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READ PART 1: How the pandemic is crushing company earnings
The Philippines is a nation of malls. But the landscape may soon change in the coming years, as the coronavirus pandemic disrupts one of capitalism’s largest centers.
Before the health crisis, bigger was better, and developers were racing to build the biggest and grandest malls per developing city.
Data from companies show that there are at least 14 million square meters of mall space in the country, over half of which is in Metro Manila.
SM Malls alone gobble up 8.5 million square meters of mall space. If all SM malls in the country were combined, they would be much larger than San Juan City, Metro Manila’s smallest city, with a total area of around 5.9 million square meters.
Typically the size of the mall in a city or province signifies economic growth. The first major mall in an ordinary Philippine province would even be considered a source of pride.
But that will all soon change, with foot traffic dropping by 50% to 70%. According to real estate services firm Cushman and Wakefield, bigger may no longer be better.
“New shopping mall developments will transition from bigger regional malls to town centers in the post-COVID-19 scenario, as business districts with large population concentrations become less desirable to wary consumers,” Cushman and Wakefield’s recent report said.
Colliers, another property consultancy company, added that “the implementation of physical distancing measures will likely affect retail sectors where people convene, such as cinemas and foodcourts.”
“Hence, mall operators should rethink the densities of these segments.”
What will happen to all that space post-pandemic?
Property giants, overall, are optimistic that Filipinos will flock back to shop, as soon as the crisis is contained or a vaccine is developed. They are also banking on government intervention to bring back jobs and consumer confidence.
But for now, they may need to grow their digital space or repurpose their current physical assets.
For instance, SM Prime has leased out a floor of its mall parking spaces to other companies, while Ayala Land is looking at making parts of its malls as a storage facility, according to a Bloomberg report.
Mall operators have also started to help their tenants tap the digital space, according to Piper Tan of Philstocks.
“For example, Ayala Malls have used the Zing, a mobile app, which helps you shop. You just select the items you want and pick it up at the entrance. It’s the new drive-through, you can get appliances now instead of just coffee,” Tan said.
This strategy, Colliers said, would be helpful for businesses, as the pandemic “will likely redefine the retail sector.”
“As part of the new normal in retail, Colliers encourages brick-and-mortar retailers to tap the demand by expanding their online presence. We expect these retailers to set up their own e-commerce websites, partner with e-commerce sites of mall operators or utilize social media platforms such as Facebook and Instagram,” Colliers said.
However, Tan noted that these schemes won’t really bring profits back up to normal levels, but would help the entire business ecosystem in the existing mall space to survive.
Data from COL Financial showed that property developers with malls suffered massive losses.
“All property companies delivered weaker earnings during the first half, with median earnings down 37.5% as the most significant impact of COVID-19 was felt during Q2 2020,” COL Financial said.
For property developers, office space helped offset losses, as tenants continued to operate on a skeleton workforce.
“If you have exposure to malls and hotels, it’s going to be hard. But there’s hope for you if you have plenty of office space,” Tan said.
Hotels as offices?
The office space business also took a hit, but was considered the bright spot of all property segments.
Office space, along with residential projects, helped companies like Megaworld (which has around 20% of office space in its total portfolio) trim losses, which were incurred by its mall and hotel segments.
Meanwhile, companies with little exposure to both malls and hotels like Cebu Landmasters (which focuses mainly on office space and residential businesses) only got some scratches and bruises when the national lockdown was enforced.
“Note that Cebu Landmasters is not in Metro Manila, the hot spot of the pandemic,” Tan noted.
With office space bringing in the cash, Colliers recommended that vacant spaces, especially hotels, be repurposed as flexible workspaces in the meantime.
“Colliers encourages hotel operators and developers to highlight compliance with health protocols, innovate services using technology, and consider other leasing models and repurpose facilities into co-living facilities and flexible workspaces,” it said.
“We encourage hotel operators to continue obtaining accreditation from government agencies to accommodate BPO workers and OFWs.”
Colliers’ recommendation may be the way to go for hotels for now, as average daily rates (ADR) are expected to drop by 30% due to low room occupancy.
“We do not see a pick up in ADR over the next 18 to 24 months as the leisure sector continues to suffer from the global economic crunch and limited spending of local tourists,” Colliers said.
Tourism and airlines
Data from the Department of Tourism showed that tourist arrivals and receipts from January to July plunged by more than 70%.
Due to the pandemic, tourist arrivals dropped by 73% to 1.3 million from the 4.64 million arrivals recorded in 2019.
On top of weak consumer confidence, hotels and the overall tourism sector are also keeping a close eye on the state of airlines.
As an archipelago that boasts the world’s best islands, airplanes are the best and most efficient way to move around. However, the pandemic has gutted Cebu Pacific and Philippine Airlines, which have lost P9 billion and P20.9 billion, respectively.
Both Cebu Pacific and Philippine Airlines have massive long-term debt, causing some anxiety in the banking sector. (READ: Airlines ask gov’t for lifeline as virus leads them to bankruptcy)
Philippine Airlines has long-term debt amounting to P33.7 billion, while Cebu Pacific has P48.4 billion.
Their debt-to-equity ratios, which measure how companies finance their assets and which are a signal for creditors, have ballooned due to losses.
As of the first half of the year, Cebu Pacific’s debt-to-equity ratio stood at 2.18, while PAL Holdings, the operator of Philippine Airlines, had a higher ratio of 3.88.
This means that Cebu Pacific uses around P2.18 in debt for every P1 of its equity, while PAL Holdings uses P3.88 of every P1 of its equity. In general, a good ratio is below 1, but this varies per industry.
Luis Limlingan of Regina Capital said that both airline companies have been assisted by their respective companies.
Gokongwei’s JG Summit is supporting Cebu Pacific, while Lucio Tan’s LT Group is infusing cash into PAL.
JG Summit has companies like Universal Robina, which delivered stable earnings during the 1st half of the year. On the other hand, the LT Group posted strong earnings during the pandemic, thanks to a rebound in tobacco and liquor sales.
“The airline companies will have to look for ways to refinance and find for ways to borrow from the parent without breaking the single borrowers limit. It will be tough, but hopefully they can resume operations in the next quarters,” Limlingan said.
Uncertainty in banks
With money moving around to cover up gaping financial holes among industries, another good barometer of the economy’s health is the financial position of banks.
ChinaBank Securities research director Rastine Mercado said that banks’ earnings performance was mixed during the 1st half, with some posting steep contractions in their bottom line (BDO, PNB, and Metrobank), while others managed to post growth (EastWest Bank, ChinaBank, Security Bank).
However, he noted that contractions were mostly pulled down by higher loan loss buffers – an accounting mechanism where banks “anticipate” bad loans by setting aside cash.
“These provisions were mainly anticipatory in nature as it is still uncertain as to what the actual impact of recent events is on banks’ loan books,” Mercado said.
To understand how banks are faring during this pandemic, one must look at non-performing loans.
The Bangko Sentral ng Pilipinas said that the level of bad debt, so far, remains low. This is partly due to the moratorium on loans through the Bayanihan Law, which gave borrowers up to 6 months to settle or stagger obligations.
Tan said that the level of non-performing loans will be clearer in the latter part of the year, when borrowers either start paying up or not.
Should banks feel a sucker punch, rather than just an expected pinch, they would tighten up even more and make it harder for companies to look for cash to finance future projects.
Analysts are on a wait-and-see mode for now, watching if another domino effect will take place, affecting businesses, employment, and overall Philippine growth. – Rappler.com