retail beyond the capital davao city retail snapshot/media/reports/philippines/davao_rep… · the...

RETAIL BEYOND THE CAPITAL

Davao City Retail SnapshotDECEMBER 2015

Table of Contents

INTRODUCTION 2

WHY DAVAO? 3Increasing Population 3

High Income City 4

Massive Regional Consumer Market (Davao Region) 5

Strong Tourism Market 7

DAVAO RETAIL MARKET OVERVIEW 10

Cumulative Supply 11

Rental Rate 11

Vacancy 12

Tenant Mix 13

Increased International Brand Presence 14

OUTLOOK 15

This report provides a glimpse of the retail scene in Davao City and also examines the city’s potential to be one of the country’s

next retail hot spots. Strong macroeconomic fundamentals, driven mainly by a healthy and bourgeoning consumer

market coupled with supporting social infrastructure, have supported the recent growth in retail space and influx of

international brands. Correspondingly, this report posits that such fundamentals will continue to be the backbone of city’s

retail scene, allowing Davao City to be a viable option for retail expansion outside Metro Manila.

INTRODUCTION

Retail is an important element of the Philippine real

estate industry. It responds to the strong domestic

consumer market that is fundamental to the economy.

Already more than 70% of the country’s GDP is

supported by consumption, and this is still expected

to grow given the consumer income driving forces of

the thriving BPO sector and OFW remittances. For this

reason, the retail sector is foreseen to be a force to be

reckoned with in the coming years. This is manifested in

the significant expansion of retail space and the entry of

foreign retailers recently.

Metro Manila has since been in the spotlight, given

the massive market that it possesses for retail. There

has been a substantial increase in retail supply, major

redevelopments of existing shopping centers, and

the rise of mixed-use developments catering to retail

among others. There is no denying that Metro Manila

is a bourgeoning and lucrative market, but the issues

of congestion, saturation, limited space and inefficient

infrastructure, and mass transportation linger and pose

challenges.

Correspondingly, real estate developers have been

looking to key markets outside the capital. IT parks and

business districts have emerged and will continue to

do so, especially within the so-called emerging cities1,

like Baguio, Davao, Dumaguete, Iloilo, and Bacolod.

Retail developments have likewise been expanding

aggressively outside the capital. Also, with growing

incomes spanning provincial areas in the country, retail

has never been in a better position to look beyond the

capital.

The gains from expanding outwards are immense. Not

only are these markets potentially ripe for substantial

retail and real estate growth, but from a much wider

perspective, they allow for a more inclusive and

decentralized “trickle down” growth of the Philippine

economy.

This report aims to be one of many retail reports that

provides a glimpse of retail outside Metro Manila.

Precisely, the focus will be on Davao City, an emerging

market that has generated a lot of interest when it

comes to safety and good governance. It is a vibrant

market with huge potential for further retail growth. This

report will provide a snapshot of the existing major retail

centers of the city and the opportunities that

are presented.

Executive Summary

Retail Beyond the Capital Davao City Retail Snapshot

cushmanwakefield.com | 54

A Cushman & Wakefield Research Publication

1 The IT and Business Process Association of the Philippines (IBPAP) has identified key markets or “Next Wave Cities” based on their potential as business process outsourcing hubs (given talent bank, infrastructure, cost, and business environment and risk).

DAVAO CITY

Among the Philippines’

Hailed as one of the country’s

by IT and Business ProcessAssociation of the Philippines (IBPAP)

Renowned to be the

in the country

center of

4th most populous cityin the Philippines

in the Philippines in terms ofLand Area

Key player in flourishing trade club

TOP TOURISTDESTINATIONS

NEXT WAVE CITIES

SAFEST CITY BRUNEI-INDONESIA-MALAYSIA-PHILIPPINES

EAST ASIAN GROWTH AREA

MINDANAO’S

1.5 MILLION

LARGEST CITY

2,444 sq km

COMMERCE

TRADE

SERVICES

WHY DAVAO?

Davao City exhibits the trends and possesses the qualities that make for a

robust retail market.

Increasing PopulationThe rapid influx of people into Davao City has transformed it into the

country’s largest urbanized area in terms of population and land area outside

the capital. Official 2010 Census figures have Davao at 1.44 million people,

and estimates for 2015 are at 1.63 million.

