Real Estate UBS Evidence Lab inside: why is the market wrong about Philippines Property Sector

We acknowledge near-term headwinds amid COVID-19-related mobility restrictions and rising e-commerce usage, but we believe these are not existential threats to Philippine malls.

27 Aug 2020

Global COVID-19 foot traffic monitor - Metro manila, Philippines

Percentage change from baseline

Source: Spending intent in Australia outpaces income, as high income consumers turn positive

This chart shows the foot traffic for Metro Manila from February to August 2020.

Captive demand for malls likely to support recovery and long-term growth

We expect Philippine malls to not only survive the pandemic, but return to 2019 profit levels in 18-24 months, expand into new and underpenetrated territories and co-exist with e-commerce. In a country with a 110m population, an average age of 24 and a consumer-driven economy (70% of GDP), we believe malls are well positioned to capture rising spending power. Given the strong fundamentals, near-term challenges brought about by COVID-19 should not deter long-term growth in the sector, in our view.

UBS Evidence Lab data shows strong mall market dynamics

We leverage UBS Evidence Lab’s whitespace analysis and competition & markets analysis (CMA) on 272 existing malls in the Philippines. The data presents several key conclusions about malls in the Philippines: 

  1. high population density boosts average spending power (US$14.5bn per mall) in catchment/ captive areas of malls, supporting retail mall sales; 
  2. malls’ regional footprint is still sparse and only 55% of the country's spending power, with potential to put up 50% more malls to reach viable provinces;
  3. there is easy access to malls within catchment areas (average 11 transport hubs per mall); and
  4. mall landlords rank high in competition and overall market quality.

Near-term headwinds are not existential threats to malls

Although e-commerce penetration is still low in the Philippines (4% of total sales, according to Euromonitor), COVID-19-related measures have accelerated online shopping usage. However, we believe e-commerce is not in direct competition to malls, which are largely lifestyle centres, and could co-exist with them. Meanwhile, UBS Evidence Lab’s global COVID-19 foot traffic monitor shows gradually improving retail and recreation foot traffic in Metro Manila, although this could be weighed down by possible intermittent mobility restrictions until a vaccine is available.

What's not priced in? Malls' recovery and a positive long-term outlook

Foot traffic and sales growth should improve with declining mobility restrictions, given strong captive demand for malls, in our view. We think malls’ lifestyle format will allow them to co-exist with e-commerce, and expand to new locations. We believe the market is ignoring these positive factors: the sector is trading at 40% discount to RNAV (25% historically), implying an unusually high EPS yield (6.6% versus 4.5% five-year average) in 2021E/22E.

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