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Higher cement prices pose risk for robust construction sector

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By Madelaine B. Miraflor

Increase in prices of cement as a result of the imposition of safeguard duty on imported cement is seen as the major risk that could put a break to the robust construction sector, one of the country’s property management firms warned.

In a press conference on the Philippine property market and outlook, KMC Savills Inc. Managing Director Michael McCullough and Research Manager Fredrick Rara both cited the 6 percent increase in construction cost last year driven by the 4 percent increase in cement.

“In the construction index, cement price is the biggest threat but we are okay as long this will remain in the short run,” Rara said.

The KMC Savills officials noted that the provisional safeguard measure of P8.40 per bag of imported cement took effect in the second week this month and is good for 200 days while the Tariff Commission is conducting a public hearing on the case could put further pressure on cement prices.

Should the Commission finding aligns with the DTI, then the provisional tariff measure becomes permanent and could stay for longer.

With more construction projects, there would be a need for more imported cement should the local cement manufacturers cannot cope up with the growth in demand.

Rara, however, said there is still good margins so both developers and consumers to absorb the 6 percent increase in construction prices in the short run or at least for a year, but could affect them if it would go longer.

McCullough said that the ten biggest property developers in the country have set aside P700 billion to P800 billion capital expenditure for this year and could still absorb the higher cost of cement. In addition, some of the government’s infrastructure projects under its Build, Build, Build Program are going on stream this year pushing further increase in demand of construction materials.

Supply for office supply spaces is expected to hit 845,000 square meters this year higher than last year’s 700,000- 800,000 sqm. McCullough also said that that deliveries could slide down to 2020 because of delays in construction projects.

In terms of vacancy rate, the office market has averaged 7 percent in the past 10 years but Quezon City posted higher with 14 percent and the Ortigas business district peaked to 16 percent as of end 2018.

McCullough explained that the higher vacancy rate in Ortigas was largely caused by the completion of Grade A office buildings with smaller target market. But this is expected to dramatically go down to 2 percent this year.

Makati has lower vacancy rate of under 3 percent while BGC is between 4-5 percent and Alabang at 1.4 percent. The Bay Area has a very low vacancy rate of 0.6 percent and could exceed Makati and BGC in terms of Grade A office buildings. Regionally, vacancy rate is at 10 percent.

“This makes the Philippines is a very excellent situation,” says McCullough.

“But if the vacancy rate goes to 10 percent then that would mean a squeeze in developers’ and consumers’ cost. It is not bad, but concerning when the vacancy rate hits double digit,” he said.

Overall average rent in Metro Manila has accelerated further hitting 5.0% YoY at the year end. Makati CBD commanded the highest rental rate among the submarkets and is expected to escalate as contract expirations are forecasted to drive higher bids.

“We expect mixed results in 2019 as we see the different submarkets undergo through varied conditions affecting vacancies, absorption, and rental growth. Overall Metro Manila rental rates might accelerate, specifically for the Makati, Alabang, and Ortigas Center submarkets due to rising demand despite the latter’s pipeline of 206,000 sq m GLA completions for next year,” said Rara.

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