This trend is associated with the migration of people from other regions,

particularly because the city has gradually been offering the right incentives

for relocation. Davao possesses quality schools1, quality hospitals2 and,

increasingly, quality jobs with the emergence and growth of the IT-BPO

sector in the city - factors that people value when moving. Apart from the

social infrastructure, the city is renowned to be one of the safest in the

country and is also very accessible due to its international airport. Also,

traffic and infrastructure woes, which have dissuaded people from living

in Metro Manila, are not present in Davao due to an early implemented

stringent traffic management system3. Further, complementing the

population trend, we have seen housing subdivisions and residential options

increase in urban Davao, which encourages people to choose to conveniently

live in the city.

These positive attributes and incentives feed into the already rapid urban

growth trend of the city, as people may look to Davao City as a place to settle

in. Optimistically, we may then see the city breaking 2 million people by 2020,

which makes for a potentially substantial consumer market to tap.



1 Ateneo De Davao, University of Southern Philippines, Davao Doctors College, Davao Medical School Foundation (DMSF) among others. Mapua just recently announced its expansion into Davao City.

2 Davao Doctors Hospital, San Pedro Hospital and DMSF among others.3 In line with Php 120-M IBM Smarter City Project, formally unveiled in 2013.

High Income CityDavao City’s rapid urbanization and transforming

economic landscape have placed it among the

country’s high income cities. Based on income, Davao is

consistently part of the top 5 cities and is the only city

outside Metro Manila on the list, making it the highest

earning city beyond the capital.

5 Highest Earning Cities in the Philippines (in million Php)

02009 2010

Quezon

2011 2012 2013 2014

5,000

10,000

15,000

20,000

Pasig

Makati Manila

Davao

Source: Bureau of Local Government Finance (BLGF)

The relative high income level of Davao City is indicative of

its economic health. A manifestation of Davao’s economic

progress is the surge in investment, as suggested by

the rise in business capitalization over time. The city

experienced a 16% increase in total capital from 2011 to

2014 alone.

Total Capitalization of Business, Davao City (in billion Php)

160

170

180

190

200

210

220

2010 2011 2012 2013 2014

Source: Davao City Business Bureau

The economic gains of the city can also be gauged

from the city’s transforming economic landscape with

buildings rising in every corner. We see the emergence

of infrastructure like high-rise residential buildings

and mixed- use developments. Among the significant

upcoming developments are a mixed-township Davao

Park District and luxury accommodations by Dusit (Dusit

Thani Residences, DusitD2 Hotel) and the Lubi Plantation

Resort.

Clearly, Davao City has proven and continues to prove

to be a economically healthy emerging high income city

that offers right incentives for business and investment.

02000 2007 2010 2013* 2014* 2015*

0.5

(mill

ions

)

1.0

1.5

2.0

Source: Philippine Statistics Authority (PSA). 2013-2015* are estimates made by Davao City Planning and Development O�ce.

Davao City’s Population

Massive Regional Consumer Market (Davao Region)Davao City serves as the regional center of the Davao

Region (Region XI). As such, the city essentially captures

demand from the entire region. According to 2010

official census figures, the region houses 4.5 million

people with 2015 projections at 4.7 million people.

What makes the Davao Region an important catchment

market for Davao City? It is the fastest growing region.

The latest official statistics show that the Davao Region

outperformed all other regions in the country in terms

of growth rate, exhibiting an exceptional gross regional

domestic product (GRDP) growth rate in 2014 at 9.4%, a

big leap from 6.7% in 2013.

One of the primary GRDP drivers is the services sector

with its 2014 growth rate pegged at 8.3%. This is

associated with the region’s locational advantage as a

financial and business hub in Southern Philippines. This

motivated business expansion into the region, resulting in

the increased demand for property in the form of offices,

residential, and retail spaces. A prominent example would

be the strong Information Communication Technology-

Business Process Outsourcing (ICT-BPO) trend in the

region, and the consequent emergence of IT business

parks in the region. Davao City, for one, has an active

ICT-BPO industry, and was ranked by the IBPAP as

number one among destinations of ICT investors.

Responding to this trend, local developers began

constructing BPO office space as early as 2011 with

Damosa IT Park, Luisa IT Center, and Filandia IT Center.

National players entered more recently with Ayala’s

Abreeza Corporate Center in 2012 and SM’s dedicated

office space in 2013. As of now, the city currently has

roughly 115,000 sq.m of office space and is expecting

approximately 20,000 sq.m in the coming year. The

last five years have seen major BPO companies such as

Convergys, Teleperformance, Concentrix, Sutherland and

VXI setting up shop in the city.

Comparative Gross Product Growth Rates 2013-2014, At Constant 2000 Prices

0

2

4

6

8

10

PhilippinesGDP

National CapitalRegion

Davao Region

6.1 5.9

9.4

Source: PSA

“What makes the Davao Region an important catchment market for Davao City?

