Office space in Vietnam going, going
... By David Fullbrook
HO CHI
MINH CITY - Vietnam's office rents, already among Asia's
highest, look set to soar as space is tight, while
developers, unable to forget the late 1990s market
crunch, focus on the fast-return retail market. With
Vietnam's economy apparently on track for a sustained
boom, the plucky few building offices, especially in
Hanoi's and Ho Chi Mihn City's new centers, look set to
reap big profits.
Offices in Ho Chi Minh's
central Saigon district are renting for US$26 per square
foot, against $25 in Singapore, $23 in Hong Kong and $22
in Hanoi, reports property consultant CB Richard Ellis
(CBRE). That compares with $12 in Bangkok and $6 in
Manila.
Downtown land prices in both Hanoi and
Ho Chi Minh have soared - in Saigon, prime retail prices
are similar to Chicago's - as Vietnamese with sacks of
spare dong invest in land because they remain wary of
banks, the formal stock market is still tiny and the
much bigger informal market is very risky. Unlike Hong
Kong or Singapore, though, there are precious few office
towers in either Hanoi or Ho Chi Minh. Vacancies are
also among the region's lowest, and rates are not seen
peaking until 2008 or 2009.
"This year is the
biggest net take-up we've seen in the market. We've
identified tenants looking for another 20,000 square
meters of space in the next few quarters. Rents will be
sustained, they may even rise, there isn't much space
left," says Marc Townsend, CBRE's Vietnam managing
director.
But many investors still have doubts,
recalling the early 1990s, when Vietnam was tipped for
economic take-off but spluttered and stalled due to
botched reforms and the 1997 regional financial crisis.
That left many developers sitting on loss-making rents.
"Guys who invested in 1995-98 are sitting on very slim
profits, if any. There have been very few successful
projects. A number of very big sites have been
stagnating in the city since 1997; they are excellent
sites you wouldn't get anywhere else in Asia," says
Townsend.
Back in the mid-90s, construction
costs were high, everything had to be imported, and
implementation was slow. "Only now are they just
managing to cover their interest charges," says
Townsend. "Rents are the highest they've ever been, but
they're unlikely to fall as nothing new will be in the
market for another two or three years."
Economic
growth running around 7-8% annually, earning fat profits
for an increasing number of both private and better-run
public Vietnamese firms, is turning heads. Their tastes
in offices are also beginning to change, suggesting
office demand will soar. "Local companies tend to stay
in villas for example. Only some of them are now
starting to move to commercial buildings," says Eric
Chu, a Hong Kong developer working in Vietnam for 15
years. "A small street in central Hong Kong probably has
more supply in terms of square meters than the whole of
Saigon. The yield here is still very good."
Over
the last few years a raft of reforms, including a
wide-ranging trade deal with the US and steps toward
World Trade Organization (WTO) membership in 2006, have
caused a growing number of foreign investors to sit up
and take notice. "The government is quite good at
facilitating investment, much more helpful and
knowledgeable than it was 10 years ago. You can now
apply for investment licenses over the Internet, with
approvals sometimes in eight hours," says Brett Ashton,
property consultant Chesterton Petty's Ho Chi Minh
director.
Firms from northeast Asia in
particular are pouring money into low-end manufacturing.
Consequently, vacancies in most office buildings are
below 5%. "In two years, people will be screaming for
space," says David Clarkin, an Australian developer and
consultant operating in Ho Chi Minh for over a decade.
Still, despite signs that demand is taking off
against a healthier economic picture, many - though not
all - developers remain wary. That is partly because
developers cannot look back to previous cycles to gauge
demand because there has never really been one.
"Question is how much additional requirement is there
each year? It's such a new market, the depth of the
market growth is not necessarily fully understood," says
Clarkin.
Foreigners cannot buy land, but only
hold land-use rights on maximum 49-year leases. Most are
looking for 99 years, if not more, and would prefer to
legally own the land rather than just the rights.
Consequently, Vietnamese developers will drive the
market, not only because they can secure longer leases
and borrow easier than ever before, but because they are
more comfortable with the land use rights concept.
Having said that, land reforms in recent years
suggest more is to come, particularly as Vietnam takes
reform cues from China, where foreigners can buy
significant pieces of land, something still not possible
in relatively open Thailand for example. So a developer
starting work on a project now could reasonably expect
significant market liberalization over the next 49
years.
It is also hard justifying office
investments, which typically take years to generate
returns, when the residential market, which usually
delivers profits in a few years - months even - is
boiling away. "Many of the stalled office ventures are
trying to convert into apartments for sale," says
Ashton. Interest is perking up though, but not quickly
enough to impact the market significantly over the next
few years. "The tallest building in Vietnam is 32
stories. The next stage will be 40 stories and above.
We're currently consulting on one project that is 65
stories. We'll see a lot more integrated developments,"
says Townsend.
In Hanoi and Ho Chi Minh,
integrated urban development projects in areas where
land is plentiful and cheap are starting to get off the
ground, after stalling in the late 1990s. They will take
a decade or two to complete. Nor will they remain cheap
forever. Their out-of-town location and modern aesthetic
will not appeal to every tenant either.
Indonesia's Ciputra, which somehow survived
economic dire straits, is developing 300 hectares in
western Hanoi - mixing offices, retail and residential.
Two apartment blocks are just entering the market along
with a few hundred houses. Much more will follow. It
will be complemented by Hanoi New Town, lead by a South
Korean consortium, including Daewoo, steel giant POSCO,
and four others, plus local partners.
Vietnam's
biggest development is Saigon South, also called Phu My
Huong, a vast, comprehensive development planned by
foreign consultants taking shape in Ho Chi Minh. Its
masterplan includes offices, malls, parks, universities
and housing. Taiwan's CT&E is responsible for the
overall 700-hectare site, building infrastructure in
return for development rights from the Ho Chi Minh City
People's Development Committee, the city council.
"Phu My Huong, we're starting to see a lot of
interest down there. Manulife has just bought a plot for
their headquarters down there. A large, fast-moving
consumer goods company is also looking. With the new
bridges you're going to see a lot more activity in
Saigon South than you are in say Thu Thiem," says
Ashton.
Thu Thiem is the eastern bank of the
Saigon River opposite the Saigon district. It is akin to
Shanghai's new financial district, Pudong. Thu Thiem's
masterplan sees a forest of office towers mixed with
parks and homes. But with only one bridge connecting it
to the rest of the city, its development must await more
bridges and tunnels that are now under discussion.
Saigon South and Thu Thiem hold out the prospect
that Saigon proper, still a pleasant leafy place, will
avoid rash development that has scarred other Asian
cities and that will require decades and vast amounts of
political capital to fix. Those developments also seem
likely to temper land prices in Saigon, ensuring the
area draws developers.
"I'd imagine it will be
more of a Shanghai than a Bangkok or Jakarta. I think
they are a lot more switched on in some ways. I also
think the economic growth, and therefore the city's
growth and modernization, is going to be quite
phenomenal over the next 15 to 20 years," says Clarkin.
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