How to Make Money from Office Rentals in Philippine Cities

Given Metro Manila’s tight supply of office spaces, commercial real estate is fast becoming a viable investment option

Experts on Philippine real estate believe that office spaces are quickly becoming the next attractive investment in Metro Manila’s real estate.

Prices and rental rates of office spaces, especially in the metro’s key central business districts (CBD), are poised to increase over the next year, thanks to healthy demand and tight supply.

Vacancy rate, meanwhile, is expected to decrease as more companies, such as BPOs multinational corporations, and small- and medium-sized enterprises, are expanding, providing savvy investors another option to diversify their real estate portfolio.

Indeed, there are office buildings or towers in the Makati CBD where units get snapped up by corporate renters in a matter of days, while the waiting time for units can be as long as two months.

If there is any consolation, it looks like office stock within Metro Manila is expected to increase, from the current 6.99 million sqm to 9.52 million sqm by 2018, according to data from Colliers International. As expected, most of this new supply will be coming in the popular areas of Bonifacio Global City and the Bay City.

And this looks good for the savvy real estate investor. As competition for renters is quite tight in the residential market, office rental business promises to be a viable business venture.

However, just like any business venture, office rentals have potential pitfalls if one is not sufficiently informed. Global property portal Lamudi Philippines lists down several steps to get started on renting out office real estate.

1. There is a difference between office and residential

Commercial real estate—under which offices fall—is valued differently from residential real estate. They are usually more expensive (mainly because of their location) and they incur higher real property tax.

However, because they are more expensive, it also means that the returns are higher, especially in capital value, as offices in Metro Manila’s prime CBDs are predicted to increase in value at least 9.7 percent year-on-year to 2016.

2. Know what businesses want

In residential real estate, tenants have roughly the same requirements: bedroom, bathroom, living room, furnished kitchen, and amenities that are common in gated communities or condo estates.

Office renters, on the other hand, have vastly different requirements. Yes, they won’t have much use for beds, designer couches, and a well-appointed kitchen, but they may need IT infrastructure (at least most of them do), industrial carpeting or sturdy flooring to accommodate high foot traffic, and a good location that’s never a dead-spot for mobile reception. Remember, employees in corporate offices are on their phones a lot, so it’s best if the reception in the office is good (and trust us they do check before they sign a lease contract).

3. Make sure your property is adaptable

As a landlord, you have to adapt your office space to accommodate each tenant’s specialized trade (a lawyer’s office may have a pretty basic requirement but an IT company may need an office that can support IT infrastructure). However, once you have found a tenant, most are willing to sign much longer lease contracts (usually 3 years) as moving frequently disrupts a business.

4. Know your responsibilities as a landlord

As a landlord, you have to be ready to handle tax issues, maintenance responsibilities, and business permits related to owning office real estate. As your tenants will be businesses or corporate entities, it is imperative to issue them official and BIR-approved receipts; otherwise, they cannot declare the rent as an expense in their financial statements.

In addition, offices are subjected to more stringent fire-safety inspections and any violation, however small, carries a hefty fine.

5. Get a broker that specializes in office real estate

Finding a corporate tenant requires a specific skills set on the part of the real estate broker. While tenants of residential properties have basic needs (bedrooms, bathrooms, kitchen, and living room), a corporate client will have very specific needs and matching the property with the right tenant means more time and effort on the part of the broker to advertise and prospect clients for the property.

6. Pick a great location

In office real estate, the importance of location cannot be overemphasized. This is because corporate tenants choose prime locations that are close to their clients, can be easily reached by their employees, and give their business a prestigious address. In addition, the local government attracts businesses by offering incentives so it is important to pick a city that’s business-friendly.