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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.
(Copyright 2004 Asia Times Online Ltd. All rights reserved. Please contact
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