FOOD, GLORIOUS FOOD. Summary & Recommendations

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1 COLLIERS L QUARTERL Y RETAIL MANILA Q NOVEMBER 2018 Joey Roi Bondoc Manager Research Philippines +(632) Joey.Bondoc@colliers.com FOOD, GLORIOUS FOOD Summary & Recommendations Colliers believes that the food and beverage (F&B) segment remains the major driver of retail space occupancy in Metro Manila. We also see opportunities in home furnishings especially with the entry of major foreign brands and increased completion of condominium units across Metro Manila. Colliers encourages developers to: > look at the viability of housing more high-end shops in the Bay Area > continue offering a differentiated mix of retailers to consumers > carve out flexible workspaces in new malls > curate retail offerings based on the growth of consumer spending sub-segments Demand Supply Rent Vacancy > From 2019 to 2021, Colliers expects F&B to occupy at least half of new retail space across Metro Manila. We also see demand for home furnishings picking up while demand for footwear and clothing will likely slow down over the next 12 months. > From 2019 to 2021, Colliers sees the delivery of 200,000 sq m (2.2mn sq ft) of new retail space per annum. We project the new space will expand Metro Manila's stock by 11% to 7.6mn sqm (81.8mn sqft) by end-2021 from 6.8mn sqm (73.2mn sqft) as of 3Q > In light of the projected new supply, Colliers still sees lease rates across Metro Manila rising, albeit at a slower pace of 1% to 2% annually, from 2019 to > We project vacancy hovering between 8% to 9% by end We are retaining our vacancy forecast of between 8% and 9% annually from 2019 to Source: Colliers International Note: USD1 to PHP54 as of end-q3. 1 sqm = sq ft Q ,000 sq m 80,000 sq m End Q3/QOQ 1.3% PHP1, pp Full Year ,000 sq m 90,000 sq m End 2018/YOY 3.0% PHP1, pp E Annual Average 182,000 sq m 200,000 sq m End 2021/ Annual Average Growth % PHP1, pp 9% 8% - 9% 8.5% Demand

2 COLLIERS QUARTERL Y RETAIL MANIL A Q NOVEMBER 2018 RECOMMENDATIONS Increased differentiation Colliers sees the completion of a mix of district malls and super-regional malls in Metro Manila from 2019 to The new supply intensifies the need to differentiate product offerings to sustain consumer traffic. The opening of the ABS-CBN s Experience Store in Ayala Malls Trinoma shows that developers have been employing strategies to remain relevant amid the growing penetration of online shopping in the country. To retain old customers and appeal to a younger profile of mallgoers, mall operators should continuously aspire for a lifestyle-centric retail mix. Over the past nine months, we have seen malls in Metro Manila responding to this need by: > featuring the largest entertainment centre in the country > housing Europe's largest retailer of affordable sports equipment and sportswear > featuring curated retail and dining concepts from Japan and South Korea > opening an experience store with a media company > offering a farmer s market-inspired food hall Carve out flexible workspaces There are two regional malls that are scheduled to be developed over the next two to three years. With significant amount of leasable space, developers should consider carving out space for flexible workspace operators. The apportioning of flexible workspace in malls is also feasible given the worsening traffic in Metro Manila and tight office vacancy that persists in the market. To attract more tenants, developers can forge partnerships with retailers within their malls and provide special rates to consumers of in-house retail including restaurants, fitness centres, and cinemas. More luxury offerings in the Bay Area The prices of pre-sale condominiums in the reclaimed business district have been rising. A number of projects recorded increases between 30% and 80% since being launched in 1Q2017. This is indicative of the spending profile of tourists and foreign investors in the area. Colliers believes that the Bay Area is ripe for more high-end F&B, footwear and clothing brands. Prada, Givenchy, and Salvatore Ferragamo have opened shops in Solaire casino. More high-end brands should also differentiate the business district s retail offerings from the profile of retailers in nearby business districts such as Makati CBD and Fort Bonifacio. Curate offerings based on consumer spending sub-segments Colliers believes that mall operators should carefully assess their retail tenancy and feature tenants based on the needs of consumers, and developers are encouraged to feature a good mix of retailers that represent the spending pattern of consumers. From 2010 to 2017, among the fastest growing sub-segments are health (which covers medical products, appliances and equipment, out-patient services, and hospital services), restaurants, recreation, food and beverage, and miscellaneous goods and services which includes personal care and personal effects. 2

