Bigger hurdles around corner for industrial real estate

Despite lots of talk in attempting to overhaul the real estate market in Vietnam, patience will likely be required as many new challenges are set to pop up even as old ones are solved.

In its latest report, VNDirect Securities said that the factors supporting industrial park (IP) real estate in particular were fading, while some barriers are appearing to rise.

Industrial real estate may be affected by tax overhauls about to take place for corporates in many countries, photo Le Toan

“Vietnam’s ability to attract foreign direct investment (FDI) is under strong competition from other countries in the region such as Indonesia, Malaysia, and Thailand, who are racing to provide preferential policies for more foreign companies into their countries, especially in terms of e-vehicles and the semiconductor industry – which are Vietnam’s strengths in attracting FDI,” the report said.

Dinh Thanh Phuong, director of business operations at KCN Vietnam, said that the current difficulties of the industrial real estate market are mainly related to compensation and site clearance for infrastructure investment and administrative procedures for granting land use right certificates.

In particular, the procedures for transferring the form of land lease and payment of land have been greatly affecting the access to capital for project development from commercial banks.

In addition, the determination of land area for construction of common-use infrastructure, difficulties in funding sources for infrastructure maintenance and repair, progress of appraisal and approval for adjustment of IPs, and regulations on their construction are also delaying many projects.

“With these obstacles, attracting funding into Vietnam will be harder. Ventures will take longer, and IP investors suffering from infrastructure delays and lengthy licensing procedures will fail to hand over land to secondary investors in a timely fashion,” Phuong told VIR.

Meanwhile, Bui Trang, country head of Cushman & Wakefield Vietnam, said that the industrial real estate sector is facing stiff competition from countries in the region such as Thailand, Indonesia, and India.

“Attracting investment from tax incentives is losing its advantage. Instead, the real competition comes from the quantity and quality of human resources,” Trang said.

Some advantages fade

Along with that, the global minimum tax expected to be applied in 2024 may ensure Vietnam’s tariff advantages are not as great as before. The global minimum corporate income tax is an agreement reached by dozens of nations to combat tax evasion by multinational corporations of a certain size.

“The tax increase may reduce the attractiveness of the investment environment in Vietnam because efforts to attract foreign funding through the exemption and reduction of corporate income tax will lose its effectiveness,” said Trang. Industrial real estate will also be affected by this tax because, in the past, this type of investment was gained mainly thanks to tax incentives and cheap labour costs, Trang added.

Meanwhile, the competitive advantage of Vietnam’s IPs is still being lost due to high land prices, lengthy procedures, and inadequate infrastructure in some areas.

According to VNDirect Securities as well as many other segments, IP real estate still has many problems related to legal procedures, so it is difficult to expand the available land to invest in real estate property at this time. The decline in FDI inflows into Vietnam will also affect the development dynamics of this industry.

Figures from the Foreign Investment Agency under the Ministry of Planning and Investment said that as of April 20, the total registered foreign capital in Vietnam reached nearly $8.9 billion, down 17.9 per cent over the same period last year.

FDI inflows into Vietnam weakened in the first four months of 2023 due to the impact of new investment plans and production expansion in the context of global economic uncertainties, including slowing global growth, high inflation, and financial market liquidity being tightened due to rising USD interest rates.

Other issues emerged last year with the implementation of Decree No.35/2022/ND-CP in May 2022 on the management of industrial and economic zones. It states that investment divergence must be carried out during the whole process, from policy to approval and implementation on the project site.

“This leads to the fact that an IP with many different investors generate many complicated procedures which take time to solve,” Trang said.

In addition, Decree 35 does not allow foreigners to stay in IPs, leading to difficulties in arranging accommodation for workers.

There is also a lack of procedures in the mechanism of converting IPs into urban-service areas. In addition to the relevant conditions, the converted decision can be carried out only if there is a consensus between the investor of the IP and more than two-thirds of the enterprises subleasing land in the area agreed to be converted.

“However, the problem is that the enterprises that sublet the land may not agree to the conversion because they are not ready to move their business to another place or may not be financially ready yet,” Trang said.

Meanwhile, the concept of IP combined with urban areas and services is still facing problems because of the confusion in the legal system to regulate such a complex. It could eventually be guided in the Law on Housing, the Law on Real Estate Business, or it may be necessary to have a separate mechanism altogether.

Global weakening effects

According to Cushman & Wakefield Vietnam, the industry has recently faced many challenges with reduced demand and disrupted supply chains.

Due to the lengthy legal and procedural situation, in the first quarter of 2023, the Ho Chi Minh City market did not record a new supply of IPs. The market recorded a supply of 82,000 sq.m of ready-built factories (RBFs) and 51,500 sq.m of warehouses.

According to experts, IP real estate still has many problems related to legal procedures, so it is difficult to expand the available land to deploy new projects at this time. This is also a common difficulty of many real estate segments in recent years.

Specifically, the occupancy rate of the southern IPs hit 81 per cent, up slightly on-quarter but only equivalent to a net absorption of 48.3 hectares. Furthermore, RBFs and warehouses recorded a decrease in occupancy, with factories reaching 78 per cent (down 2 per cent on-quarter) and warehouses reaching 73 per cent (down 3 per cent).

The causes may come from the weakening of the world economy, causing the demand to shift and expand production abroad of international manufacturers to decrease. On the other hand, domestic enterprises also faced fewer orders, causing units to reduce production scale.

Despite difficulties, Cushman & Wakefield Vietnam cited that industrial real estate rental prices in Ho Chi Minh City and the southern region in general have stabilised at a high level. Accordingly, the average primary rental price of an IP reached $163 per sq.m per lease term, up 2.5 per cent on-quarter and 13 per cent on-year due to the scarcity of industrial land supply in the central existing business areas.

Meanwhile, rents for RBFs and warehouses were stable on-quarter while industrial activities slowed down, at $4.60/sq.m each month for factories and $4.40/sq.m per month for warehouses.

However, Cushman & Wakefield forecast that global economic instability, weak consumption, and reduced export orders will affect demand in the short term. Therefore, the rental price of RBF real estate may stabilise or decrease over the next two years. At the same time, no new IP land supply will be recorded until the end of this year, and around 1.1 million sq.m may come into the market after that, they added.

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