It is the fastest growing region.”




The Davao Region also exhibits signs of a maturing

consumer market. According to the National Statistical

Coordination Board (NSCB), the Davao region recorded

the second highest expansion in per capita household

spending in 2014. The region posted a growth rate of 8.5%,

only second to Central Luzon (9.4%). In addition, the region

surpassed the growth of national and Metro Manila per

capita household spending, which were recorded at 3.6%

and 4.3%, respectively. Indicators show that purchasing

power is increasing in the region and this presents ample

opportunity for growth in retail.

Per Capital Household Final Consumption Expenditure 2013-2014 Growth Rate, At Constant 2000 Prices

0

2

4

6

8

10

Philippines National CapitalRegion

Davao Region

3.64.3

8.5

Source: National Statistical Coordination Board (NSCB)

Supporting this growing consumer trend is the

modest increase in overall annual family income in the

latest official figures. The region experienced a real

income growth rate of 17% between 2006 and 2012.

Correspondingly, trends have been pointing towards the

growth of the middle class1, possessing more share in

total annual income over time. This entails more middle

class earners likely to spend on mass consumer goods,

which comprise a bulk of retail. The middle class grew

by both share and in nominal amounts between 2006

and 2012, eating some share away from the upper class.

Significantly, even considering inflation through time, the

middle class posted a substantial growth of almost 100%,

almost doubling, in total annual family income from

2006 to 2012.

This trend can be attributed to the IT-BPO industry

which has been making strides in the region, especially

in Davao City. This industry has been producing a

significant amount of middle-class earners. In Davao City

alone, there are about 32 IT-BPO firms that employ more

than 20,000 full-time workers.

Strong Tourism MarketDavao City has become a popular tourist destination in

the Philippines, in part because it is the urban center of

the South and is also very easily accessible through the

Francisco Bangoy International Airport. The city only

recently broke the 1 million mark in tourist arrivals in 2012,

and has been gaining momentum since. Latest figures

show the city hitting 1.5 million by 2014. While these are

impressive numbers, it is important to note that more

than 90% travelers are domestic, therefore leaving a lot

of room to grow for international travelers. We anticipate

that this will be addressed with the opening up of direct

international flights at the airport. Nonetheless, domestic

travelers have proven to be a strong market for retail

tourism, as Filipino travelers tend to include shopping in

malls in travel plans.

Tourist Arrivals and Estimated Tourist Receipts in Billion Php (2010-2014), Davao City

Year Tourist Arrivals Estimated Tourist Receipts (Php Billions)2010 682,821 9.552011 744,275 10.422012 1,075,000 15.052013 1,429,827 22.872014 1,529,907 17.13

Source: Davao City Tourism Operations Office

0

20

40

60

5.57.7

45 47.3 49.444.9

0

50,000

100,000

150,000

Lower Class(Lower 20%)

MiddleClass

20062012

Upper Class(Upper 20%)

Lower Class(Lower 20%)

MiddleClass

Upper Class(Upper 20%)

Total Annual Family Income by Class, in million Php, Davao Region,At Constant 2000 Prices

Share of Middle Class in Total Annual Family Income, Davao Region, Based on Constant 2000 Prices

Source: PSA

1 Middle class in this research refers to the third to eighth deciles of the population, or the middle 80%, as pre-sented by PSA data.

“…domestic travelers have proven to be a strong market for retail tourism, as Filipino

travelers tend to include shopping in malls in travel plans.”




DAVAO RETAIL MARKET OVERVIEW

Consequently, retail developers have acknowledged the opportunity in Davao based on the aforementioned factors

and have responded by developing projects in the city. The past 5 years have been the most vibrant so far in terms

of retail.

This report will focus on the 4 major shopping malls based on higher observed foot traffic and relative substantial

presence of international brands. These malls are also the 4 largest malls in the city, and should give a good

perspective on the direction Davao’s overall retail development.

Cumulative SupplySince the opening of its first mall in the early 1990s,

Davao City has had quite a lethargic retail supply history.

The city saw its first major mall chain development, SM

City Davao, only in 2001, yet no significant development

followed in ten years. To illustrate the lackluster historical

retail supply growth, it took the city almost 10 years to

come close to doubling retail supply since 1997.

Davao City Cumulative Shopping Mall Supply in SQ.M, 2000-2015

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Cushman & Wakefield Research

Fortunately, the Davao retail market has evolved

substantially within just the last 5 years. Exhibiting the

fastest retail growth in the city’s history, the supply of

shopping malls has nearly doubled since 2005 from

approximately 350,000 sq.m in 2005 to 660,000 sq.m in

2012. This can be attributed to mall expansions in 2012 and

the construction of two major malls, namely Ayala Abreeza

and SM Lanang Premier, in 2011 and 2012, respectively.

