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2019

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Philippines
Real Es
Esta
tatte R
Report
eport
Includes 5-year forecasts to 2023
Philippines Real Estate Report | 2019

Contents
Key View............................................................................................................................................................................................ 4

SWOT .................................................................................................................................................................................................. 5

Industry Forecast........................................................................................................................................................................... 6
Office Forecast............................................................................................................................................................................................................................... 6
Retail Forecast..............................................................................................................................................................................................................................11
Industrial Forecast......................................................................................................................................................................................................................15
Residential/Non-Residential Building ...............................................................................................................................................................................20

Macroeconomic Forecasts........................................................................................................................................................24
Philippines Will Struggle To Reverse Weakening Growth Momentum .................................................................................................................24

Market Overview..........................................................................................................................................................................27

Competitive Landscape.............................................................................................................................................................29

Philippines Demographic Outlook .........................................................................................................................................31

Real Estate Methodology ..........................................................................................................................................................34

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2019
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THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Key View
Key View: A deteriorating business environment and dwindling investor sentiment act as headwinds to commercial property
investment in 2019. Commercial assets in fringe markets are expected to encounter rising vacancies and lower demand.
Meanwhile, demand for core assets in prime locales will remain steady as quality remains the primary driver of occupier demand, but
external factors will still put downward pressure across the board.

The Philippine economy is among one of the strongest growth performers in the Association of South East Asian Nations (ASEAN)
region. Our real GDP growth forecasts for the Philippines is 6.2% in 2018 and 6.1% in 2019. The contraction can be attributed to
challenging business conditions and geopolitical risks such as a slowdown in China, volatile oil prices and the US-China trade war.
Despite a lull in headline growth this year, the Philippines continues to be viewed as a stable location for business in the ASEAN
region, with a number of regional and international companies seeking opportunities in a range of sectors.

Our view for the commercial property sector is that it will be cooling down for the short-to-medium term as unfavourable base
conditions will bring challenges to investment in 2019.

In the office sub-sector, there is a distinct possibility of a reversal in prices and rental trend as uncertainty over the outsourcing
industry mounts. The business process outsourcing (BPO) and offshore gaming industries are the primary demand drivers in the
office market. With a more protectionist US administration, where most of the outsourcing companies originate, there is growing
concern over the future for these companies who operate overseas. With this and a challenging business environment, demand for
office property is dwindling in secondary markets. Conversely, in Makati the office market is booming due to increased demand and
moderate supply. We expect rent to increase in Makati over 2019 as demand outstrips supply, whereas in Manila and Cebu concerns
of oversupply will put downward pressure on rental rates.

Sound macroeconomic fundamentals and a strong tourism sector foster demand for retail space from domestic and international
brands. Demand for retail assets is strongest in metro Manila, where the highest-grade premises can be found and rent is witnessing
steady increase. Property developers are aggressively seeking and competing for space in the limited Manila market, where low land
availability and strong demand is providing lucrative opportunities for landlords and investors. Strong development activity is
expected to see vacancies climb in Manila over 2019 with approximately 200,000sq m of retail space is expected to enter the
market in 2019, hence driving rent down. Property in Makati and Cebu is seeing moderate demand and increased supply which is
also causing a fall in rent prices.

Typically, the rise of e-commerce presents a real threat to brick-and-mortar retail space, while simultaneously providing
opportunities for investment in the industrial property market. In the Philippines, the slow penetration of e-commerce into the
country and a poor infrastructure network is limiting the appeal for many e-commerce operators seeking to expand into the ASEAN
region. The Duterte administration’s plans to develop key infrastructure should increase prospects for industrial property
investment in the long run and foster higher demand from logistics and distributions companies for industrial space. In the
meantime, we expect demand to remain subdued for industrial units as imports and exports slow down due to a slowdown in the
global economy.

Headwinds to the outsourcing industry and an unfavourable business environment are our primary concerns for stable investment
returns in the property sector. The commercial property sector will face downward pressure in the short term. Income producing
office and retail assets will continue to provide appealing investment returns in the medium term, although we highlight the gradual
introduction of e-commerce providing great opportunity to acquire value-added property with high yields and long-term
sustainability.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

SWOT
SWOT Analysis
Strengths • Strong ties with other ASEAN members and prominent Asian nations, such as China and Hong Kong, support
the Philippine economy and inward investment into domestic assets.
• Large population and high urbanisation rate support growth in the retail market, influencing demand for
retail space.
• A robust outsourcing industry maintains good demand for quality office property.
• Demand for core assets remains solid, supporting high returns on income producing commercial property
such as prime office and retail.

Weaknesses • The business environment appears to be deteriorating as the Duterte administration is more focused on the
war on drugs and domestic security threats.
• Saturated prime markets and limited land capacity will restrict available options for foreign players going
forward
• REITs are yet to penetrate the Philippine market; the sector remains inactive and immature.

Opportunities • Intensifying competition among developers and occupiers for grade A space supports rising rental costs.
• Growing demand for flexible workspace and co-working environments in the office sub-sector.
• Strong tourism and high spending activity supports the expansion of the retail sector, with good demand for
multi-use and mall developments.
• Significant infrastructure development provides long-term scope for the development of quality logistics
and distribution facilities.

Threats • US China trade war and uncertainty over free trade can affect trade from its key trading partners and reduce
demand for industrial units.
• Global economic slowdown and high inflation can affect remittances to the Philippines which a majority of
households rely on, thus decreasing household spending.
• The commercial property market remains segmented, with primary locations outperforming secondary and
fringe locales where demand is dwindling.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Industry Forecast
Office Forecast
Key View: Despite uncertainty surrounding the BPO industry, the office property market continues to record strong demand for
prime and grade A office stock particularly in Makati. Vacancies are kept low as new supply is absorbed quickly, particularly in
popular business locales such as central Manila and the Makati CBD. Office rent is forecast to decrease over 2019 in Manila and
Cebu, due to a gradual rate of incline because of aggressive development activity and unfavourable business conditions. Makati,
which is the country's financial hub, will continue to see increases in rentals.

Latest Updates

• The strong expansion of the Philippine economy up until 2018 was an appealing prospect for many domestic and international
businesses seeking to expand into the ASEAN region. Due to high rate of growth, the Philippines witnessed a steady flow of new
business into the country, with many companies seeking to establish themselves in core business districts within tier 1 (prime)
cities such as Manila and Makati.
• Many of the companies coming into the country comprise outsourcing ventures looking to take advantage of the well-educated,
English-speaking labour force that has already attracted myriad other outsourcing companies to the nation. This has boosted
the office market significantly, driving demand for premium grade facilities and attracting strong development activity.
• We are revising down our real GDP growth forecasts for the Philippines to 6.1% in 2019, from 6.3% previously. Private
consumption growth is expected to remain weak amid tightening monetary conditions, sustained elevated inflation and
declining consumer confidence.

Structural Trends

It is important to consider the implications of dwindling investor sentiment and poor business conditions, which have the potential
to influence a reversal in office prices and rent if conditions worsen as the Duterte administration is more focused on the war on
drugs and domestic security threat.

Real GDP Growth Cooling Down


Real GDP Growth (2017-2023)

e/f = Fitch Solutions estimate/forecast. Sources: National Statistical Coordination Board, Fitch Solutions
THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

As a key driver of office demand, the health of the services sector is a vital aspect of our analysis for the office property market. After
a period of healthy growth in 2017 the tertiary sector is anticipated to slow down to 1.7% in 2019, from a high of 10.5% y-o-y
growth in 2018. Companies in the sector will still necessitate demand for office stock, particularly high grade facilities, whereas lower
grade units will suffer the most.

Tertiary Services To Slow In The Short Term


Tertiary Services (2017-2023)

e/f = Fitch Solutions estimate/forecast. Source: Philippine Statistics Authority, Fitch Solutions

Manila remains a core location for domestic and foreign investment in the office market. The rental rate for office space in Manila is
witnessing a decrease due to moderate demand and increased supply. Supply levels rose in 2018 with 990,000sq m entering the
market and hence the vacancy rate increased slightly.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Oversupply Becoming An Issue In Rentals


Philippines - Average Office Rental Rates, USD per sq m

Source: Fitch Solutions

General demand continues to be driven by the BPO and online gaming sectors. We forecast a rental range of between USD13.7/sq
m and USD26.3/sq m, depending on the location and quality of the office asset, averaging USD20.0/sq m, down 3.3% y-o-y.

