Government options to offset rising rents

Jack Nguyen, partner from Mazars

For a country in development, the significant uptick in land prices is dangerous with many pointing to speculation as the main culprit for the increased prices. Some locations clearly have no reason for the (relatively) high land prices other than they are artificially inflated by speculators hoping to do a quick flip of the land.

The country and the government of Vietnam very much want to attract foreign investment into the country through various free trade agreements and courting companies to diversify their supply chain to Vietnam.

Vietnam is high on many foreign investors’ radar as an attractive country to put money into. However, high rental and high occupancy rates at industrial parks (IZs) are creating challenges for companies planning to do so, with the high land cost a major point when companies consider setting up a manufacturing plant in IZs.

At least one company has said that land rents tends to increase during land fee adjustment periods, making it difficult for project owners to invest in IZs as they are sensitive to shifting rental costs affecting profitability.

A slowdown in manufacturing investments into Vietnam will be problematic in many areas – continued economic development, sustaining GDP growth, maintaining employment for workers and, more importantly, hampering the sharing of advanced technology if manufacturers are unable to find space in IZs.

Clearly the increase in land prices will impact investments from foreign manufacturers into Vietnam, and the land price is an issue that the government is cognisant of and is motivated to manage.

The government may consider offering other incentives under its control to offset increased costs of foreign investors. It can continue to offer better tax incentives than it currently does, and also improve infrastructure development so that companies reduce their transportation costs and ultimately make it easier to do business here.

Ease of doing business includes simple company set-up procedures, efficient customs declaration, more tax assessment transparency, and moving more administrative procedures online.

During the past two years alone, Vietnam has ratified major free trade agreements and cemented deals within ASEAN, the EU, the UK, and more.

With these and continued global supply chain shifts out of China, it is in Vietnam’s interest to create as many favourable conditions as possible for foreign investors, particularly in the manufacturing sector.

Other incentives that Vietnam should consider include easier access to local financing and lowering lending interest rates, improving the legal framework and dispute resolutions, and doing more to increase the supply and skill of labourers. This could be done through better vocational training and helping manufacturers move their goods by improving logistics and reducing bureaucratic red tapes.

But in order for these measures to be effective, land prices need to be addressed and managed so that rental rates don’t become too much of a burden on foreign investors.

Land prices in provinces throughout Vietnam jumped noticeably during the past year. A recent report by the Ministry of Construction indicated that just in the first two months of 2021, land in some places increased by more than 10 per cent compared to the same period the previous year.

The increase in land prices has impacted land rental in IZs in the country, with parks in northern Vietnam experiencing a 6.5 per cent rise while those in the south showed a 12.2 per cent increase in 2020.

In the residential sector, international real estate service firm Savills commented that apartment prices on average increased by 10 per cent year-on-year in the third quarter 2020 to $1,500, as developers delayed launches due to the pandemic.

In southern Vietnam, the ready-built landed property segment in Ho Chi Minh City saw average prices climbed by nearly 36 per cent to $5,277 per sq.m and $5,337 per sq.m in the second quarter and third quarter of 2020, respectively.

The residual effect of the increase in land prices has clearly flowed to the IZs. Average leasing costs in Ho Chi Minh City and other southern provinces rose to $106 per sq.m, a 9.7 per cent increase compared to the previous year. And in Ho Chi Minh City, the rent was highest at $182 per sq.m, according to a recent report from real estate services firm JLL.