3 COLLIERS QUARTERL Y RETAIL MANIL A Q NOVEMBER F&B TO DOMINATE RETAIL SPENDING, LURE MORE FOREIGN PLAYERS Colliers believes that the F&B segment remains the major driver of retail spending in Metro Manila. The sector covers 30% to 50% of leasable space in shopping centers across the metro area, one of the highest levels in the Asia Pacific region. F&B spending in the country grows by nearly 6% per annum, primarily driven by money sent in by Overseas Filipino Workers (OFWs) and the business process outsourcing (BPO) workforce, mainly composed of millennial employees with relatively high purchasing power. Data from the Philippine central bank reveals that OFW remittances reached USD21.2 billion in the first eight months of the year, up 2.4% YoY. In our opinion, the increase is partly fuelled by the depreciating peso which enticed more OFWs to send in more money to their families in the Philippines. While slower than the 4% growth projected by the central bank, economists are expecting the pace of remittance flow to pick up in 4Q2018 due to holidayinduced spending. The recent reduction in personal income tax rates also contributed to an increased purchasing power of employees. We believe that these factors, coupled with a generally stable macroeconomic backdrop, are luring more foreign F&B brands to establish a footprint in the Philippines. Over the past nine months, we have seen the entry of foreign F&B retailers such as New York-based M Bakery which took up space at One Bonifacio High Street while South Korean fish cake brand Samjinhas opened its first Philippine store at the Ayala Malls Circuit in Makati fringe. Existing players such as Wolfgang s Steakhouse continue to expand. Wolfgang s is set to open its third branch in Manila at Bonifacio High Street. Meanwhile, retailers planning to open shops in the next 12 to 18 months are Shake Shack, Panda Express, and Popeyes, which is making a comeback after exiting the Manila market in Popeyes comeback is indicative of a stronger domestic consumer market. SMALLER MALLS PROLIFERATE Only one regional mall opened during Q3 2018, Ayala Malls Circuit, which just reached our classification of a regional mall with a GLA of 52,000 sq metres (600,000 sqft). Colliers classifies a regional mall as having a GLA of 50,000 sqmetres to 99,999 sq metres (538,200 sq ft to 1.08 million sq ft ). Megaworld opened three neighbourhoodmalls during the period, totalling 27,000 sqmetres (291,000 sqft) of leasable space, primarily catering to their surrounding communities. These are San Lorenzo Place and Three Central in Makati CBD and The Village Square in Alabang. During the period we also saw the renovation of Robinsons Galleria, one of the largest malls in Ortigas Center. Overall, Colliers recorded nearly 80,000 sq metres (861,000 sq ft) of new retail space in 2Q and 3Q2018. This is smaller than the 150,000 sqmetres (1.5 million sqft) of leasable space completed from 4Q2017 to 1Q2018. As of 3Q 2018, Metro Manila s retail stock is 6.85 million sqmetres(73.7 million sq ft), a mere 1% higher compared YoY. In Q4 2018, we expect Ayala Land s Bonifacio High Street in Fort Bonifacio to open. The mall is up for completion in 4Q2018 but parts of the 20,000 sq metres (215,000 sqft) development are already open, housing foreign retail brands such as M Bakery. By end 2018, we see Manila s retail stock reaching 6.87 million sqmetres, about 4% higher compared to 2017 stock.