OFFICE RENTAL RATES, 2013-2019 (PER SQ M)


2013 2014 2015 2016 2017 2018 2019f

Manila USD per square metre min 12.20 12.10 11.94 12.87 12.71 14.32 13.69

Manila USD per square metre max 28.10 28.60 28.22 30.23 27.82 26.97 26.25

Average rent per square metre (USD) 20.15 20.35 20.08 21.55 20.26 20.64 19.97

% growth y-o-y na 0.99 -1.33 7.32 -5.96 1.87 -3.28

Manila PHP per square metre min 527.04 534.82 539.66 594.49 600.00 690.00 730.00

Manila PHP per square metre max 1,213.92 1,264.12 1,275.56 1,396.69 1,313.00 1,300.00 1,400.00

Makati City USD per square metre min 16.90 18.00 18.13 18.41 21.19 21.78 22.50

Makati City USD per square metre max 23.70 25.20 25.38 26.15 26.48 26.56 31.87

Average rent per square metre (USD) 20.30 21.60 21.76 22.28 23.83 24.17 27.18

% growth y-o-y na 6.40 0.72 2.40 6.99 1.41 12.47

Makati City PHP per square metre min 730.08 795.60 819.44 850.45 1,000.00 1,050.00 1,200.00

Makati City PHP per square metre max 1,023.84 1,113.84 1,147.22 1,208.02 1,250.00 1,280.00 1,700.00

Cebu City USD per square metre min 9.80 9.20 9.06 9.66 9.53 11.62 11.72

Cebu City USD per square metre max 18.60 19.20 19.08 20.10 18.01 17.63 17.44

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

2013 2014 2015 2016 2017 2018 2019f

Average rent per square metre (USD) 14.20 14.20 14.07 14.88 13.77 14.63 14.58

% growth y-o-y na 0.00 -0.90 5.75 -7.46 6.21 -0.34

Cebu City PHP per square metre min 423.36 406.64 409.57 446.22 450.00 560.00 625.00

Cebu City PHP per square metre max 803.52 848.64 862.50 928.74 850.00 850.00 930.00

na = not available; f = forecast. Source: Fitch Solutions

Another core location for many businesses seeking to expand into the Philippines is Makati, which offers tenants access to excellent
amenities, quality office stock and a skilled local labour force. Again, primary demand drivers are BPO and offshore gaming
companies, though information technology firms are also prevalent in the market here. As a result it has highest rental rates out of
the three cities. The demand from BPO companies has eased in recent quarters as the US administration looks to rein in
outsourcing companies operations, which has caused uncertainty and seen a number of US firms undergo consolidation in order to
reduce risk. That said, industry experts opine rental prices to increase over the near term as offshore gaming companies absorb the
drop in demand from BPO tenants, hence the city will witness double digit rental growth. Rental costs in the city are forecast to
range between USD22.5/sq m and USD31.9/sq m in 2019, averaging USD27.2/sq m, up 12.5% y-o-y.

Metro Cebu boasts the highest vacancies for office stock of the three cities we cover in our forecast; however, the city’s office sector
continues to perform well on the back of strong inbound investment from BPO companies who seek to capitalise on Cebu’s
favourable operating environment. Office prices and rental costs are lower than the rates found in Manila and Makati, which helps
the city to attract a steady stream of occupiers into the local market. The rental rate for office space in Cebu City is somewhat stable
due to increased demand and supply. The increase in demand is driven by the online gaming sector, where significant occupier
activity was witnessed over 2018. The BPO and KPO sectors continue dominating office space take up in the city. There is
approximately 400,000sq m of new supply expected between 2018-2020, with the majority of this space planned to be in Cebu
Business Park and Cebu IT Park. In terms of rental costs, we expect rates to maintain a slight downward trend in the near term due to
moderate supply. Rent here is forecast to range between USD11.7/sq m and USD17.4/sq m in 2019, averaging USD14.6/sq m,
down 0.3% y-o-y.

OFFICE YIELDS, 2013-2019 (%)


2013 2014 2015 2016 2017 2018 2019f

Manila net yield % 9-10 9-10 9-10 8-10 8-10 8-10 8-10

Manila yield spread % 3.2-4.2 3.5-4.5 3.5-4.5 3.5-5.5 3.5-5.5 1.7-3.7 1.2-3.2

Makati City net yield % 8-9 8-9 8-9 8-10 8-10 8-10 8-10

Makati City yield spread % 2.2-3.2 2.5-3.5 2.5-3.5 3.5-5.5 3.5-5.5 1.7-3.7 1.2-3.2

Cebu City net yield % 4.5-7 5-7 5-7 7-10 7-10 7-10 7-10

Cebu City yield spread % -1.3-1.2 -0.5-1.5 -0.5-1.5 2.5-5.5 2.5-5.5 0.7-3.7 0.2-3.2

Philippines interest rate (%) 5.8 5.5 5.5 4.5 4.5 6.3 6.8

f = forecast. Source: Fitch Solutions

Manila and Makati (8-10%) will offer the greatest net yield range of the three cities we cover in 2019, followed by Cebu (7-10%).
Strong demand and investment activity in the Manila and Makati CBDs has supported prime yields and seen spreads keep stable at
1.2-3.2%. Cebu is witnessing a similar scenario, with yield spreads at 0.2-3.2%. Reduction of 0.5% in spreads across the board
between 2018-2019 is due to rising interest rates.

A robust BPO industry and burgeoning economy presents a great opportunity for investment in the office sub-sector. Manila and

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Makati are the locations of choice under current economic and operating conditions, with rising rental costs and high yields offering
appealing returns. There is long-term scope in both cities for both developers and managers; however, the competition for space
may make it difficult to access the market. Thus, Cebu also presents an appealing opportunity, with rising rent and less competition
in the market. As a result, new players are able to capitalise on the booming market.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Retail Forecast
Key View: Steady remittances from overseas Filipino workers and resilient retail sales drove demand in the retail sub-sector.
However, rising inflation, a weaker peso and slowdown in global economic growth weighs on spending thus consumer spending in
the Philippines will fall in 2019. There is good demand for mall space in high footfall locations, such as central Manila, and for quality
space in submarkets from the MGR sector but rising supply will put further downward pressure on retail rent.

Latest Updates

• Luxury brands and modern Western retailers are yet to fully penetrate the retail market as a large proportion of the Filipino
population remain in the low-income bracket.
• Essential spending comprises the bulk of household budgets, and due to this the mass gross retail (MGR) and food and beverage
(F&B) sectors have been able to thrive. MGR and F&B sector retailers are the primary demand drivers in the retail property market,
with an appetite for space in retail strips and mall developments that offer exposure to high consumer footfalls.
• Quality retail space in central Manila is highly sought after from both domestic and international retailers, while Makati and Cebu
benefit from good demand for smaller retail formats that dominate these two locales.

Structural Trends

Household spending in the Philippines will slow to 5.3% in 2019, down from 5.8% in 2018, as economic growth slows and inflation
weighs on consumption. In US dollar terms, household spending growth will contract by 1.0% in 2019, down from growth of 6.4% in
2018, as we forecast the Philippine peso to continue to depreciate against the US dollar over 2019.

Total Household Spending To Slow Down As Global Economic Growth Slows


Total Household Spending (2017-2023)

e/f = Fitch Solutions estimate/forecast. Sources: National Statistics Office, Fitch Solutions

Household spending will grow at an annual average of 6.4% over the medium term to 2022, reaching USD333.3bn in 2022, up from
USD255.6bn in 2019. Essential goods purchases will continue to account for the majority of household spending as tax reform will
not be enough to lift the majority of Filipino families into the higher income brackets and a wide array of domestic and international
players cater to the country's more affluent consumers. Landlords are therefore focusing efforts on incorporating F&B tenants and
mini-major retailers into their offerings in order to attract steady streams of consumers.
THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

As the global economy slows down, particularly China, a key trading partner of the Philippines, both remittances and trade will be
affected. Hence, there will be a slight dip in disposable incomes in 2019 of around 0.7% y-o-y to USD2,692.4 per capita.

Disposable Incomes Facing A Slight Dip In 2019


Disposable Incomes (2017-2023)

e/f = Fitch Solutions estimate/forecast. Sources: National Statistics, Fitch Solutions

The retail property market in Manila continues to be the destination of choice among investors and occupiers, with a continuous
entry of local and foreign retailers driving demand for space. Demand is driven by the F&B industry, which occupies just under half
of the retail space in the city. Industry experts expect this number to grow to more than half over the next three years. A few F&B
retailers, such as Shake Shack, have signalled intentions to enter the market in the next few years.

Highest Prices In Makati


Philippines - Average Retail Rental Rates, USD per sq m

Sources: Fitch Solutions


THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Approximately 200,000sq m of retail space is expected to enter the market in 2019. Industry experts expect rental costs to
decrease over 2019 due to a slowdown in consumption and increased inflation. Rental rates in Manila are forecast to range
between USD17.8/sq m and USD30.9/sq m in 2019, averaging USD24.4/sq m, down 6.0% y-o-y.

