The exit of POGOs finally lifts an overhang on the Philippine property sector. The issue of POGOs is among the factors that have caused a de-rating of the sector given legal uncertainties and significance to the economy.<\/p>\n\n\n\n
As POGOs exit the country, the office segment stands to be affected the most as vacancy rates could rise to ~24% from 19% currently. Based on our base case scenario of ~20% vacancy rate for Metro Manila, it would take about 7.4 years to absorb the unlet space in the market. A total POGO ban would extend the
absorption to almost 9 years which means it will be a tenant market for much longer.<\/p>\n\n\n\n
The impact on the residential segment should be more muted. Our simulation shows that from a current vacancy rate of 13.2% for housing units, a total POGO ban will result to only a 0.1%pts increase (1.4%pts increase if we only consider duplex, apartments and condos) in the vacancy rate. With annual take up of ~58k housing units per year in Metro Manila (23k for condos specifically), the market can easily absorb any incremental vacancy stemming from the POGO exit (not to mention that demand could get a boost from the easing of interest rates).<\/p>\n\n\n\n
Our View: <\/strong>The property sector-wide sell-down last week looks like an overreaction. We assert that valuation discounts have already priced-in the POGO exit. Apart from the POGO overhang, the wider price discounts also factor in higher cap rates and\/or earnings deterioration of the property developers. <\/p>\n\n\n\n But with earnings starting to recover and exceed the 2019 levels plus the prospect of lower interest rates, the sector-wide discounts look unwarranted. We would take any weakness as an opportunity to gain\/add exposure to the sector. <\/p>\n\n\n\n Our two property stock picks: ALI and RLC.<\/strong><\/p>\n\n\n\n