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Glut in office buildings to end sooner, says Jones Lang

Wednesday, August 12, 2009 | MANILA, PHILIPPINES [ BusinessWorld Online ]


THE OVERSUPPLY of office spaces will not last long as the existing supply of office buildings are expected to dry up soon, effectively stabilizing the prices, according to a real estate analyst.

David Leechiu, Jones Lang LaSalle Leechiu country head, said that while the country is flooded with office spaces, a number of companies have postponed or cancelled their transactions as a reaction to the global crisis.

The total one-million-square-meter (sq. m.) supply supposed to be built in the next five years, has been reduced significantly by 19% or some 341,000 sq. m., equivalent to one year’s worth of office space demand.

"The dramatic drop in supply may result in the rapid rise of rental prices by end of next year. This is the time when we might see rental rates stabilizing," Mr. Leechiu said in a press conference.

After reaching a peak last year, rental rates across all major cities went down with prime offices in the Makati district affected the most. From an average rate of P1,200 per sq. m. in the second quarter last year, rental prices in the business district dropped by 42% to P700 per sq. m. from April to June.

This was also the case in other cities although Bonifacio Global City will likely come out of depressed prices first because of tight supply in the area, Mr. Leechiu said. Rates in Fort Bonifacio are expected to go down by 21% to P550 per sq. m. in the second quarter.

"Cheap real estate in Metro Manila and Cebu will last until the second quarter next year and we will see prices climbing in the fourth quarter of 2010 as supply dries up," Mr. Leechiu said.

The peak in office supply will happen in the fourth quarter when the market will be flooded with 200,000 sq. m. of new office space. Of the total, only less than 25,000 sq. m. have been leased or "pre-committed."

The analyst was confident foreign companies would continue to move to the country despite the crisis because of cheap labor and low rental prices compared with other countries.

"This is why the oversupply that the country is experiencing will reach its bottom sooner than what most people think. The demand will come mostly from the business process outsourcing companies where some 195,000 sq. m. will come in the second half this year," he said.

While it took the sector five years to recover after the Asian Financial Crisis that hit the country in 1997, it will only take two years to pick up this time around.

"The business process outsourcing industry is still growing in the country as a result of cost-cutting measures of multinational companies. This is in contrast to the 1997 crisis when the severe contraction has forced companies to close," he said.

Mr. Leechiu pointed out that even political turmoil in the past eight years failed to slow down the growing industry. Call center seats, he said, continue to grow significantly from less than 500,000 seats in 2000 to almost 3.5 million seats last year. — Kristine Jane R. Liu

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