4 COLLIERS QUARTERL Y RETAIL MANIL A Q NOVEMBER 2018 BAY AREA MALLS TO COMPLEMENT OFFICE, RESIDENTIAL SPACE EXPANSION While most retail projects completed from April to September 2018 were in Makati, we see aggressive completion in the Bay Area over the next 18 to 24 months. Between 2019 and 2021, we expect Ayala Malls Bay Area by Ayala Land (200,000 sq metres, 2.15 million sqft) to open, along with the 200,000 sq metres (2.15 million sq ft) expansion of the existing Mall of Asia by SM Prime. These are both super regional malls, with more than 100,000 sqmetres (1.08 million sqft) of GLA each. The two malls should complement the massive office and residential developments in the Bay Area. Other malls in the pipeline are the 58,000 sq metres (624,000 sq ft) mall that is scheduled to be developed by Ayala Land and Eton Properties within their Parklinks project along C-5 road in Pasig; Arca South Mall in Arca South in Taguig; Big Apple Mall in Fort Bonifacio; and the renovation of Greenhills shopping mall by From 2019 to 2021, Colliers sees the delivery of at least 200,000 sq metres (2.2 million sqft) of new retail space per annum. We project the new space expanding Metro Manila's stock by 11% to 7.6 million sq metres (82 million sqft) by end-2021 from 6.87 million sq metres (73.2 million sq ft) as of 3Q % TO 9% VACANCY TILL 2021 District centres posted a lower vacancy of 19% in 3Q 2018 from 19.5% in 1Q 2018 due to continued take up of space especially in malls in Northern Metro Manila while we saw a slight increase in neighbourhoodmalls vacancy to 11.0% in 3Q 2018 from 10.4% in 1Q2018. Given the limited amount of projected new supply in 4Q2018, Colliers sees Manila vacancy reaching about 8.5% by end Achieving the lower end of our projection is highly probable as we see greater retail space absorption in regional malls that opened in Colliers does not see a substantial rise in vacancy over the next 12 to 24 months despite the projected completion of super-regional and regional malls. A significant fraction of the new space is planned in the Bay Area, where demand is primarily coming from employees and investors of a thriving offshore gaming sector. A ramped up presence of foreign and local retailers in the thriving business district should also complement the aggressive expansion of office and residential towers in the Bay Area. Overall, we still see Metro Manila vacancy hovering at between 8% and 9% annually from 2019 to FLATTISH RENTAL GROWTH In 3Q2018, Ayala Center rental rates averaged PHP1,665 (USD30.8) per sq m per month, up by 2.5% compared to rental rates in 1Q Meanwhile, the average lease rates in Ortigas Center averaged PHP1,549 (USD28.7) per sqmetre per month in 3Q2018, up by 2.6% compared to 1Q From 2019 to 2021, we expect rental growth for Ayala and Ortigas Centre to hover between 1% and 2% per annum. Overall vacancy in Metro Manila was stable at 9% in 3Q2018 from 9.1% in 1Q During the same period, the vacancy in super-regional malls was practically unchanged at 4%. The vacancy rate among regional malls slightly improved to 11% from 12% in 1Q2018, as we saw more space occupied by F&B, clothing and footwear tenants. These are the same regional malls that opened about 12 to 18 months ago and are now recording better occupancy. 4

5 Primary Author: Joey Roi Bondoc Manager Research Philippines +(632) For further information, please contact: David A. Young Chief Operating Officer Philippines +(632) Richard Raymundo Managing Director Philippines +(632) Arren Faronilo Senior Analyst Research Philippines +(632) Donica Cuenca Analyst Research Philippines +(632) About Colliers International Group Inc. Colliers International Group Inc. (NASDAQ: CIGI) (TSX: CIGI) is a top tier global real estate services and investment management company operating in 69 countries with a workforce of more than 13,000 professionals. Colliers is the fastest-growing publicly listed global real estate services and investment management company, with 2017 corporate revenues of$2.3 billion ($2.7 billion including affiliates). With an enterprising culture and significant employee ownership and control, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide, and through its investment management services platform, has more than $25 billion of assets under management from the world s most respected institutional real estate investors. Colliers professionals think differently, share great ideas and offer thoughtful and innovative advice to accelerate the success of its clients. Colliers has been ranked among the top 100 global outsourcing firms by the International Association ofoutsourcing Professionals for13 consecutive years, more than anyother real estate services firm. Colliers is ranked the number one property manager in the world by Commercial Property Executive for two years in a row. Colliers is led by an experienced leadership team with significant equity ownership and a proven record ofdelivering more than 20% annualized returns for shareholders, over more than 20 years. For the latest news from Colliers, visit our website or follow us on Copyright 2018Colliers International The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.