RETAIL RENTAL RATES, 2013-2019 (PER SQ M)


2013 2014 2015 2016 2017 2018 2019f

Manila USD per square metre min 19.50 19.70 19.43 20.75 19.07 18.67 17.81

Manila USD per square metre max 30.60 31.00 30.55 32.92 32.84 33.20 30.93

Average rent per square metre (USD) 25.05 25.35 24.99 26.83 25.95 25.93 24.37

% growth y-o-y n.a. 1.20 -1.42 7.37 -3.28 -0.08 -6.02

Manila PHP per square metre min 842.40 870.74 878.17 958.58 900.00 900.00 950.00

Manila PHP per square metre max 1321.92 1370.20 1381.04 1520.84 1550.00 1600.00 1650.00

Makati City USD per square metre min 20.60 21.40 21.44 21.99 25.61 24.90 24.37

Makati City USD per square metre max 31.60 32.90 32.95 34.29 35.40 35.06 31.87

Average rent per square metre (USD) 26.10 27.15 27.20 28.14 30.51 29.98 28.12

% growth y-o-y n.a. 4.02 0.17 3.48 8.41 -1.73 -6.20

Makati City PHP per square metre min 889.92 945.88 969.21 1,015.83 1,209.00 1,200.00 1,300.00

Makati City PHP per square metre max 1,365.12 1,454.18 1,489.31 1,584.42 1,671.00 1,690.00 1,700.00

Cebu City USD per square metre min 12.10 11.50 11.36 11.92 18.01 18.67 16.87

Cebu City USD per square metre max 29.90 29.00 28.66 30.02 29.66 29.46 29.06

Average rent per square metre (USD) 21.00 20.25 20.01 20.97 23.83 24.07 22.97

% growth y-o-y n.a. -3.57 -1.18 4.78 13.68 0.97 -4.57

Cebu City PHP per square metre min 522.72 508.30 513.66 550.58 850.00 900.00 900.00

Cebu City PHP per square metre max 1291.68 1281.80 1295.32 1386.80 1400.00 1420.00 1550.00

f = forecast. Source: Fitch Solutions

The retail market in Makati is also being driven by F&B sector tenants, seeking space in performing malls and large-scale shopping
facilities. Rental costs are expected to decrease over 2019. Rent is forecast to range between USD24.4/sq m and USD31.9/sq m,
averaging USD28.1/sq m, down 6.2% y-o-y. There continues to be concern over the dominance of local developers in the market
that have made it difficult for foreign firms and new entrants to acquire space in the market. However, we are observing a more
accommodating approach to foreign companies that should allow for a fairer retail landscape in Makati going forward and should
encourage greater foreign demand and investment.

Smaller retail formats dominate the market in Cebu, with small chain and budget retailers comprising the majority of occupancies.
Accessibility is the primary driver of demand from theses tenants, and space in the Cebu market accommodates smaller firms and
domestic institutions that are unable to compete with larger retailers that dominate space in primary markets. The increase in
demand is driven by the tourism industry. Furthermore, the Mactan-Cebu International Airport was modernised in 2018, adding a
THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

new terminal which will raise the airports annual capacity. Rent for retail property here are forecast to range from USD16.9/sq m to
USD29.1/sq m in 2019, averaging USD23.0/sq m, down 4.6% y-o-y. Notable additions coming to the market include the Corso
development (36,000sq m GLA) from Filinvest and the Central Bloc Mall (43,000sq m GLA) that will cater to the future expansion of
the Cebu retail market, completed in 2018, which may place downward pressure on rental rates as vacancy rates rise.

RETAIL YIELDS, 2013-2019 (%)


2013 2014 2015 2016 2017 2018 2019f

Manila net yield % 7-11 7-11 7-11 8-10 8-10 8-10 8-10

Manila yield spread % 1.2-5.2 1.5-5.5 1.5-5.5 3.5-5.5 3.5-5.5 1.7-3.7 1.2-3.2

Makati City net yield % 8-9 8-9 8-9 9-10 9-10 9-10 9-10

Makati City yield spread % 2.2-3.2 2.5-3.5 2.5-3.5 4.5-5.5 4.5-5.5 2.7-3.7 2.2-3.2

Cebu City net yield % 6-9 6-9 6-9 6-8 6-8 6-8 6-8

Cebu City yield spread % 0.2-3.2 0.5-3.5 0.5-3.5 1.5-3.5 1.5-3.5 -0.3-1.7 -0.8-1.2

Philippines interest rate (%) 5.8 5.5 5.5 4.5 4.5 6.3 6.8

f = forecast. Source: Fitch Solutions

Makati (9-10%) will offer the highest yields for retail space in 2019. Manila (8-10%) will follow close behind with a slightly
compressed yield range, while Cebu (6-8%) will offer a more subdued yield range over 2019. An increasing interest rate
(6.3-6.5% between 2018 and 2019) will reduce yields through the forecast period to 2019.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Industrial Forecast
Key View: Robust demand for industrial property is underpinned by increasing foreign investment, strong bilateral trade and
growing demand from the retail sector as opportunities in the MGR and online shopping sectors flourish. However, all three cities
are forecast to witness a decrease in rental costs due to weak occupier demand and weak trade sentiment.

Latest Updates

• Industrial property is a competitive asset in the commercial property sector. Prices and yields are favourable.
• We are observing increasing foreign investment and domestic activity in the industrial property market following a boost in
demand from mass grocery retail (MGR) retailers, and from the emergence of online shopping retailers, such as the
conglomerate Alibaba.
• Industrial lot rentals are expected to face negative growth in the near term on the back of weak global economic growth,
particularly a slowdown from China.

Structural Trends

Trade growth remains a key demand driver for the industrial property sector. In light of stronger trade agreements made with
prominent trading nations (China and Hong Kong). Export volumes are forecast for a 6.5% y-o-y rise to USD111.7bn in 2019,
whereas growth in 2018 was 9.0% y-o-y. Imports will witness a similar 6.5% rise to USD147.6bn in 2019, whereas growth in 2018
was 9.7% y-o-y. The dated infrastructure network and rising operational costs in light of subsidy cuts presents challenges in addition
to raising trade wars and global trade volatility.

Goods Imports & Exports Decelerating


Goods Imports & Exports (2017-2023)

e/f = Fitch Solutions estimate/forecast. Sources: National Statistical Coordination Board, Fitch Solutions

The manufacturing industry benefits from radio, television and communications manufacturers who are beneficiaries of the global
demand for electrical goods. Setbacks in the manufacturing industry will arise as China's economy cools down and falling global
demand results in a decline in production volumes. Manufacturing nominal GVA contribution is expected to see no growth in 2019
and settle at USD70.6bn.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Manufacturing Output To Decline


Manufacturing Output (2017-2023)

e/f = Fitch Solutions estimate/forecast. Sources: Philippine Statistics Authority, Fitch Solutions

Other opportunities arising in the industrial property spectrum involve the burgeoning MGR retail sector, with MGR chains spreading
rapidly across the country and penetrating remote areas with great efficiency. This is driving demand for big box storage and tailored
warehousing, as well as contemporary distribution facilities in key industrial hubs. Online retail will also contribute to this, with the
entrance of Alibaba signifying strong confidence in the market that should encourage greater demand from global retail
organisations. However, this is reliant on the efficacy of Duterte’s infrastructure programme and the fast implementation of
supportive foreign policy that currently restricts international organisations in a number of sectors.

