000 10%
(In Php Billions)

2,000,000 8%

1,500,000 6% BPO Revenue

1,000,000 4%
30,000 BPO Revenue Potential Loss % to GDP 14%
500,000 2% 25,000 12%
10%
20,000

(In USD Millions)

- 0% 8%
2012 2013 2014 2015 2016 2017 2018 2019 F 2020 F 15,000
6%
10,000
4%
5,000 2%
- 0%
Assumptions:
Tourism: No tourism activity for 2 months and 80% decline in tourism activities for the rest of 2020 2012 2013 2014 2015 2016 2017 2018 2019 F 2020 F
OFW: ACTS-OFW Estimate
BPO: 50% Operational for 2 months and no disruption thereafter
Computations are straightline and does not consider seasonality

Source: NEDA, DOLE KMC Savills | 7

Central bank actions reduced default risk and protected overall real estate
sector
Residential REL Commercial REL
Real Estate Loan to Total Loans Gross NPREL to REL
2,500 25.0%

2,000 20.0%

in PHP billions
1,500 15.0%

1,000 10.0%

500 5.0%

0 0.0%

 The Bangko Sentral ng Pilipinas (BSP) has cut interest rates to its lowest level since 2018 and is still expected to cut rates
further. It has also reduced the reserve requirement ratio by 200 bps with potentially another 200-bps reduction within this year.
 The central bank has also implemented its own form of quantitative easing with a programmed purchase of up to PHP 300
billion in government debt.
 These moves should assist fiscal measures currently in place and reduce default risk during this ECQ. Real estate loans in the
banking sector amount to more than PHP 2.1 trillion with non-performing loans at 1.7% end 2019.

Source: BSP, KMC Savills Research KMC Savills | 8

 Government still has fiscal space to address and contain the spread of the
pandemic

Budget Deficit % to GDP Total PH Debt

0 0% 100.0%

(100) -1%
90.0%
(200)
-2%
80.0%
(300)
-3%

% of Nominal GDP
in PHP billions

(400) 70.0%
-4%
(500)
60.0%
-5%
(600)

-6% 50.0%
(700)

(800) -7% 40.0%

 There is still fiscal space for the government to address and contain the COVID-19 pandemic.
 However, expectations see this deficit to grow as the government fuels spending to contain the pandemic. From 3.2% of GDP,
the country's budget deficit may increase to 5% by the end of the year.
 The key here is to gradually decrease spending when the overall situation improves in order to reduce the risk of high inflation.

Source: BSP, KMC Savills Research KMC Savills | 9

Business sentiment: Industrial/ Logistics and BPO are the most optimistic to recover within 2 to 3
months

Source: KMC Savills Research KMC Savills | 10

Office Sector
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Grade A Office Take-Up vs. New Supply
 Due to construction delays, Metro Manila
experienced a muted new supply of only New Supply Net Absorption Vacancy Rate
400 8%
36,500 sq m during the quarter.
 Overall vacancy managed to sustain its
stable rate at 5.5% in 1Q/2020
 Leasing activity is forecasted to
300 6%
slowdown and present an increase to
overall vacancies.

000 sq m (GLA)
 In the wake of the pandemic, we expect
office demand to hit a slump in the
coming quarters as companies 200 4%
accommodate a workforce that chooses
to work from home. However, the
magnitude will depend on how long
current circumstances will pan out.
100 2%

0 0%

Source: KMC Savills Research 1Q 2020 KMC Savills | 13

New Office Supply 2019 – 2023F
Makati CBD BGC Ortigas Center Makati Fringe Alabang CBD
Bay Area C5 Corridor Quezon City McKinley Greater Ortigas
1,200

1,000

800
'000 sq m (GLA)

600

400

200

Source: KMC Savills Research 1Q 2020 KMC Savills | 14

Rising office vacancies in the horizon

Metro Manila Makati CBD BGC Ortigas Center Alabang CBD Bay Area Quezon City

30%

25%

20%

15%

10%

5%

0%

Source: KMC Savills Research 1Q 2020 KMC Savills | 15

Grade A Office Market at a Glance (1Q/2020)
Makati Ortigas Quezon
1Q2020 Unit BGC Alabang Bay Area
CBD Center City

PhP/sq m 1,149.0 1,036.8 696.5 697.0 758.0 872.3

Average net
rental rate
US$/sq ft 2.10 1.90 1.30 1.30 1.40 1.60

PhP/sq m 1,600.0 1,400.0 900.0 725.0 825.0 950.0

Upper net
rental rate
US$/sq ft 2.90 2.60 1.60 1.30 1.50 1.70

Vacancy rate % 1.7% 3.0% 14.2% 4.5% 11.9% 3.7%

Current Stock sq m 1,191,611 1,829,458 759,357 551,299 739,051 872,157

Development
Pipeline sq m 217,219 385,256 457,857 96,089 104,495 297,815
2020-2023

