Philippine Property Outlook:Paving the way

Event

We are incrementally more positive on the Philippine property sector given thenew administration pushing for growth outside of Metro Manila. As highlightedin our latest strategy report hitting the ground running, we expect the newadministration to execute better and spend more on infrastructure, ashighlighted by President-elect Duterte’s selected cabinet members. We alsobelieve he has a good eight-point plan that makes the property sector a bigwinner.

Our top picks on the sector are Ayala Land (TP: P47.00/sh, Op), Megaworld(TP: P6.00/sh, Op) and SM Prime (TP: P28.00/sh, Op). We’ve now placed ALIabove both SMPH and MEG on our preference list due to its attractive upside.

In addition, we believe that ALI will benefit from the push to grow cities outsideof Metro Manila given its expertise in developing estates (mixed-usedevelopment) and massive landbank in Visayas and Mindanao. On the otherhand, we also like Megaworld due to the continued strong BPO growth in thePhilippines. Lastly, we believe SMPH will continue to benefit from thedomestic consumption growth inside and outside of Metro Manila through itsextensive shopping mall network.

Impact

Revisiting REITs – potentially US$9.1bn initial value. With the newadministration and cabinet members, we believe that the REIT law will berevisited and hopefully revised in order to be more palatable. Based on ourestimates, at least 4.9mn sqm in leasable retail space or malls between thetop property companies is already mature and prime for REITs. In ourestimate, this could amount to potentially a $9.1bn initial REIT value and thisonly includes malls that are at least five years old. Assuming 30% is floated tothe public, then property companies could raise $2.7bn to fund future projects.

We’ve got your back-office. BPO demand remains strong and has taken upthe majority of the additional space expected to be completed this year. TheIT and Business Process Association of the Philippines (IBPAP) is projectinga total full time BPO employees of 2.6mn by 2020, more than double currentlevels. If this target is reached, then the BPO industry alone would likely needat least another 4mn sqm in leasable space from 2017 to 2020. Both Colliersand Leechiu are estimating that the additional office space that has beenlaunched will be 3mn sqm or less in Metro Manila for the same period.

Outlook

We remain positive on the property sector, as take-up on office and shoppingmall revenues remains robust. Although we are seeing the residential sectorso far having a soft landing in terms of launches, development outside ofMetro Manila could be another source of growth or at least bring continuity inmomentum. We are putting ALI as our top pick, now ahead of our other toppicks SMPH and MEG. We are downgrading our TP on Vista Land due todilution from Starmall acquisition. However, given that upside remainssubstantial, we keep our Outperform rating on VLL. We’ve downgradedFilinvest to Neutral due to valuations.