Approximately 1.4mn sq m of additional supply is expected over the next three years in Manila, with the majority of this located in
the Calaba and Batangas regions. The market continues to witness interest from foreign companies, such as Eastern Petroleum
Group, who plan to open a vehicle assembly plant for Russian based GAZ Group in the next three years. However, industry experts
advise that there has been a decrease in interest from foreign investors compared to previous years. This partly added to
uncertainty around the implementation of the second phase of the Tax Reform for Acceleration and Inclusion (TRAIN) Act.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Manila To Remain The Top Market


Philippines - Average Industrial Rental Rates, USD per sq m

Source: Fitch Solutions

In terms of rental costs, industrial lots in the Manila market are forecast to remain the highest of the three cities we cover, coming in
at a range between USD3.8/sq m and USD5.4sq m, averaging USD4.6/sq m, down 4.8% y-o-y. As aforementioned, the
government’s pipeline of infrastructure projects will be imperative to the industrial property sector, as it will provide a much more
efficient network for industrial operators to use.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

INDUSTRIAL RENTAL RATES, 2013-2019 (PER SQ M)


2013 2014 2015 2016 2017 2018 2019f

Manila USD per square metre min 3.30 3.30 3.26 3.55 3.86 3.94 3.75

Manila USD per square metre max 6.30 6.30 6.24 6.70 5.78 5.71 5.44

Average rent per square metre (USD) 4.80 4.80 4.75 5.12 4.82 4.82 4.59

% growth y-o-y n.a. 0.00 -1.07 7.90 -5.93 0.08 -4.78

Manila PHP per square metre min 142.56 145.86 147.18 163.78 182.00 190.00 200.00

Manila PHP per square metre max 272.16 278.46 282.10 309.66 273.00 275.00 290.00

Makati City USD per square metre min 4.50 4.80 4.72 4.98 5.38 5.39 4.87

Makati City USD per square metre max 8.30 8.70 8.61 9.23 10.17 10.37 9.66

Average rent per square metre (USD) 6.40 6.75 6.67 7.11 7.78 7.88 7.26

% growth y-o-y n.a. 5.47 -1.26 6.64 9.40 1.39 -7.85

Makati City PHP per square metre min 194.40 212.16 213.56 230.09 254.00 260.00 260.00

Makati City PHP per square metre max 358.56 384.54 388.97 426.65 480.00 500.00 515.00

Cebu City USD per square metre min 3.40 3.50 3.42 3.61 2.54 2.59 2.25

Cebu City USD per square metre max 8.10 8.10 8.04 8.43 4.98 4.98 4.69

Average rent per square metre (USD) 5.75 5.80 5.73 6.02 3.76 3.79 3.47

% growth y-o-y n.a. 0.87 -1.14 5.00 -37.54 0.68 -8.40

Cebu City PHP per square metre min 146.88 154.70 154.77 166.65 120.00 125.00 120.00

Cebu City PHP per square metre max 349.92 358.02 363.58 389.64 235.00 240.00 250.00

na = not available. Source: Fitch Solutions

Demand in Makati is driven by the manufacturing sector. With the slow down in manufacturing, vacancy rates are expected to rise.
Rents range between USD4.9/sq m and USD9.7/sq m in 2019, averaging USD7.3/sq m, down 7.9% y-o-y. A lack of available space
for prospective development will continue to limit interest into the market and drag on rental costs over the long term.

Cebu is subject to increasing foreign investment flows and growing demand from domestic operators that is boosting the industrial
property market. Cebu as an emerging opportunity in the industrial property sub-sector, although, much akin to the Manila market,
infrastructure development remains a vital component to the health of the local market due to the savings on logistics and
feasibility of transport. Industry experts advise that the market is witnessing a shift from the core areas in the city due to limited
availability of space. In terms of rent, rates are set to fall in 2019, coming in at a range between USD2.3/sq m and USD4.7/sq m,
averaging USD3.5/sq m, down 8.4% y-o-y, the highest fall out of the three cities we cover.

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Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

INDUSTRIAL YIELDS, 2013-2019 (%)


2013 2014 2015 2016 2017 2018 2019f

Manila net yield % 5-8 5-8 5-8 4-8 4-8 4-8 4-8

Manila yield spread % -0.8-2.2 -0.5-2.5 -0.5-2.5 -0.5-3.5 -0.5-3.5 -2.3-1.7 -2.8-1.2

Makati City net yield % 7-8 7-8 7-8 7-8 7-8 7-8 7-8

Makati City yield spread % 1.2-2.2 1.5-2.5 1.5-2.5 2.5-3.5 2.5-3.5 0.7-1.7 0.2-1.2

Cebu City net yield % 7-8 7-8 7-8 5-12 5-12 5-12 5-12

Cebu City yield spread % 1.2-2.2 1.5-2.5 1.5-2.5 0.5-7.5 0.5-7.5 -1.3-5.7 -1.8-5.2

Philippines interest rate (%) 5.8 5.5 5.5 4.5 4.5 6.3 6.8

f = forecast. Source: Fitch Solutions

Net yields will remain stable over the forecast period to 2019, with the highest range found in the Cebu market with a range of
5-12%, the spread is at -1.8-5.2% due to rising interest rates and raises concern as to the fluctuation of return on investment ROI.
Makati comes in with a net range of 7-8% and a more narrow spread of 0.2-1.2%, while Manila follows a similar higher rate of 4-8%,
though ranging down to 4.0%, with a spread of -2.8-1.2%.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Residential/Non-Residential Building
Key View: Growth in the Philippines' residential and non-residential buildings sector will remain strong over the coming decade,
driven by the country's rapid urbanisation, strengthening tourism sector, and continued private and foreign investment in industrial
real estate projects.

Latest Updates

• The Philippines' residential and non-residential buildings sector will grow by 11.0% in real terms in 2019, 10.8% in 2020 and at an
annual average of 9.6% between 2019 and 2028. Both the residential and non-residential building sectors will record strong
expansion trends, as robust macroeconomic growth supports public, private and foreign investment in residential, commercial
and industrial building projects.
• In June 2018, Bloomberry Resorts Corporation reiterated plans to build a second integrated resort in the Metro Manila
region. The 15,000sq m property, located in the Vertis North area of Quezon City, will be developed under the Solaire brand. A
master plan for the high-rise hotel and casino resort is expected to be presented by January 2019, with construction expected to
begin by mid-2019. The project reflects how the strengthening tourism sector in the Philippines is driving private investment in
non-residential buildings.
• In August 2018, Megaworld is set to invest PHP28bn (USD528.3mn) over the next 10 years to build a central business district in
Bacolod city, Philippines. The project, known as The Upper East, will be a 340,000sq m mixed-use development comprising
residential condominiums, malls and commercial centres, mixed-use buildings, office towers and hotels.
• In June 2018, Taiheiyo Cement Corporation announced plans to invest PHP3.5bn (USD65mn) to expand its San Fernando
cement facility in Cebu. In October 2018, Holcim Philippines announced it will increase the cement-production capacity of its
plant in La Union, Luzon, from 1mn tonnes per annum (mntpa) to 1.8mntpa by H119. In October 2018, a unit of CEMEX
Holdings Philippines (CHP) selected Chinese firm CBMI Construction Co as the main contractor for a new cement
production line in Antipolo, which is expected to add 1.5mn metric tonnes per annum to the plant’s existing capacity. The
scheme will require an estimated investment of USD235m. These projects are reflective of how strong growth in the
construction sector has led to increased demand for construction materials, and associated industrial production facilities.
• In January 2019, Duros Land Properties is reported to be in negotiations with China's Hang Lü Group for a hotel project on
Panglao Island in the Philippines' Bohol province. The 3,000sq m property will be built outside the new Bohol-Panglao
International Airport. The building will be constructed as a condominium but will be operated as a hotel that offers both short-
and-long term stays. Duros will build the property and thereafter lease the whole space from Hang Lü, including the hotel
operations. The hotel is scheduled for opening in H120 (Hotel Management).

PHILIPPINES - RESIDENTIAL & NON-RESIDENTIAL BUILDING INDUSTRY FORECASTS


Indicator 2018e 2019f 2020f 2021f 2022f 2023f 2024f 2025f 2026f 2027f 2028f

Residential and non-residential building industry


12.2 11.0 10.8 9.8 9.6 9.2 8.5 8.5 8.5 8.5 8.5
value real growth (%)

Residential Building Industry Value Real Growth


10.1 10.4 9.8 9.7 8.6 8.6 8.1 8.1 8.0 8.0 8.0
(%)

Non-residential Building Industry Value Real


28.7 12.3 12.8 10.1 11.3 10.3 9.2 9.2 9.3 9.3 9.3
Growth (%)
f = Fitch Solutions forecast. Source: Central Bank, National Statistical Coordination Board, Fitch Solutions

Structural Trends

2019-2028: Strong, Sustained Growth

Growth in the Philippines's residential and non-residential building sector will remain robust over the coming years, supported by
public-and-private investment in real estate, commercial developments and industrial facilities. Within the residential component,
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Philippines Real Estate Report | 2019

strong demand for homes coupled with government affordable housing plans will drive construction projects over the next decade.
Within the non-residential component, a thriving tourism sector and positive economic growth is facilitating investment in hotels,
offices and factories. Overall strength in the construction industry is also generating demand for construction-related materials, and
will spur investment in steel and cement manufacturing facilities. We currently forecast the Philippines's residential and non-
residential building sectors to grow at an annual average of 9.3% between 2019 and 2028, among the fastest in Southeast Asia.

The use of public-private partnership (PPP)s will continue to draw significant interest from the private sector, despite a track record
of having past projects delayed. President Rodrigo Duterte has promised to uphold all existing PPP contracts while significantly
reviewing the framework to improve efficiency and effectiveness. Downsides to our forecast include an underdeveloped credit
market, volatile foreign direct investment inflows and a risky business environment.

