Decongesting Metro Manila, building necessary infrastructure critical to sustaining growth The Philippines' continuing economic growth has enabled it to become one of the more popular investment destinations in Southeast Asia. While other countries are still recovering from the effects of the 2008 financial crisis, the Philippines has grown steadily, posting 6.2% growth for the 2nd quarter of 2014 and getting credit rating updates from key international debt-watchers Standard & Poor’s, Fitch, and Moody’s. In its 3rd Quarter Report, real estate services agency KMC MAG Group noted that the Philippines will need to focus on two key issues—decongesting Metro Manila and building the necessary infrastructure—in order to stay ahead and to sustain the momentum it currently enjoys. “The long-term economic growth of the Philippines is dependent on whether or not it can address the issue of decongestion and make smart, sustainable decisions to improve its infrastructure,” said Michael McCullough, Managing Director of KMC MAG Group. “If the Philippines can bring the growth in Manila to other areas within the country and support that with infrastructure, then we see no reason why it wouldn’t fulfill its promise of being the next Asian miracle.” The real estate services agency highlighted that efforts to decongest have become more visible, with business parks and special economic zones being built in provinces outside Metro Manila, such as Cavite, Laguna, and Batangas, and in areas outside of Luzon, such as Cebu, Davao, Cagayan de Oro, and Zamboanga. Meanwhile, within Metro Manila, developers are exploring Quezon City and Bay City as potential central business districts, which could potentially spread out job opportunities, foot traffic, and even investments more evenly within Metro Manila. McCullough noted that Quezon City has shown a lot of potential, given its size, the presence of government institutions, educational institutions, and major broadcasting networks, and its extensive road and railway network. Another area that could potentially develop into a business district is Bay City, the reclaimed area located near Roxas Boulevard on Manila Bay, which currently houses the Mall of Asia and Entertainment City. Bay City is also the site of various business parks, such as Aseana Holdings Inc.-backed Aseana City, the SM-backed Future City, and the Metrobank Group-backed Metropolitan Park. “Previous investments by the government and the private sector have shown that these areas can grow into central business districts,” shared McCullough. “For both Quezon City and Bay City, it will be critical to provide more public transport options and ensure that social services are in place for these two areas to fully develop.”

1. Q3 Market Update
Media Round Table | November 26, 2014

2. real estate market overview
Very positive sentiment
Demand remains high in residential sector but moving towards lower segment
Local players have massive CAPEX plans to cover current constructions and new launches
Main drivers:
OFW remittances
IT-BPO industry
Domestic demand
Tourism
66%
9%
21%
4%
Office
Other
Dev site
Hotel
Transaction volume by type of use, last 12 months
Developer
CAPEX 2014
Ayala Land
Php 70B
SM Prime
Php 70B
Megaworld
Php 46B
Vista Land
Php 20B
Filinvest
Php 20B
Robinsons Land
Php 16B
Source: KMC MAG Group Research

3. real estate market overview
Mid end residential
Luxury residential
Office
Industrial
Retail
Late upswing
Early downswing
Late downswing
Early upswing
Sustained growth in demand, increasing construction
Positive but falling demand, increasing vacancy
Increasing demand, decreasing vacancy
Falling demand, decreasing vacancy
Source: KMC MAG Group Research

4. office market update
Attractive landlord’s market
Strong market performance
Driven by shortage of supply
New supply will put pressure on rental growth and vacancy rate
Rental growth will continue but will be more conservative
0.0
200.0
400.0
600.0
800.0
1,000.0
Rental Rate Php/sqm/month
Makati CBD
Bonifacio Global City
Ortigas
Grade A Office Market
Makati CBD
Bonifacio
Global City
Ortigas CBD
Rental rate
(PHP/sqm)
940.5
827.3
584.8
Source: KMC MAG Group Research

5. residential market update
Average net rental
levels Q2 2014
Average net rental
levels Q3 2014
Makati CBD
764.1
768.5
Bonifacio
Global City
868.5
874.3
Ortigas CBD
689.5
695.0
Slight increase in average rental rates from Q2 2014
Positive demand for residential market
Focus of developers is shifting to the lower segments from the luxury segment
Middle income market keeps demand buoyant
Source: KMC MAG Group Research

6. property bubble|the central bank’s measures
The high activity has raised issues of an overheated property market
The Central Bank introduced stress tests
Macro prudential measure
To ensure the banking industry’s healthy exposure to real estate lending
Good initiative to stabilise liquidity and restrain speculation
This will gear up the economy for the possible normalisation of global interest rates
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
In Billions PHP
Commercial REL
Residential REL
Bank Average Lending Rate
Reverse Repo Rate
Real estate loans and interest rates, 1999-1H/2014
Source: KMC MAG Group Research

7. upcoming cbd|quezon city
What makes Quezon City the next CBD?
Largest city in Metro Manila
Location of numerous government offices and headquarters of PNP & AFP
Home of major broadcasting networks
Major educational institutions
Extensive railroad and road network
What areas does QC need to become a full- fledged CBD?
Infrastructure interconnecting the sub- districts
Public transport options
Source: KMC MAG Group Research
Average Rental Rate
PHP 635.4/sq.m
Vacancy Rate
3.5%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
n Grade A Office

8. upcoming cbd|bay city
What makes Bay City the next CBD?
Entertainment City
Future tourism hotspot
Multiple business parks being built:
Aseana City
Metropolitan Park (Metrobank Group)
Future City (SM)
 What areas does Bay City need to become a full-fledged CBD?
Proper support infrastructure (roads, public transport, healthcare, etc.)
Source: KMC MAG Group Research
Average Rental Rate
PHP 589.2/sq.m
Vacancy Rate
2.04%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
n Grade A Office

9. decongesting metro manila
Key to decongesting Metro Manila is fixing the traffic and transport system
Poor infrastructure costs the PH P2.4B/day
All things needed to improve the situation is ready and waiting for the go signal
The plans are there: JICA Study
The money is there: the Philippines has the best credit ratings it has ever had (cheaper debt)
Why is there no go signal?
Main issue is lack of political will
Source: KMC MAG Group Research, JICA, NEDA

10. hotel & leisure industry
Tourism industry continues to welcome more arrivals each year
Biggest hindrance to growth is the vital infrastructure that provides accessibility to the country
 NAIA renovation is purely cosmetic, the infrastructure still lacks support for more planes to land
There is a need for more runways or airports in order to absorb more transit arrivals
The Hotel & Leisure industry is all about access
0
1,000,000
2,000,000
3,000,000
4,000,000
2010
2011
2012
2013
2014
Visitor Arrivals to the Philippines, January to August
2,355,628
2,626,134
2,832,207
3,180,903
3,268,542
Source: KMC MAG Group Research, DOT

11. hotel & leisure industry
Outside of Metro Manila, developers are focusing on Cebu, Boracay, and Palawan particularly in El Nido and San Vicente
Source: KMC MAG Group Research
Lio
Developed by Ayala Land
Located in El Nido, Palawan
Mactan Newtown
Developed by Megaworld
Located in Mactan, Cebu
Boracay Newcoast
Developed by Megaworld
Located in Boracay
Sta. Barbara
Developed by Megaworld
Located in Iloilo

12. Q3 Market Update
Media Round Table | November 26, 2014