Source: KMC Savills Research 1Q 2020 KMC Savills | 16

Impact on Occupier Mindset

Q2 2020 KMC Savills | 17

A More Sophisticated Outlook on Business Continuity

2020-04-16/gorman-sees-morgan-stanley-future-with-much-less-real-estate Q2 2020 KMC Savills | 18

Residential Sector
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Fewer project launches as developers slash their capex and adjust their
cash flow strategies

Temporary OFWs: Nature of Work (POEA)

Impact 560K Deployed in 2016

• Low transaction volume across the buyer spectrum (I.e. local and foreign investors, OFWs, end-
user buyers), as most try to conserve cash and assess the situation.
3%
5%

12%
Outlook

• Fewer project launches as developers slash their capex and adjust their cash flow strategies. 57%
23%
• Delays in project construction due to supply chain bottlenecks (e.g. steel, glass) and lack of
labor due to ECQ

• Income disruption from job losses may be largely felt in the low-income bracket. We expect this
to result into receivable losses in the socialized and economic housing segments.

• The mid-market segment may still have a steady stream of cash from receivables during this
period, and sales is expected to be sustained post-COVID.

• We expect high-end and luxury buyers to be opportunistic during this period as they observe
any price changes in the secondary market. On the flip side, if owner cash positions are Service Workers Production Workers Professionals
threatened, assets may be liquidated. Sales Workers Other
• Businesses will evolve to capitalize on technology, e.g, virtual tour and online payment
platforms, to ensure business continuity and mitigate the impact of the pandemic stigma. • Temporary or Cont ractual OFWs working in the service sector such as hotel
receptionist, food service attendant, and housekeeping attendant have higher risks of
• Slower take-up from the OFW market due to job losses and uncertainties abroad. being laid off.

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OFW remittances, a driver of residential demand, might lose $4.5B but will
see an upside in the demand for healthcare workers

• ACTS-OFW Coalition of Organizations estimates that the

national government stands to lose $4.5B in remittances under
a "best-case scenario"

• While there were lay-offs in tourism, travel, hotel,

accommodation, and retail, one possible upside is the
deployment of more OFWs working in essential sectors like
healthcare.

Source: BSP, Philippine Star KMC Savills | 21

GFC Impact on Residential Market Take-up

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Outlook
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What’s next?
Office Sector Retail Sector
• Adoption of telecommute policies could likely reduce • Quicker shift to e-commerce from traditional brick and
office space demand in the long run mortar stores

• O&O sector may still come on top. Cost-savings will
become key business priorities
Work from
home mode • The pandemic has seriously questioned China’s role in
spreading the disease and may likely affect diplomatic
ties in the future. It is likely the POGO sector will be
collateral damage during this relationship fallout
• Mall developers may address the rise of e-commerce
by adjusting their tenant mix to compensate for the loss
Shoppers of foot traffic from merchants affected
buying online
• Food and beverage should stay as a key component in
that mix but expect changes on how these merchants
are positioned throughout the mall

Hospitality Sector Residential Sector

• We expect tourism activity to start later next year when • Tenants and end-user buyers may prefer residential
The question remains the government adopts looser travel restrictions project which have larger unit sizes and lower unit
in the real estate • The heightened awareness of social interaction will lead
densities per floor

sector: will this drastic to changes in the frequency and nature of both physical • Our key concern is in the Economic and Low-End
and digital interactions segments wherein buyers’ incomes are more
change in business From physical susceptible to economic disruption
and consumer to digital • Business travel may be hit substantially. As such,
business trips may be unnecessarily scrutinized if firms • Once the pandemic hits the real economy, demand for
behavior stabilize once have invested heavily on their digital infrastructure. new residential projects may diminish as unemployment
we flatten the curve, or Slower rises and wage growth falters
launches and
is this our new normal? Industrial Sector pre-selling • We do not discount the possibility that prices may
• Transitioning to a Modified Community Quarantine correct itself after a prolonged ECQ. It is also possible
(MCQ) may give the logistics sector a head start as new that prices will begin correcting themselves once an
policies are introduced to jumpstart the supply chain MCQ takes place as owners reassess their cash
position
• With the pandemic exposing the vulnerability of the
Disruption in global supply chain’s dependence to China, some
operations countries grant incentives to relocate their production
outside of China

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We practice what we preach – KMC Milestones over the years

KMC has been a pivotal force in the Philippines for more than a decade now as we continue to build forward -looking initiatives and innovations in
the real estate industry.

Time and again, KMC aimed for excellent talent that provide competent real estate solutions. Join the fold and share how we can help you.

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