Robust Residential Performance


Philippines - Residential & Non-Residential Building Industry Forecasts

Source: Philippine Statistics Authority, Fitch Solutions

Residential: Private And Public Investment Provide Support

The Philippines' residential-building segment will be supported by a robust private real-estate market combined with government
initiatives to bridge the country's housing shortage. In 2017, building permits approved for the residential sector remained stable on
2016, with about 110,000 permit numbers. The housing market continues to show signs of strong growth in 2018, with more than
29,000 residential-construction permits issued in Q218, an 8,3% increase over Q217. Housing prices, particularly in Metro Manila/
National Capital Region, remain strong, fuelling investment interest. In view of these positive factors, we forecast growth in the
residential-building sector will average 8.7% in real terms between 2019 and 2028.

A slight downside risk to our forecast come from our Country Risk team's expectation that the Bangko Sentral ng Pilipinas will raise
its benchmark interest rate by a total of 50 basis points by end 2018, with the view that the current rate of 3% is too low given
economic growth and inflation trends. However, we do not believe this will significantly affect the residential building segment in the
long term, given the Philippines' strong market fundamentals and persistent housing shortage.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Housing Prices Remain Elevated


Philippines - Housing Price Index By Region

Note: 2014 Q1 = 100. Source: BPS, Fitch Solutions

Non-Residential Building: Rising Demand From Offices And Industries

The non-residential segment is also set for strong growth over the next-10 years, averaging 10.3% in real terms between
2019-2028, as sustained demand and falling vacancy rates in offices and industrial space will support new construction. 2018 is
showing strong signs of growth with building permit applications for non-residential buildings in Q218 rising by 16.1% compared to
Q217. Manila's office vacancy rate of 2.4% is the lowest among major cities in Asia, according to real estate firm Cushman &
Wakefield, while a separate report from Colliers International said it expects office demand to grow by 8% over the next year.
These factors will sustain growing investments in the construction of offices over the next decade. For investors and developers,
opportunities will be supported by the Philippines' liberal investment climate, which has few foreign ownership restrictions and is
therefore welcoming to international and private investors.

Growth in non-residential buildings construction will also be boosted by government-led social-infrastructure projects, many of
which are being launched as public-private partnerships (PPPs). Notable initiatives in the pipeline include upgrading and
modernisation works for courthouses across the Philippines, an office building for the Department of Trade and Industry, and
construction and maintenance of a PHP50.2bn (USD974mn) prison. The previous Aquino government also turned to PPPs to build
schools and hospitals in the past. We expect a number of larger-scale social-infrastructure projects to be launched as PPPs in the
future, given the growing population's need for education and healthcare facilities.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

PHILIPPINES - MAJOR CONSTRUCTION AND SOCIAL INFRASTRUCTURE PROJECTS


Project Name Sector Value Size Unit Companies Timeframe Status
(USDmn) End

Resorts World Commercial 1,100 Alliance Global Group 2018 Under


Bayshore City Construction (AGI)[Operator](95){Philippines}, construction
(RWBCI) Project, Genting Group
Pagcor HongKong[Operator]{Hong Kong}
Entertainment
City, Paranaque,
Metro Manila

Fort Magsaysay Other 1,070 Department of Justice - 2019 In tender/


Regional Prison Philippines[Operator]{Philippines} Tender
Facility, Nueva launched
Ecija, Central
Luzon

Balara Water Hub Commercial 465 750000 square Metropolitan Waterworks and At planning
Project, Quezon Construction metres Sewerage System stage
City, Metro Manila (MWSS)[Sponsor]{Philippines}

Cemex Cement Industrial 300 1500 '000 tonnes Cemex[Operator]{Mexico} 2019 At planning
Plant Expansion, Construction stage
Central Luzon

Eagle Davao Industrial 300 2000 '000 tonnes Eagle Cement 2017 Under
Cement Construction Corporation[Operator]{Philippines} construction
Production
Facility, Davao
Region

Note: na = not available. Source: Fitch Solutions Key Projects Database

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Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Macroeconomic Forecasts
Philippines Will Struggle To Reverse Weakening Growth Momentum
Key View

• We are revising down our real GDP growth forecasts for the Philippines to 6.2% in 2018 and 6.1% in 2019, from 6.3% previously.
• We expect private consumption growth to remain weak amid tightening monetary conditions, sustained elevated inflation, and
declining consumer confidence.
• Additionally, the declining business environment and tax uncertainty surrounding the government’s fiscal reforms are likely to
weigh on private investment over the coming quarters.

The Philippines recorded real GDP growth of 6.1% y-o-y in Q318, which was slightly down from an upwardly revised rate of 6.2% y-o-
y in the previous quarter. This brought the cumulative growth in the first nine months of 2018 to 6.3% y-o-y, versus 6.8% y-o-y in the
same period a year ago. We believe that the Philippine economy will struggle to reverse its waning growth momentum over the
coming quarters owing to tighter monetary conditions, deepening trade tensions, as well as a declining business environment.
Accordingly, we are lowering our forecasts for real GDP growth to come in at 6.2% for 2018 and 6.1% in 2019, from 6.3% previously.

Slowing Growth Momentum To Face Further Headwinds


Philippines - GDP By Expenditure Breakdown, % chg y-o-y

Source: PSA, Fitch Solutions

According to the Philippine Statistics Authority, private consumption growth slowed significantly to 5.2% y-o-y in Q318, from 5.9% y-
o-y in Q218, and was the main reason for the growth deceleration, alongside weaker fixed capital formation, which also decelerated
to 16.7% y-o-y (from 21.5% y-o-y).

Tightening Monetary Conditions And Elevated Inflation To Weigh On Consumption

The slowdown in private consumption and investment growth was in line with our view, and we continue to expect both GDP
components to perform poorly over the coming quarters. In our view, private consumption growth is likely to remain soft over the
coming quarters owing to declining consumer confidence, tightening monetary conditions, and sustained high inflation. According
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Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

to the Consumer Expectation Report released by the Bangko Sentral Ng Pilipinas (BSP) in Q318, the leading confidence index for
Q418 and the year ahead dipped to 3.8% (from 8.7%) and 13% (from 23.1%), respectively. This means that consumers’ optimism
turned less positive, while a negative index would indicate that the pessimists outnumbered the optimists. The reasons cited were
expectations of high prices of goods, low salary or income, and rise in expenditures.

Meanwhile, we believe that the rate hiking cycle in the Philippines and in the US is far from over, given the expansionary fiscal stance
in both countries, which is exerting upside pressure on inflation. Consumer price inflation (CPI) in the Philippines came in at 6.7% y-
o-y in October, holding steady from the previous month, but this remained significantly higher than the BSP’s target of 3±1%.
Furthermore, the BSP is unlikely to keep real interest rates in negative territory as this would remove a crucial support for the peso,
particularly at a time when risk aversion is rising globally, and the US Fed is maintaining a hawkish stance. We therefore forecast the
BSP to hike its policy interest rate by an additional 25bps to 4.75% by the end of 2018, and by another 75bps to 5.50% by
end-2019. The rising interest rate environment is likely to dampen consumer spending.

In Danger Of Dipping Into Negative Territory


Philippines - Consumer Confidence Index

Source: BSP, Fitch Solutions

Declining Business Environment And Tax Uncertainty To See Private Investment Slow Further

We also expect fixed capital formation to slow over the coming quarters as the strong public-led investment drive under Duterte’s
flagship ‘build, build, build’ programme is unlikely to offset a slowdown in private investment growth. Looking at the business
environment, the Philippines dropped 11 notches at the World Bank’s 2019 Ease of Doing Business Index to 124th position, from
113th in the 2018 edition. In total, the Philippines’ ease of doing business ranking has dropped by 25 positions since 2017 (from
99th), marking the largest decline in ASEAN and placing it just above the three frontier markets in the region – Cambodia, Laos, and
Myanmar. The Philippines not only saw its ranking decline but also its score, suggesting that the archipelago is becoming less
business friendly not just relative to its peers, but also in absolute terms.

Moreover, the implementation of the second package of the Tax Reform or Tax Reform for Attracting Better and High-Quality
Opportunities (TRABAHO) appears to be creating uncertainty for businesses. The tax bill passed the third and final reading by the
House of Representatives on September 4, and is set to be reviewed by the Senate before it goes to President Duterte. TRABAHO
seeks to reduce corporate income tax rate, but the lost revenue would be recovered through the reduction and the rationalisation
of existing fiscal incentives. Foreign companies operating in special economic zones are spooked by the prospects of the tax bill
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Philippines Real Estate Report | 2019

being passed and have threatened to leave and relocate to other countries in the region like Vietnam. For instance, according to a
survey done by the Japanese Chamber of Commerce and Industry of Cebu, Inc. (JCCICI) on 99 member firms, more than a quarter of
them plan to pull out their investments in the country if the opposed tax reform pushes through. Even if the tax reform bill falls
through (which seems unlikely after the amount of deliberation), the uncertainty would slow investment growth in the coming
months.

