APPD Market Report Article

Manila

November 28, 2022

Janlo de los Reyes, Head of Research, Philippines

-4.6%

PHP 1,577

Rents
Rising

Store closures and late store openings lead to negative absorption

  • Net absorption fell to about -9,900 sqm in 3Q22 as store closures persisted and select malls closed off sections for renovation or redevelopment. The majority of move-outs (26.1%) consisted of F&B establishments such as Frankie’s, Yoshinoya and Gerry’s Grill. The postponement of new store openings to 4Q22, in time for the holiday season, also contributed to the quarter’s performance.
  • Despite the negative absorption, significant move-ins were also recorded. F&B stores (27.3%) like Marugame Udon and Paper Moon in Makati City, as well as Greyhound Cafe in Pasay, have made notable openings. The number of stores scheduled to open soon also climbed by another 10.3% q-o-q in 3Q22, supported by the opening of the whole economy and the quickly approaching holiday season.

Vacancy is elevated as demand slows and new supply comes online

  • The vacancy rate rose by 25.0 bps to 6.1%, due to new supply and relatively slower leasing demand in 3Q22. The increase was mainly driven by the addition of approximately 5,300 sqm of retail space from The Shops at Ayala in Makati City. The development came online when still around 75% vacant, contributing significantly to the increased vacancy.
  • Developments that were originally scheduled to be completed in the quarter, such as One Ayala, Shops at Ayala – Phase 2 and Gateway Mall 2, have delayed their openings to 4Q22. Around 355,000 sqm of retail space is anticipated to enter the market in the upcoming quarters, which may impede vacancy rate recovery.

Rents continue improving, driven by a stabilising market

  • Retail rents picked up by 2.4%, reaching PHP 1,577 per sqm per month with more retail operators slowly returning to pre-pandemic rates, encouraged by the relatively more stable retail market, with mall foot traffic remaining high. Operators have also reverted to pre-pandemic lease term practices.
  • Capital values increased by another 1.5% q-o-q to PHP 226,799 per sqm, supported by the continued improvement in activities in the market. This is expected to rise further as the market continues to expand, and more investment pledges are anticipated in light of new policies such as the Retail Trade and Liberalization Act, which aims to lower entry requirements for foreign entrants.

Outlook: Relaxed restrictions to boost retail market recovery

  • The ongoing economic expansion and fewer restrictions are projected to fuel the retail sector’s recovery by the end of the year. The simultaneous opening of stores scheduled for 4Q22, in time for the holiday season, is expected to alleviate vacancy pressure.
  • Rents are expected to climb steadily in the upcoming quarters as lease terms return to pre-pandemic norms and demand for new leases remain steady. Despite the threat of rising inflation and a weakening peso, the retail sector is still likely to perform well by year-end as consumer spending increases, particularly during the holiday season.

Note: Manila Retail refers to metro Manila's overall prime retail market.

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