Diamond in the Rough: A minor setback but a positive outlook for Davao City real estate

by PRIME Philippines Research and Advisory  September 19, 2018

 

This article was published on September 17,2018 by Davao Edge. This article was a contribution of PRIME Philippines to the newspaper and the city of Davao, providing insights on the real estate sector of the city.

 

Although known for its resiliency, natural resources, and rich culture, a year of martial law in Mindanao had various effects on the King City of the South. Last year, when the president decided to implement martial law due to a national security emergency, martial law garnered varied reactions from different stakeholders in Mindanao.

In a study released by PRIME Philippines last year regarding the effects of martial law to businesses in the City of Davao, it states that there are both positive and negative connotations on the declaration. The study showed that investors that are based in Davao and have existing property investments in the city are 83.3% certain on their investment, beating the 60% certainty of Luzon and Visayas based investors with existing investment in Davao and Luzon and Visayas investors without any investments at 33.3%. Data showed that the existing businesses in Mindanao were unaffected by the declaration except for the hotel and tourism industry, which experienced lower revenues and multiple cancelled events.

PRIME Philippines has recently released an update on the state of Davao City real estate from January to June of 2018, under the extended martial law in Mindanao.

 

Hotel sector is thriving given growing tourism numbers and upcoming hotel developments

A year after the declaration, what previously took a bullet has now recovered and can be dubbed as bullish as tourism and hospitality facilities receive larger demand. Today, the tourism industry is one of the rising investment sectors of Davao despite martial law, with visitors growing at 13.36%. The city’s goal of becoming a world-class MICE city, partnered by the viability of Davao, facilitates the steady increase in tourist arrivals, both domestic and foreign. International hotel operators are still keen on putting up their brand in the King City of the South, looking to compete with Filipino developers that have already started construction on their own hotel projects. Number of hotel rooms is expected to reach the 6,000 mark in 2020, a far cry from the 2017 room numbers of just over 4,000 rooms.


Residential sector is performing well due to local investor purchasing and positive outlook for Mindanao

Since the declaration last year, residential condominiums remain to be stable. The sector is experiencing relatively high occupancy. In fact, more brands and projects from big developers are on the way for launching. More projects are expected to be built in the grounds of Davao City as it has a stable take-up average of 83%. Most of these units are sold to local investors in Mindanao, implying no significant effect in relation to the extension of martial law. 

            JP Laurel Avenue, Mindanao’s most valuable highway, houses most of the condominium projects in the city, making Poblacion and Matina as very good locations for a condominium project as there is lower supply in these two commercial areas. More luxurious facilities and amenities are encouraged to cater to the high-income tiers of the city.

 

Retail sector is experiencing slower growth due to limited expansion of anchor brands

 The retail sector in Davao City is currently experiencing a slower growth among other real estate sectors. The current setting of the city is gaining skepticism from brands that are outside of Davao. However, brands that are already in the city are in its continuous pursuit to capture the big Davao market.

By beginning of this year, there is no significant new entrant in the city for anchor brands. With the extension of martial law along with its stigma, the retail sector has continued to decline.

Anchor brands prefer to put up new retail stores to rising areas within Greater Metro Manila. With the imminent impact of martial law to the perception of investors and retail developers of Davao City, expansion focus is shifting to those areas that also offer more connectivity and infrastructure developments such as Pampanga, Bulacan, Cavite, Laguna, Batangas, and Rizal.

 

Local and existing company expansion sustains office space demand for Grade B office spaces, with lower office space demand for Grade A buildings

The office sector has a noticeable effect due to martial law. Just like the retail sector, the office market experienced a slower take-up from locators based outside of Davao City.  Though there is increase in the supply, the demand for office spaces failed to catch up. A total of 5 listed expansions of BPO firms was noted prior to martial law, but after martial law, no new anchor BPO was listed. Given the slowdown, Grade A buildings have experienced lower demand. Despite this, the office sector still has an average occupancy rate of 81% with total leasable area of around 183,022 sqm. Poblacion has the highest occupancy rate among key areas in Davao City, with an average occupancy rate of 95%, while the Bajada-Lanang and Matina area garner 79% and 73% occupancy respectively. Demand continues for local expansion, notably from government agencies and insurance companies.

 

Commercial land values are still rising at robust rates

            Mindanao’s commercial land sector is known as Mindanao’s gold mine due to its continuous and steady progress. Developments are increasing, making commerciality in the area improve. Year by year, commercial lands in Davao City experience a growth of 20%. This indicates the rapid escalation of Davao to becoming a premium central business district of the Philippines.

The Bajada-Lanang area, especially along JP Laurel Avenue, remains to be the city’s most prime avenue. Big developers and notable establishments are mostly located along the strip, making it the ideal investment for developers, land bankers, and other real estate stakeholders.

The Poblacion area experienced the most significant rise in land value at 28% compared to Matina’s at 25%. Poblacion lots are currently priced between Php 55,000 per sqm to Php 70,000 per sqm. Matina prices are the lowest among key areas, with prices at Php 35,000 per sqm to Php 45,000 per sqm. In the Bajada-Lanang area, lots are still ranging from Php 70,000 per sqm. to Php 120,000 per sqm.

Infrastructure developments and networks, high level of commerce, real estate developments, investor confidence in the land sector, and government stability are the most notable factors contributing to the increase in land value.

 

Davao: King City of the South

Undoubtedly, martial law took its toll to the different sectors of real estate. Even though majority of Mindanao-based investors and businessmen are nonchalant to martial law, there are also other investors and businesses that are still skeptical as to the safety, assurance, and viability of doing business in Mindanao particularly in Davao City.

Despite the extension of martial law, the retail and office sectors are expected to pick up after the expiration. Martial law’s expiration means lower political risks for brands and businesses, easing their way to the city and increasing their confidence more to cater the Davao market. Though rates currently aren’t increasing rapidly, it is expected to experience stronger growth once demand picks up. Rates are currently competitive and enticing for business expansion, showing the perfect time to enter the market while growth is still slow.

Martial law’s extension helped in the stabilization of commercial land values in the city. Contrary to the mentioned sectors, there is a possibility of a sudden increase in land prices once

martial law is lifted. Thus, investors are encouraged to acquire properties during this most stable time.

The residential sector is expected to have a steady take-up as other industries also continue to develop within Davao City.

The hotel and MICE facilities sector remains to be bullish as Davao is aiming to be a MICE capital. The steady increase in tourist arrivals with the local government’s effort in promoting Davao as a destination is an element that will create a strong synergy for the hotel and MICE sector of Davao.

            In the end, real estate in Davao City remains to be stable because of the strong fundamentals of the city. Its population of 1.6 Million means a large market as well as a good source of work force. In fact, Davao has a working force of 65.5%, making it a top-tier destination for businesses with its competitive work force. To partner with the high number of work force, employment in Davao is recorded at 95.3%. Tourist arrival has a year-by-year growth of 13.36%. Davao City is also third in the Philippines in terms of competitiveness.

            With these facts, along with its infrastructure-driven economy and active government initiatives, Davao is truly the King City of the South. Investments and businesses in the city are set to thrive, not just survive.

 

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