Risks To Outlook

Risks to our growth forecasts are weighted to the downside. Deepening trade tensions between China and the US are weighing on
global risk sentiment, and a faster-than-expected rate hiking cycle in the US could exacerbate a possible capital flight to safety,
weighing on foreign investment further. The Philippines has rebalanced towards China under President Duterte, but the two
countries continue to be at odds regarding maritime claims in the South China Sea. A flare-up of tensions between both sides
would damage economic cooperation and could see China pull out of infrastructure investments in the Philippines.

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Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Market Overview
Key View: The Philippine commercial property sector continues to witness strong overseas investment, particularly from the
ASEAN region. Office, retail and industrial markets are driven by the BPO sectors. The slow development of infrastructure and the
Duterte administration's strong stance on foreign corporate expansion into the Philippine market are setbacks that weigh on overall
demand in addition to the slowdown in the global economy, particularly in China.

The Philippine property investment market is one of the more attractive property markets in the ASEAN bloc thanks to a positive
economic backdrop and educated labour force. That said, the commercial property sector is beset by geopolitical turbulence,
dwindling investor confidence and slow reforms momentum. This is set to have an impact on the commercial real estate sectors as
a whole, limiting demand and growth.

Amid signs of a slowdown in the Chinese property market and stronger bilateral trade, Chinese investors are increasingly seeking
opportunities for capital growth in the Philippine property market. Further abroad, there is growing demand from European
companies who seek to get a foothold in the ASEAN market. However, an unorthodox stance on foreign companies by the Duterte
organisation is deterring some EU companies from entering the market, which has seen a number of potential investors seek
opportunities in regional markets.

Real Estate Investment Trusts (REITs) are yet to fully establish themselves in the Philippine commercial property market. Barriers to
entry in the form of a lackluster investment framework and an unsupportive regulatory environment are preventing the
proliferation of REITs in the domestic property market. The 12% GVA tax levy implemented by the Bureau of Internal Revenue (BIR) is
of particular concern as most of the profits generated by REITs are already passed onto the investor, and the addition of this tax
incurs little reward for these institutions while operational costs are high. Until the government tackles the tax and implements a
proper framework, we expect the REIT sector to remain dormant.

Office

Demand for grade A space is on the rise in Makati city due to the growing BPO industry and its reputation as a financial hub and as a
result is facing increasing rental rates. Bonifacio Global City, in Metro Manila, is an increasingly popular business location, and
increasingly popular for BPO firms. It is, however, facing a supply glut and hence rates in manila are on the decline. Cebu, meanwhile,
is a more established centre of the global BPO industry, and demand in the city remains moderate.

Other key developments include Ayala Land's redevelopment, announced in April 2015, of the Food Terminal property in Metro
Manila into a new central business district. Over five years, Ayala plans to invest PHP80bn in the project, named Arca South.

Retail

Metro Manila is the focus of most of the country's retail activity, but other urban areas are gaining on the capital as business centers
grow throughout the country, boosting city populations and affluence, and the Manila and Makati markets gradually mature.
Vacancy rates in Manila and Makati are rising as supply increases, with low uptake of new space. Cebu's retail real estate market
remains largely dominated by domestic companies, in the food and beverage due to greater tourism numbers and the expanding
BPO industry. Large malls are popping up, particularly around the city centre, where there is plenty of space for such development,
while urban areas in general are seeing more modern retail replacing traditional format markets. The increase in supply of units, rise
in inflation and slowdown in household spending will keep downward pressure in rental rates in the short-to-medium term.

Major developers such as Ayala Malls, SM Prime Holdings and Robinsons Land Corporation are active across the country,
with major developments in the pipeline. Demand is not only on the rise for large malls and shopping centres but also for
convenience and local stores. Despite the lack of major international grocery retailers, local convenience stores, supermarket and
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Philippines Real Estate Report | 2019

hypermarket operators have been expanding aggressively, ahead of what is seen as the inevitable entry of a giant international
player.

Two new projects by Ayala Land look to increase the company's portfolio in Metro Manila, with key acquisitions and partnerships.
These are the 58,000sq m Circuit Mall in Makati and the 73,000sq m Arca South Taguig Phase 1 facility.

The government's goal of establishing the Philippines as a tourism and gaming hub has taken a significant step forward with Belle
Corp and Melco Crown Entertainment (MCE)'s plans to open a USD1bn casino complex. A USD5bn development of casinos
along a stretch of Manila's coast reflects growing confidence in a country where consumer purchasing power is rising and the
government has committed to heavy investment in infrastructure. However, downside risks exist in the form of a sharper-than-
expected Chinese economic slowdown and increasing competition from other countries in the region.

Industrial

The major manufacturing areas in the Philippines are mostly in the environs of Metro Manila, and include the freeport zones of Clark
and Subic and the region of Calabarzon, notably the high-tech hubs of Cavite and Laguna.

Demand for industrial space is closely linked to the strength of the export market, with trade growth slowing the need for
warehousing and logistics facilities is limited, as well as wider manufacturing activity. Industrial rental rates have been largely
stagnant over recent quarters, following sluggish growth in both the Philippines' manufacturing and export sectors. We have begun
to see public-private partnerships (PPP) in the industrial sphere. The municipality of Minglanilla, in Cebu, has a PPP with Ming-Mori
Development Corporation to develop the Minglanilla Reclamation and Industrial Park.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Competitive Landscape
Key View: Domestic institutions continue to hold a monopoly on the domestic commercial property market as corporate policy
remains in favour of local firms. President Duterte’s efforts to cut red tape and boost infrastructure development bode well for
foreign investment flows over the long term. However, saturated prime markets and limited land capacity will restrict available
options for foreign players going forward.

Firms with a significant presence in the Philippine commercial real estate industry include SM Prime Holdings, Ayala Land,
Century Properties, Megaworld, Robinsons Land Corporation and DMCI Holdings.

Property Developers

The key property developers in the Philippines tend to be large conglomerates. Significant development sub-sectors have included
business process outsourcing (BPO) space and call centres.

Ayala Land is one of the largest Philippine real estate developers. It has a number of business lines, including property development,
commercial leasing and services. Notable areas of focus include corporate headquarters, BPO complexes and residential space.
Subsidiaries include Laguna Technopark and Ayala Property Management Corporation. In total, it has 12 office buildings and malls
in 17 locations across the Philippines. According to its website, Ayala Land (ALI) posted a net income of PHP20.8 bn the first three
quarters of 2018. The company opened One Bonifacio Highstreet in Bonifacio Global City, in October 2018. ALI’s total shopping
center portfolio in 2018 was 1.8mn sq m of gross leasable space.

SM Prime primarily develops retail outlets, although its portfolio also includes office real estate. It continues to expand the E-com
hub in the Mall of Asia and develop stand-alone BPO buildings across Metro Manila. In 2013 it embarked on a landmark merger that
consolidated its businesses real estate assets. This allows it to develop its own mixed-use projects, beginning with the Mall of Asia
Complex in Pasay City. It has 72 malls in the Philippines and seven shopping malls in China, totaling 9.5mn sq m of Gross Floor Area
(GFA).

Megaworld is listed on the Philippine Stock Exchange Composite Index. It principally develops and manages BPO offices and
industrial parks, as well as residential and other real estate outlets. It is building the 18ha Eastwood City in Libis, Quezon City. As well
as having a residential component, the complex, has nine malls in its portfolio.

According to DMCI Holdings' 2012 annual report, its subsidiary DMCI Homes posted PHP2.2bn net contribution to the holding
company's annual income and posted about PHP9.2bn in revenues.

Science Park of the Philippines (SPPI) develops industrial estate and has a strong foothold in the industry. It has developed Light
Industry & Science Parks I and II, which host major domestic and international companies, and is currently developing three estates:
LISP III, Batangas, Cebu Light Industrial Park and Hermosa Ecozone Industrial Park. Other projects in development include three
industrial estates: LISP III, a 109ha industrial estate in Sto Tomas, Batangas, accessible from Manila via the South Luzon Expressway;
Cebu Light Industrial Park, a 62ha industrial estate which will have the country's largest desalination plant and the Hermosa
Ecozone Industrial Park, a 162ha industrial park in Bataan.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Property Managers

CPMI is the largest property management company in the Philippines. It is the first independent company to make use
of international standards in the Philippine market. With 60 buildings in its management portfolio, CPMI manages a total area of
about 3.3mn sq m, totalling USD3.5bn of assets managed. It services commercial and residential properties.

