Global Investors Assess Vietnam’s Domestic Real Estate Market
• Foreign investments in Vietnam are on the rise
• Retail and Office Spaces in Ho Chi Minh City are in high demand
• Rents are rising in both residential and retail spaces in Ho Chi Minh City
When discussing the most dynamic emerging markets globally, it’s hard to lose sight of Vietnam. Driving its strong economic growth is an expanding middle class with thickening wallets. Rapid urbanisation supported by a young, growing and educated population all bode well for an economy with one of the world’s fastest growing GDP rates. With robust growth momentum, the World Bank has projected that Vietnam’s GDP will expand by 6.8% in 2018. Understandably, this has fueled the appetites of global investors looking to make their mark in Vietnam’s burgeoning domestic real estate market.
Home to Asia’s best performing stock market in 2017 and the second largest retail market in 2018, much of the appeal Vietnam currently holds sits, ironically, in its auspicious future. Since 2015, the bulk of big-ticket M&A transactions we’ve seen have been championed by those investing in property development sites, followed by hotels, apartments and offices. This is testament to the fact that those pouring money into Vietnam are in it for the long run.
Year-on-Year Increase in Foreign Investment in Vietnam
Over the last three years, foreign investment in Vietnam’s real estate market has been increasing year-on-year. In particular, developers from Singapore, Japan and Korea have favoured development sites in downtown areas and within close proximity to Metro Line stations. Local developers usually enter into joint venture agreements with foreign developers on the premise of optimizing decision-making in site sourcing and project management.
Can Supply Equal Demand in Ho Chi Minh?
Running alongside the strong demand for commercial sites is the relative shortage of supply, which is especially prevalent in the market for prime retail and office spaces in Ho Chi Minh City and Hanoi. Grade A rents in Ho Chi Minh City have increased from about US$35 per square meter per month (psm/month) in Q2 2016 to US$43 psm/month in Q2 2018, which translates to a healthy 23% growth. Similar office rental growth has been observed in Hanoi over the past two years. In the office market, an increasing presence of international firms has resulted in developing areas absorbing the overflow of occupants. But, progress in office construction has been pleasing and the second half of 2018 will bring a significant amount of Grade A office supply onto the market.
Another area generating solid demand is the residential sector, and this segment of the market stands to inject further momentum in the economy – to illustrate, the largest IPO this year was that of a luxury residential developer in which Singapore’s sovereign wealth fund GIC recently acquired a stake. Investors from Singapore, Hong Kong and Taiwan have shown much enthusiasm in the serviced apartment and condominium markets, together representing 75% of total buyers in the buy-to-let market. As a whole, foreign buyers accounted for 50% of all successful residential deals. What this tells us is that foreign investors are not merely entering Vietnam to set up operations, they are committed to keeping their money here. This could explain the 15% rise in prime residential prices in Ho Chi Minh City over the past two years.
Thanks to governmental efforts to ease restrictions on foreign holding of public companies, the future just got brighter. This allows the composition of the economic landscape to diversify and encourages foreign ownership of commercial assets – thereby creating additional demand for real estate and increasing the rate at which Vietnam outpaces its fellow “BB” rated peers in economic growth.
Is This Growth in Vietnam Sustainable?
Given the parallels we can draw between the Vietnamese and Chinese stories, you might begin to speculate how sustainable demand and overall economic activity are. A differentiating factor Vietnam boasts is the relatively equal dispersion of wealth compared to other developing nations. And, to understand why else investors would be inclined to stay in Vietnam, we need to think in reverse. With a government that has publicly expressed the need to improve productivity and lower transaction and logistics costs, businesses are better equipped in attracting investors not only to individual companies and projects but to the wider market.
As concerns about credit tightening and geopolitical uncertainties remain, it’s easy to see why there may be some speed bumps in the short term. But, escalating trade tensions between the US and China have prompted companies to shift production to Southeast Asia in a bid to circumvent levies. Vietnam, which is a major exporter of apparel and electronics, has benefitted from this shift of low-cost manufacturing away from China.
Further, as the 2015 real estate market recovery shows, the occasional market correction is good news in the long run. And, we only need to look at the largest transactions this year – for major office, residential and retail sites, all backed by foreign capital, to gauge the fervor foreign investors have in Asia’s rising star.
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About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2016 revenue). The company has more than 75,000 employees (excluding affiliates), and serves real estate investors and occupiers through more than 450 offices (excluding affiliates) worldwide. CBRE offersa broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com or www.cbrevietnam.com.
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