Ayala Abreeza contributed to an additional 134,000 sq.m

to retail mall stock, while SM Premier Lanang, currently the

largest shopping mall in Mindanao, added 144,000 sq.m.

SM PREMIER LANANGSM Prime HoldingsGFA: 144,236 SQ.MOpened 2012GAISANO MALL OF DAVAO

DSG Sons Group, Inc.GFA: 120,061 SQ.MOpened 1997

AYALA ABREEZAAyala Land Inc.

GFA: 134,000 SQ.MOpened 2011

SM CITY DAVAOSM Prime HoldingsGFA: 125,143 SQ.M

Opened 2001


“Exhibiting the fastest retail growth in the city’s history, the supply of shopping malls has nearly doubled since

2005 from approximately 350,000 sq.m in 2005 to 660,000 sq.m in 2012.”




Rental RateAs of the third quarter of 2015, the average rental rates

among the major shopping malls in Davao lie within

the Php 900 to 1,000 per sq.m range. The newer, and

arguably more premiere malls, SM Lanang Premier and

Ayala Abreeza, expectedly ask for much higher rents,

ranging between Php 1,100 and Php 1,200 per sq.m, while

Gaisano Mall, which is the oldest among the 4 and the

most local in terms of tenancy mix, asks for the lowest

rents, between Php 800 to Php 950 per sq.m. Finally, SM

City Davao, which straddles between both high income

and middle income markets and commands the highest

foot traffic among the 4, prices competitively at Php

1,000 per sq.m.

Relative to Metro Manila retail rents, Davao City’s rents

are very competitive. The national capital currently

sees retail rents in prime shopping malls at nearly more

than double Davao City’s shopping mall rents. For this

reason, the surge of retailers into the Davao retail scene

is unsurprising. On the demand side, as seen earlier, the

city and region has a ripe and growing consumer base,

and on the supply side, there is a healthy supply of retail

offering nationally and internationally competitive rental

rates. This retail demand and supply dynamic creates a

strong case for retailers to locate in the city.

Average Rental Rates, as of Q3 2015, per SQ.M in Php

0200400600800

1,0001,2001,400

SM CityDavao

SM LanangPremier

GaisanoMall

AyalaAbreeza


VacancyOn average, retail vacancy in Davao City remains low at

4% to 5% through the third quarter of 2015. Estimates

have shown the vacancy rates among the major

shopping malls dropping from the same period last year,

indicating vigorous and consistent demand for retail

space.

Vacancy Rates Q3 2014 vs. Q3 2015

0.0%

2.0%

4.0%

6.0%

8.0%

SM CityDavao

SM LanangPremier

Q3 2014 Q3 2015

GaisanoMall

AyalaAbreeza

Source: Cushman & Wakefield Research Estimates

Noting historical estimated overall Davao City retail

vacancy rates we can observe very fast take-up of retail

space. 2013 overall vacancy is estimated to be within the

9% to 10% range, which is associated with the opening

of Ayala Abreeza in 2011 and the fresh opening of SM

Lanang Premier in the latter half 2012. In spite of the

additional retail supply, the following years exhibited a

drastic fall in vacancies, with occupancy rates breaching

the 95% mark by 2015. Demand for retail space was

buoyed by the dynamic and aggressive expansion

of retailers outside Metro Manila. Correspondingly,

rapid take-up of retail space can also be attributed to

the influx of international brands responding to the

increasing spending power of Davao City locals.

Recent ocular inspections of the malls point to vacancy

rates moving closer to 1%, pushing occupancy to almost

100%. Healthy and rapid take-up of retail space is a

good signal to retail developers to respond accordingly.

The trend is associated with and is indicative of the

optimism toward Davao City’s dynamic retail and

consumer market.

9.50%

Q3 2013 Q3 2014 Q3 2015

5.30% 4.30%

Source: Cushman & Wakefield Research Estimates

Estimated Overall Average Vacancy Rate, Q3 2013 to Q3 2015




Tenant MixThe optimism toward Davao retail and the consequent

response of retail developers with additional retail supply

ushered in an influx of retailers. We can now observe a

very international mix of tenants, especially in the newer

malls of Ayala and SM. This is a drastic departure from

6 years ago when tenants were predominantly local

brands.