SM Prime is the largest mall operator in the Philippines and controls 72 malls across the country, and seven in the China with a
combined GFA of around 9.5mn sq m. Its portfolio also includes 11 office building totalling 0.6mn sq m.

Commonly recognised as the Philippines' second largest mall operator, Robinsons Land Corporation, incorporated in 1980, is the
real estate arm of JG Summit, one of the country's largest conglomerates. The company operates 40 shopping malls nationwide
and 13 office buildings in Metro Manila and Cebu.

In terms of management, despite the strength of local players, we believe the best opportunities for commercial real estate
management will be in the Metro Manila area.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Philippines Demographic Outlook


Demographic analysis is a key pillar of our macroeconomic and industry forecasting model. Not only is the total population of a
country a key variable in consumer demand, but an understanding of the demographic profile is essential to understanding issues
ranging from future population trends to productivity growth and government spending requirements.

The accompanying charts detail the population pyramid for 2017, the change in the structure of the population between 2017 and
2050 and the total population between 1990 and 2050. The tables show indicators from all of these charts, in addition to key
metrics such as population ratios, the urban/rural split and life expectancy.

Population
(1990-2050)

f = Fitch Solutions forecast. Source: World Bank, UN, Fitch Solutions

Philippines Population Pyramid


2017 (LHS) & 2017 Versus 2050 (RHS)

Source: World Bank, UN, Fitch Solutions

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

POPULATION HEADLINE INDICATORS (PHILIPPINES 1990-2025)


Indicator 1990 2000 2005 2010 2015 2020f 2025f

Population, total, '000 61,947.3 77,991.6 86,274.2 93,726.6 101,716.4 109,703.4 117,664.7

Population, % y-o-y 2.17 1.88 1.63 1.61 1.48 1.36

Population, total, male, '000 31,292.5 39,280.4 43,361.6 47,309.8 51,237.9 55,137.2 58,995.7

Population, total, female, '000 30,654.8 38,711.2 42,912.7 46,416.8 50,478.5 54,566.2 58,669.0

Population ratio, male/female 1.02 1.01 1.01 1.02 1.02 1.01 1.01
na = not available; f = Fitch Solutions forecast. Source: World Bank, UN, Fitch Solutions
KEY POPULATION RATIOS (PHILIPPINES 1990-2025)
Indicator 1990 2000 2005 2010 2015 2020f 2025f

Active population, total, '000 34,640.2 45,438.3 51,289.1 58,074.0 64,283.6 70,026.3 75,621.2

Active population, % of total population 55.9 58.3 59.4 62.0 63.2 63.8 64.3

Dependent population, total, '000 27,307.1 32,553.2 34,985.1 35,652.6 37,432.7 39,677.1 42,043.5

Dependent ratio, % of total working age 78.8 71.6 68.2 61.4 58.2 56.7 55.6

Youth population, total, '000 25,360.7 30,013.3 31,986.2 31,774.7 32,782.4 34,003.7 35,060.3

Youth population, % of total working age 73.2 66.1 62.4 54.7 51.0 48.6 46.4

Pensionable population, '000 1,946.4 2,539.9 2,998.9 3,877.9 4,650.4 5,673.4 6,983.2

Pensionable population, % of total working age 5.6 5.6 5.8 6.7 7.2 8.1 9.2
na = not available; f = Fitch Solutions forecast. Source: World Bank, UN, Fitch Solutions
URBAN/RURAL POPULATION & LIFE EXPECTANCY (PHILIPPINES 1990-2025)
Indicator 1990 2000 2005 2010 2015 2020f 2025f

Urban population, '000 30,100.2 37,400.9 40,206.4 42,416.0 45,134.6 48,554.7 52,850.3

Urban population, % of total 48.6 48.0 46.6 45.3 44.4 44.3 44.9

Rural population, '000 31,847.1 40,590.7 46,067.9 51,310.6 56,581.8 61,148.7 64,814.4

Rural population, % of total 51.4 52.0 53.4 54.7 55.6 55.7 55.1

Life expectancy at birth, male, years 62.6 64.2 64.6 65.1 65.7 66.3 66.9

Life expectancy at birth, female, years 68.0 70.3 71.1 71.8 72.5 73.3 74.0

Life expectancy at birth, average, years 65.3 67.2 67.8 68.3 69.0 69.7 70.3
na = not available; f = Fitch Solutions forecast. Source: World Bank, UN, Fitch Solutions
POPULATION BY AGE GROUP (PHILIPPINES 1990-2025)
Indicator 1990 2000 2005 2010 2015 2020f 2025f

Population, 0-4 yrs, total, '000 9,450.0 10,748.1 11,423.1 10,965.6 11,434.4 11,790.4 12,005.2

Population, 5-9 yrs, total, '000 8,402.3 9,970.4 10,651.2 10,499.6 10,889.3 11,363.0 11,726.7

Population, 10-14 yrs, total, '000 7,508.4 9,294.8 9,911.9 10,309.5 10,458.6 10,850.3 11,328.3

Population, 15-19 yrs, total, '000 6,610.5 8,230.2 9,133.5 9,786.7 10,208.0 10,359.8 10,768.6

Population, 20-24 yrs, total, '000 5,855.2 7,208.3 7,954.0 8,501.0 9,610.0 10,033.4 10,216.0

Population, 25-29 yrs, total, '000 5,140.5 6,248.5 6,931.8 7,496.5 8,314.6 9,420.4 9,872.1

Population, 30-34 yrs, total, '000 4,416.9 5,518.8 6,019.5 6,823.6 7,328.5 8,144.1 9,265.5

Population, 35-39 yrs, total, '000 3,753.5 4,848.1 5,328.5 6,062.4 6,666.3 7,171.1 7,997.0

Population, 40-44 yrs, total, '000 2,636.7 4,153.9 4,679.4 5,501.8 5,905.9 6,505.6 7,018.7

Population, 45-49 yrs, total, '000 2,133.9 3,497.4 3,988.4 4,712.5 5,322.9 5,723.6 6,323.3
THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

fitchsolutions.com 32
Philippines Real Estate Report | 2019

Indicator 1990 2000 2005 2010 2015 2020f 2025f

Population, 50-54 yrs, total, '000 1,723.8 2,401.7 3,318.0 3,924.1 4,497.5 5,091.4 5,491.5

Population, 55-59 yrs, total, '000 1,386.1 1,882.8 2,233.9 3,028.3 3,674.7 4,222.6 4,797.4

Population, 60-64 yrs, total, '000 983.0 1,448.6 1,702.1 2,237.1 2,755.2 3,354.3 3,871.1

Population, 65-69 yrs, total, '000 788.8 1,075.4 1,249.9 1,516.5 1,943.3 2,402.5 2,941.6

Population, 70-74 yrs, total, '000 548.5 677.0 866.4 1,152.1 1,235.4 1,591.5 1,980.4

Population, 75-79 yrs, total, '000 362.7 452.1 490.5 719.2 849.4 917.4 1,191.8

Population, 80-84 yrs, total, '000 178.7 226.1 267.0 343.3 435.2 520.2 569.5

Population, 85-89 yrs, total, '000 54.9 87.3 97.4 115.6 149.9 193.1 235.3

Population, 90-94 yrs, total, '000 11.4 19.6 24.1 26.9 32.2 42.6 56.3

Population, 95-99 yrs, total, '000 1.3 2.3 3.3 4.1 4.6 5.6 7.6

Population, 100+ yrs, total, '000 0.1 0.1 0.2 0.3 0.4 0.5 0.6
na = not available; f = Fitch Solutions forecast. Source: World Bank, UN, Fitch Solutions
POPULATION BY AGE GROUP % (PHILIPPINES 1990-2025)
Indicator 1990 2000 2005 2010 2015 2020f 2025f

