What impact could a potential POGO ban have on the REITs?

I got this question in response to news that the House of Representatives approved two measures that seek to ban POGOs in the Philippines. POGOs, or Philippine Offshore Gaming Operators, are licensed and monitored by the Philippine Amusement and Gaming Corp. (PAGCOR), and have been controversial since their presence exploded during Rodrigo Duterte’s term as president. These shady organizations proliferated wildly in the early days, causing huge spikes in demand for commercial office space for the companies and residential condos around those offices for the workers who were largely Chinese nationals. Our commercial REITs were initially exposed to these POGOs in various degrees due to the tempting rents that could be (in theory) extracted from these companies, but some of the more risk-adverse REITs quickly moved to limit their exposure due to a long (and growing) list of problems with these POGOs. The most important problem was the chaotic management of the sector by PAGCOR and the President, which seemed to only attract “here for now” type companies that often struggled to pay their monthly rents or outright refused to do so. Of all the commercial REITs, all have (in some form) committed to reducing their POGO exposure over time. Three REITs have declared that they are POGO-free: AREIT [AREIT 33.90, down 0.6%], MREIT [MREIT 13.52, down 0.1%], and Filinvest REIT [FILRT 3.21, up 0.9%]. RL Commercial REIT [RCR 5.49, down 2.0%] said back in 2021 that 2.8% of their tenants were POGO, but have not (to my knowledge) provided any updates on the proportion of their tenants that are POGOs. DDMP [DDMPR 1.21, up 0.8%] reported in its FY22 Annual Report that it still had 37% of its total GLA rented out to POGO and PAGCOR-accredited tenants. 

MB bottom-line: Thank you to Your REIT Buddy and MB’s own, Jewel, for putting together the research on this one. Back in September 2022, David Leechiu, CEO of Leechiu Property Consultants (LPC), said that a total POGO ban would have dire consequences for the commercial property market by “pushing rental rates further down than during the pandemic”. In July 2023, LPC was looking at POGOs as a potential source of commercial space take-up that would help support the commercial real estate sector. In December 2023, LPC noted demand from BPO and POGOs as contributing to a “better than expected” performance in 2023, and that continued demand could “gradually” reduce vacancies in Metro Manila. I couldn’t find any current analysis that speaks about the potential impact of a ban in 2024, and I didn't receive any response when I reached out to LPC for an updated take. On the surface, DDMPR looks as though it could be exposed to the most immediate risk, though it’s possible that they’ve made significant changes to their tenant mix since their last report in early 2023. It would also seem like the rest of the commercial REITs would be insulated from the initial blastwave of the ban, given that they have no (AREIT/MREIT/FILRT) POGOs or very few (RCR) as part of their tenant mix. But that’s only the initial blast. Sure, DDMPR could be the one to have its face melted, but the rest are still exposed if a total ban causes a quick dump of hundreds of thousands of square meters of vacant office space to hit the market all at once. That inventory glut could push rental rates back down. Will a ban become a reality? Will it be a full ban or a partial ban? Will the ban be quick or will it happen gradually as licenses expire? These are things that we don’t yet know. But they are certainly risks for the commercial REITs, and part of the reason why I think most are looking to diversify their holdings away from just holding office space.

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