Demand for office space strong in Jan-Aug

More realistic asking prices and an improvement in market sentiment has translated in several large investment purchases over the first eight months of the year. Domestic investor interest focused on en-block Grade B office premises in the Makati Central Business District where prices have come down to more realistic levels.

"It is encouraging to see investment deals coming back to the market after a long period of time. En-block transactions have been absent for over four years," commented Monique Cornelio-Pronove, associate director for research and consultancy and capital markets division at Jones Lang LaSalle. "It is not surprising to see that interest has focused on well located Grade B premises given its redevelopment potential and more realistic pricing levels as compared to newer developments. However, it is noteworthy that transactions were directed towards single owned developments as against strata-owned buildings. This is largely attributed to the ease of undertaking negotiations with only one owner and eventually, not having to seek approval from different unit owners to undertake re-development."

Major transactions during the second quarter to August include the sale of Gercon Center (7,000 sq.m.) at HV Dela Costa in Legaspi Village; the sale of Petron Building (15,000 sq.m.) along Makati Avenue and most recently, nine floors (7,500 sq.m.) at Banker’s Center along Ayala Avenue. Anecdotal evidence reveal that transacted price for the last two transactions were in the vicinity of P23,000-27,000 per sq.m.

Overall, average market capital values based on a representative basket of properties in the Makati CBD have consistently declined since its peak in 1997 and are currently at levels close to those in 1992 at P42,777 per sq.m. A decline of 2.8 percent was registered over the period from March to June 2001 and a decline of 17.6 percent from June 2000.

Leasing activity has also improved as tenants took advantage of the supply overhang thus, giving them the upper hand in rental negotiations. During the first half of the year alone, absorption levels registered a 61 percent growth over the same period last year. In fact, absorption levels between January-June this year of approximately 60,000 sq.m. have already exceeded the levels achieved for the entire 2000 (approximately 50,400 sq.m.). Absorption or take-up is the total sq.m. of office space "taken up" during two periods. It is computed as the floor space occupied less floor space vacated. Alternatively, it may be computed as the difference of total occupied stocks at two points in time.

Vacancy rate, however, remained at a high of 19.2 percent despite the improvement in absorption level. This was due to the record high delivery of 206,230 sq.m. of office space in the first quarter, which included RCBC. Towers and PBCOM Tower, both located along Ayala Avenue. Within the Asia Pacific region, however, the country’s office performance appear to be better place than in Bangkok and Jakarta where vacancy rates have reached 27. percent and 23.7 percent respectively despite low levels of supply in the last 18 months. While vacancy rates in Hong Kong hover at a single digit figure, it has experienced increasing number of "surrendered pace" from e-business smart-ups and related IT companies that have closed operations. It was estimated that as at end of June, there were some 33,000 sq.m. of surrender space in Central.

Market rents in the Makati CBD have similarly declined over the last 3 1/2 years and are currently averaging Php4,522/sqm. per annum or Php377/sq.m. per month as at end June 2001. This reflected a decline of 2.7 percent from the first quarter and a decline 20.2 percent during the same period last year. Unlike capital values, current market rentals are still 10 percent higher than its 1992 levels.

In light of the significant supply and declining rental scenario in the Makati CBD, overall interest has remained focused in this district. Whilst there had been transactions closed in the decentralized precincts of Ortigas Centre and Filinvest Corporate City/Madrigal Business Park in Alabang, this has been limited to date.