Population, 0-4 yrs, % total 15.25 13.78 13.24 11.70 11.24 10.75 10.20

Population, 5-9 yrs, % total 13.56 12.78 12.35 11.20 10.71 10.36 9.97

Population, 10-14 yrs, % total 12.12 11.92 11.49 11.00 10.28 9.89 9.63

Population, 15-19 yrs, % total 10.67 10.55 10.59 10.44 10.04 9.44 9.15

Population, 20-24 yrs, % total 9.45 9.24 9.22 9.07 9.45 9.15 8.68

Population, 25-29 yrs, % total 8.30 8.01 8.03 8.00 8.17 8.59 8.39

Population, 30-34 yrs, % total 7.13 7.08 6.98 7.28 7.20 7.42 7.87

Population, 35-39 yrs, % total 6.06 6.22 6.18 6.47 6.55 6.54 6.80

Population, 40-44 yrs, % total 4.26 5.33 5.42 5.87 5.81 5.93 5.97

Population, 45-49 yrs, % total 3.44 4.48 4.62 5.03 5.23 5.22 5.37

Population, 50-54 yrs, % total 2.78 3.08 3.85 4.19 4.42 4.64 4.67

Population, 55-59 yrs, % total 2.24 2.41 2.59 3.23 3.61 3.85 4.08

Population, 60-64 yrs, % total 1.59 1.86 1.97 2.39 2.71 3.06 3.29

Population, 65-69 yrs, % total 1.27 1.38 1.45 1.62 1.91 2.19 2.50

Population, 70-74 yrs, % total 0.89 0.87 1.00 1.23 1.21 1.45 1.68

Population, 75-79 yrs, % total 0.59 0.58 0.57 0.77 0.84 0.84 1.01

Population, 80-84 yrs, % total 0.29 0.29 0.31 0.37 0.43 0.47 0.48

Population, 85-89 yrs, % total 0.09 0.11 0.11 0.12 0.15 0.18 0.20

Population, 90-94 yrs, % total 0.02 0.03 0.03 0.03 0.03 0.04 0.05

Population, 95-99 yrs, % total 0.00 0.00 0.00 0.00 0.00 0.01 0.01

Population, 100+ yrs, % total 0.00 0.00 0.00 0.00 0.00 0.00 0.00
na = not available; f = Fitch Solutions forecast. Source: World Bank, UN, Fitch Solutions

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Real Estate Methodology


Industry Forecast Methodology

Our industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric
modelling. The precise form of model we use varies from industry to industry, in each case determined, as per standard practice, by
the prevailing features of the industry data being examined.

Common to our analysis of every industry is the use of vector autoregressions. These allow us to forecast a variable using more than
the variable's own history as explanatory information. For example, when forecasting oil prices, we can include information about oil
consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most
desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile
form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate
because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or
smoothing methods as a basis for analysis and forecasting.

We mainly use OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, we use a
'general-to-specific' method. We mainly use a linear model, but simple non-linear models, such as the log-linear model, are used
when necessary. During periods of 'industry shock', for example poor weather conditions that affect agricultural output, dummy
variables are used to determine the level of impact.

Effective forecasting depends on appropriately selected regression models. We select the best model according to various different
criteria and tests, including but not exclusive to:

• R2 tests explanatory power; adjusted R2 takes degree of freedom into account;


• Testing the directional movement and magnitude of coefficients;
• Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value);
• All results are assessed to alleviate issues related to auto-correlation and multi-collinearity.

We use the selected best model to perform forecasting.

Human intervention plays a necessary and desirable role in all of our industry forecasting. Experience, expertise and knowledge of
industry data and trends ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a
purely mechanical forecasting process would not.

Sector-Specific Methodology

In each of the countries surveyed, local real estate agents are contacted and asked questions regarding monthly rental costs per
square metre net yields, terms of contract (length of a lease and rent-free months) and a general overview of the market, across the
following three commercial real estate sub-sectors:

• Office
• Retail
• Industrial

In each sector, a standardised approach is employed to ensure comparability and consistency in the data. The maximum monthly
rental values refer to prime/grade-A quality space and the minimum monthly rental values refer to non-prime/grade-B quality
THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

space. The net yields data refer to the rate of return on the investment after expenses have been deducted.

The answers have been combined into the data tables and text that form part of the market overviews and industry forecast
scenarios. In taking this grass-roots approach, we ensure that we identify, in a timely fashion, key issues that will likely drive rents and
yields over the short, medium and long term. A framework has been developed that facilitates comparisons between sectors in
different countries.

Sources

Sources used in real estate reports include UN statistics, national accounts, housing and economy ministries, officially released
company results and figures, trade bodies and associations, international and national news agencies and international real estate
companies.

Risk/Reward Index Methodology

Our Risk/Reward Index provides a comparative regional ranking system evaluating the ease of doing business and the industry-
specific opportunities and limitations for potential investors in a given market. The system divides into two distinct areas:

Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state characteristics that may
inhibit its development. This is further broken down into two sub categories:

• Industry rewards. This is an industry-specific category taking into account current industry size and growth forecasts, the
openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors.
• Country rewards. This is a country-specific category, and factors in favourable political and economic conditions for the
industry.

Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic profile that call into
question the likelihood of anticipated returns being realised over the assessed time period. This is further broken down into two sub
categories:

• Industry risks. This is an industry-specific category whose score covers potential operational risks to investors, regulatory
issues inhibiting the industry, and the relative maturity of a market.
• Country risks. This is a country-specific category in which political and economic instability, unfavourable legislation and a poor
overall business environment are evaluated to provide an overall score.

We take a weighted average, combining industry and country risks, or country and industry rewards. These two results in turn
provide an overall Risk/Reward Index score, which is used to create our regional ranking system for the risks and rewards of
involvement in a specific industry in a particular country.

For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall Risk/Reward Index score
being a weighted average of the total score. As most of the countries and territories evaluated are considered by us to be 'emerging
markets', our indices are revised on a quarterly basis. This ensures that we draw on the latest information and data across our broad
range of sources, and the expertise of our analysts.

Indicators

The following indicators have been used. Overall, the Real Estate Risk/Reward Index uses four subjectively measured indicators, and
over 20 separate indicators/datasets.

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

REAL ESTATE RISK/REWARD INDEX INDICATORS


Rationale

Rewards

Industry rewards

Construction output, USDbn (previous year) Absolute size of construction sector used as proxy for size of real estate sector.

Construction sector real growth, CAGR (previous Indicates prospects for, and confidence in, the construction sector, and hence a proxy for
year to three years hence) prospects/confidence for real estate sector.

Total commercial bank lending, USDbn (end Real estate projects are long term and capital intensive, with most finance obtained from
previous year) commercial banks. Indicates funding availability.

Commercial bank lending, CAGR (previous year This indicates prospects for the stability of finance and, implicitly, its cost. In times of
to three years hence) crisis, this is likely to be the most volatile indicator.

Country rewards

Our business environment index score for This captures the efficiency of the commercial banking sector and other elements of the
financial infrastructure financial services industry in making funding available to the real estate sector.

Higher per capita GDP correlates with the expansion of the middle classes, which are the
Per capita GDP, USD
key market for residential real estate, and the users of commercial and retail real estate.

Urbanised states tend to be more conducive to real estate development, as they have
Urbanisation, % of total population living in deeper, more mature markets. However, we take a favourable view of less urban, or even
urban areas predominantly rural, states that are characterised by persistently strong construction
sector growth.

Risks

Industry risks

Lending risks, ratio of the growth in nominal It is assumed that lending volumes and nominal GDP should, generally, grow at the same
lending (ie by commercial banks to non-bank rate. If lending growth substantially exceeds nominal GDP expansion, this would suggest
customers) to the nominal growth in GDP over a deterioration in risk standards by lending institutions. Conversely, if nominal GDP rises
five-year period (last year to current year plus substantially faster than bank lending, the cost of finance for real estate ventures is likely
three) to rise, affecting profitability.

This is used as a proxy for the stability of finance. Thus, a rapid decline in the ratio (ie a
Financial institution confidence, change in the lending squeeze) is penalised. Conversely, we are more tolerant of a rise in lending, as in
loan to deposit ratio over a five-year period (last itself, this may be positive for the industry. High rates of lending growth are penalised as
year to current year plus three) they could indicate an investment bubble unless our short-term economic score for the
state, a proxy for vulnerability to an economic shock, is very high.

Where possible, we have identified a national index (usually for house prices) and assess
annual growth. The indicator is symmetrical, in that high growth (which indicates a
Real estate prices, % change y-o-y bubble) is penalised, as is sharp price falls (which indicates that bubbles have been burst).
Where no real estate price index is available, this indicator does not affect the overall
score for this section.

Country risks

Our long-term economic index score A measure of long-term economic stability.

Our business environment legal framework Denotes the strength of legal institutions in each state. Security of investment can be a
index score key risk in some emerging markets.

CAGR = compound annual growth rate. Source: Fitch Solutions

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

Weighting

Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal weight. The following
weight has been adopted.

WEIGHTING OF INDICATORS
Component Weighting, %

Rewards 50, of which

Industry rewards 65

Country rewards 35

Risks 50, of which

Industry risks 65

Country risks 35

Source: Fitch Solutions

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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Philippines Real Estate Report | 2019

THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings' credit ratings. Any comments or data included in the report are solely derived from Fitch
Solutions Macro Research and independent sources. Fitch Ratings' analysts do not share data or information with Fitch Solutions Macro Research.

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