Fitch unit sees Philippines economy falling into recession in 2020

CEBU, Philippines — While supply and demand for leased properties are always at the center of market discussions under the COVID-19 period, a good relationship between landlords and tenants is deemed crucial.

Real estate professional services and investment management company, Colliers International Philippines advised tenants that the concerns they expressed revolve around devising a shared solution with the landlords for continued partnership in the long term by avoiding worse case scenarios such as bankruptcies, employee retrenchments, having high vacancies and falling rents.

A former top officer of one of the top real estate developers said that during the global financial crisis (GFC), some occupiers were given concessions depending on the standing of the occupiers as evidenced by payment history, reputation and credibility.

Some of these were rent reduction for one year in exchange of lease term extension of three years, rent escalation deferment for two years, lifted restrictions on sublease rights, etc.

For new leases, substantial rent discounts were given on the first year of the term. These measures were taken because the minimum occupancy rates to cover and keep buildings operational are 50 percent for existing buildings and 60 percent for new buildings.

With all the problems brought about by this pandemic, this presents an opportunity for market leaders to differentiate themselves in the way they take care their partners. We believe that a premium will be placed on the values and ethics reflected by the decisions that companies will take during this period. For the commercial real estate sector, the occupiers will remember how landlords reacted and supported them during this pandemic.

As both sides are equally affected, Colliers International suggests that occupiers should look at possible ‘gives’ to the landlords in exchange for rent relief, rent abatement, adjustment in the dates of handover, lease and rent commencement, longer rent-free fit-out period, etc. such as the following:

• Apply the Advance Rent to be applied to the last 3 months of the lease term now

• Apply the Security Deposit after the Advance Rent is applied, subject to replenishment immediately thereafter this pandemic

• Rental deferment for a few months in exchange for a longer lease term equivalent to the length of the rent deferment period

• Rental discount for the duration of the pandemic to be paid by the occupier 12 months after in cash or in staggered basis

• Rent-free within the lease term can be exchanged and applied now

• Modification of the rent and escalation structure to recover the rent relief extended

• Adjustment in other fixed charges like common area charges and aircon charges equivalent to the savings on water and power consumption

• Waive parking rental

• Waive signage rental

• Removal of pre-termination option

• Removal of the “No Reinstatement” provision

• Removal or modification of the Sublease and Assignment provision

• Revision of the following provisions:

* Renewal provision to modify a collar on renewal rent

* Tightening of the obligations of the occupiers in the contract of lease (e.g. shortening of curing periods)

* Softening of any Interruption of Services provision in favor of the landlords

The spirit of Bayanihan is being displayed proudly by the Filipino people. “We believe that this can also be extended to the commercial real estate industry such that whoever has the capability should help those who need a lifeline in the short-term so that everybody wins in the long-term. Survival should be a shared cause,” said Dom Fredrick Andaya, Director of Colliers International Philippines.