Tenant Mix Profile

Shopping MallGeneral Retail* Food and Beverage

Local International Local InternationalAyala Abreeza 28% 72% 80% 20%SM Lanang Premier 37% 63% 83% 17%SM City Davao 48% 52% 82% 18%Gaisano Mall 65% 35% 89% 11%

Source: Cushman and Wakefield Research

* General Retail for purposes of this research will refer largely to fast fashion and other non-F&B retailers

Observing dedicated tenants for non-food and beverage

(F&B) general retail (which for the case of Davao is 90%

fast fashion), we see that the major shopping mall tenant

mixes are largely biased towards international retailers

now. This proves especially true for Ayala Abreeza and

SM Lanang Premier, posting an international tenant share

of 72% and 63%, respectively. This is anticipated as both

Ayala Abreeza and SM Lanang Premier have always

marketed themselves as the premier and upscale malls

of the city. Although not as significant as the premier

malls, a majority of SM City Davao’s general retail tenant

share is attributed to international retailers as well. This

is a huge development from when it opened in 2001 with

a primarily local tenant mix. Lastly, while homegrown

Gaisano Mall is still mostly local, it has also exhibited

a drastic evolution from when it opened in 1997 with a

completely local tenant mix.

The opposite trend is true however for food and

beverage retailers. The food and beverage market

is still dominated by local players, accounting for

approximately more than 80% of the tenant share in

major shopping malls. This may be because food and

beverage is localized and is typically attuned to local

tastes. Moreover, the rich local food scene in Davao City

is embedded in the lifestyle of the locals that what is

local just naturally appeals to them. Also, local food and

beverage retailers tend to price more competitively. For

these reasons, local food and beverage retailers are able

to compete and dominate international retailers. This is

in stark contrast with general retail, especially for fast

fashion, wherein there is a general inclination towards

and preference for international brands, thus allowing

international brands to overshadow local ones.

Increased International Brand PresenceDavao City has seen more than 60 international retailers locating into the city since 2011. This coincided with the

opening of Ayala Abreeza and SM Lanang, which welcomed a diversity of international brands. In general retail,

or fast fashion, notable mentions would be American Eagle Outfitters, Cotton On, Gap, Aeropostale, Forever 21,

Sperry, Marks and Spencer, Herschel and Aldo among many others. Despite still being overshadowed by local

retailers, food and beverage also saw an arrival of foreign retailers, such as Coffee Bean and Tea Leaf, Krispy Kreme,

Bonchon, Happy Lemon, Cha Time, and Starbucks Coffee. A few upscale brands have also made their way into the

market, which is suggestive of the maturity of the city’s consumer market. Brands like Armani Exchange, Charriol,

Technomarine, and Phillip Stein have entered Davao.

Among the International Brands That Entered Davao

Source: Cushman and Wakefield Research

General Retail

Food & Beverage




OUTLOOK

Davao has shown to be an appropriate market for retail expansion beyond

the capital. Its demographics have dictated the surge in retail supply in

recent years, and in turn the rise in retail demand ushering in the influx of

retailers. The rapid take-up of retail space in major malls is sure to keep

occupancy rates at a high, with optimistic projections looking at close to

100% occupancy by 2016.

So, with retail supply in the existing major malls nearing saturation, the

question arises: where does future retail growth of the city take place?

While there are no visible major shopping mall projects in the city’s pipeline

yet, future retail development is looking to take place in many of Davao’s

mixed-used developments. Township developments, such as the upcoming

Davao Park District, will incorporate retail strips and a lifestyle mall to cater

to retail expansion. IT Parks and IT-BPO buildings have also integrated retail

components into their developments. Case-in-point would be recently

opened mixed-use development Felcris Centrale, which is an IT-BPO office

with a two-floor retail podium. This corresponds with overall real estate

trends that respond to the need of the majority demographic- the working

age population. Therefore, the outlook now is that we will be seeing retail

integrated into workplaces and mixed-use township communities.

Of course, this does not take major shopping malls out of the picture. Major

malls tend to evolve over time, more often than not expanding retail space

in the process. Many of the major mall developers in the Davao, like SM and

Ayala, have sizable land banks that allow for any form of expansion.

The bourgeoning consumer market in Davao City will continue to encourage

real estate developers, and provide opportunities for local and foreign

retailers. While Davao retail is already more dynamic than it has ever been,

it will become even more vibrant as new developers and retailers enter the

market. With the right demographic fundamentals, the social infrastructure

to support the demographic, and an energetic and fresh retail sector, Davao

City is poised for further retail development and is surely a retail destination

to look out for outside the capital.




Jude David Roque

Senior Analyst Research and Consultancy [email protected]

Janlo de los Reyes

Manager Research and Consultancy [email protected]

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