High-value foreign investors bullish on Vietnam’s industrial sector

John Campbell, manager of Industrial Services at Savills Vietnam

How has the COVID-19 pandemic affected foreign investors’ sentiments about the Vietnamese market?

Production disruptions in factories and industrial zones (IZs) attracted considerable coverage in the international media. Low-value industries are beginning to set up elsewhere in Southeast Asia as Vietnam no longer offers the same incentives, and these industries such as textiles and furniture struggle to source affordable labour and land in Vietnam. However, foreign and high value-added investors remain bullish on Vietnam’s long-term growth.

Overall, protecting the interests of foreign investors is a government priority as the country’s dependence on foreign capital is key to its recovery and economic development. In September, Prime Minister Pham Minh Chinh visited a Samsung factory where he reaffirmed the government’s commitment to protect the interests of foreign investors. He also met and assured American business leaders that Vietnam’s pandemic-related difficulties are only temporary.

High-value foreign investors are still bullish on Vietnam’s industrial sector. Despite the concerns in the media, the numbers tell a promising story: Total registered foreign direct investment (FDI) in manufacturing increased 16.45 per cent on-year. Newly registered manufacturing FDI is also up 16.15 per cent.

Furthermore, the National Assembly highlighted that trade turnover and FDI from the EU countries have soared since the EU-Vietnam Free Trade Agreement (EVFTA) came into effect last year. As of the first nine months of the year, there were 2,242 projects from all but one EU country in Vietnam, an increase of 164 projects on-year. Total registered capital was $22.24 billion, up $483 million on-year, despite the pandemic.

Which factors will help anchor the development of industrial property segment in 2022 and beyond?

The government’s re-opening plan has instilled confidence in developers and investors. A successful 2022 will largely rely on the resumption of international flights, but this fourth quarter is already looking more promising than the first three.

Coupled with an encouraging re-opening plan, the government’s avowed support for foreign investors and the sheer resilience and adaptability of local enterprises are promising. It paints a reassuring picture that not only will the country recover but is likely to come back stronger than ever.

Vietnam is expected to continue its move up the value chain thanks to its stable growth, business climate, FTAs, and relocations out of China. In 2022 and beyond, we also expect some forecast trends to continue to emerge, such as Industry 4.0 and smarter manufacturing, modernising supply chains, sale-leasebacks, new IZ models and modern masterplans, data centres, and cold storage.

The sale-leaseback trend has recently emerged in the Vietnamese market with several new deals. What are your expectations for this trend?

I certainly expect more sale-leaseback transactions in the near future. It should be considered as a cost-effective alternative to taking out high-interest bank loans.

The emergence of the sale-leaseback strategy, which is converting industrial real estate into cash by selling the property and leasing it back again without interrupting operations, is becoming a smarter and viable option for businesses.

Due to the pandemic, more owner-occupiers need to raise capital than ever before – whether to stay afloat, help their cash flow, or invest in their other business lines. Until recently, many of these companies were not even aware of sale-leaseback as a means of financing

As the trend continues, we expect to see a lot of sale-leaseback activity in the market.

Where could the primary demand for industrial property be coming in near future?

With international flights expected to resume in the near future, demand for logistics land and standard warehouse will continue to rise. E-commerce, fast-moving consumer goods (FMCG), and pharmaceuticals are growing at a rapid pace and need to source locations near the central business districts.

We also expect the manufacturing relocation wave from China to continue, especially from electronics and supplier industries as companies seek to mitigate risk and diversify their supply chains.

Demand for industrial and logistics land, in addition to ready-built factories and warehouses, will continue to be the core of enquiries next year.

However, in terms of new trends, data centres and cold storage facilities are in demand and have gained traction in 2020 and 2021. Next year, we expect this to continue, as Vietnam is now on the radar for hyperscale facilities.

Vietnam leads the Southeast Asian data centre market and is projected to grow at a compound annual growth rate of 14.6 per cent to reach $1.6 billion by 2025. This is driven by the growing popularity of big data solutions, IoT, and cloud-based solutions. Digital infrastructure has never been so important to the global economy, and its demand is driven by growth in video streaming, video conferencing, online gaming, and social networking.

Regarding cold storage, Asia’s growing middle class and maturing economies mean demand for products like safe and high-quality food will continue to increase, with important cold storage drivers being the exponential growth of Vietnam’s grocery market and modern retail trade.

Vietnam’s cold chain logistics is growing, and forecasts expect it to be worth $295 million by 2025 with a growth of 12 per cent per annum. Despite growing demand, cold storage facilities are in short supply with only 48 facilities in 2019. Long build times and high costs have resulted in limited supply and rapid rent increases from $52 in early 2020 to $87 per tonne in 2021.

The surge of e-commerce is putting Vietnam’s limited cold storage facilities under pressure, despite the increasing investment and expansion of cold storage facilities by local and international developers over the last three years.

In late 2019, the whole country had only 48 cold storages with a capacity of 600,000 pallets. At the time, they already had 80 per cent occupancy. The cancellation of seaport export orders during the pandemic peak in 2021 forced cold storages to work at maximum capacity.

Some large-scale corporations invest in their own storage systems, small- and medium-sized enterprises are depending on the overcrowded leasing market. However, as the pandemic has changed consumer behaviour, there is real potential for investors to develop the cold storage market to service upcoming demand.