Office leasing market promises undetained impetus on all fronts

Small land sites which are not ideal for residential development are suitable to develop office buildings

A bustling market

According to the Ho Chi Minh City Real Estate Association’s (HoREA) report on the real estate market in 2017, the city’s office-for-lease market saw strong growth in 2017 with high occupancy rates. Especially, the Grade A segment recorded an average occupancy rate of 90 per cent. The total stock of office space in the city currently amounts to 1.8 million square metres.

Meanwhile, real estate services firm CBRE Vietnam said that Ho Chi Minh City welcomed two Grade A and three Grade B buildings in 2017. The asking rent for both grades displayed a stable trend, with Grade A and Grade B achieving $37.04 and $20.63 per square metre per month. Grade A reported an increase of 1.3 per cent year-on-year, while Grade B displayed almost no change.

The vacancy rate remained low, averaging 8.2 and 2.8 per cent for Grade A and Grade B, respectively, in 2017.

The office-for-lease market saw a shift of projects from the city centre to suburban areas, according to HoREA. Three new office buildings were launched within one kilometre of Ung Van Khiem Street of Binh Thanh District. A slew of new Grade B offices are underway in districts 4, 7, Binh Tan, and Phu Nhuan.

This is the first time in the last three years that the local market has embraced new high-end entries, which marks a step forward, according to Savills Vietnam’ fourth quarter market report.

Savills Vietnam said that the office market has suffered from a shortage of supply in recent years, and the vacancy rate is always at a low level, as larger sites are very hard to find in the central business districts (CBD).

The economic recovery has brought massive foreign direct investment (FDI) capital, rapidly increasing demand for high-end office space. The occupancy of the operating buildings and the entire market’s leasing capacity remained high, on 95 per cent throughout all quarters in 2017.

Beside the main clients hailing from F.I.R.E. (financial, bank, insurance, and real estate) sectors, new factors that drive demand also became visible throughout the year.

“Harmonising with the global and regional trends, entrepreneurs experienced in technology and e-commerce are growing rapidly in Vietnam and require both labour and office space. This sector also saw increasing office demand in the past two years,” said the Savills Vietnam’s report.

Office-for-lease in Ho Chi Minh City draws great attention thanks to the positive indicators. The occupancy rates of Ho Chi Minh City and Manila (the Philippines) are two of the highest in Southeast Asia. Despite supply growth, there is also huge demand in the market.

The occupancy rate for the Grade A segment is consistently high

A robust year for office leasing

Savills Vietnam forecasts that in 2018, capacity will remain high and rent will keep steadily climbing due to pressuring demand.

According to CBRE Vietnam, from 2018 onwards, the market will rise with better supply, albeit at a slower pace than in 2017, with only one Grade A in the CBD—Deutsches Haus—while Grade B supply will continue to spread out at non-CBD districts like districts 2 and 10. Rental growth will increase at a slower pace as existing supply will remedy rental rates, while vacancy rates will surge momentarily before dropping just as quick as the market will continue its healthy absorption momentum with new supply.

According to the Ho Chi Minh City Department of Construction, 2018 promises to be a buoyant year for the office-for-lease market due to new supply and strong demand.

Bui Van Hieu, chief of Office at the Ho Chi Minh City Department of Construction, said that the city welcomed 41,194 newly-established enterprises in 2017, accounting for 32.4 per cent of the country’s total. These new businesses have spurred the market demand for office space in the city. In addition, the city will also relocate 2,000 offices from condominiums in 2018.

With regards to future supply, the city has a number of land plots ranging from 500sq.m to one hectare in both the city centre and urban fringe areas. As the land sites are not ideal for housing development, investors will build office buildings on these sites instead. Moreover, office buildings have easier licensing procedures than residential projects as they have no limitations on population density. The launch of office building projects in the suburban areas will significantly drive total stock in the city in the coming time.

In addition to traditional commercial lease, new officetel products by Novaland Group, Hung Thinh Corporation, Vingroup, and Him Lam Land Corporation will come on stream in 2018.

Savills Vietnam also forecasts a new breakthrough in 2018. With the successful organisation of the APEC Vietnam 2017, Vietnam is on the radars of multinational corporations. Savills Vietnam has learned that most of these companies want to set up representative offices in Ho Chi Minh City.

Hoang Dieu Trang, senior manager of the Commercial Leasing Department at Savills Hanoi, said that the office leasing segment in Vietnam is at a turning point. In 2017, occupancy rates for high-end offices were at high levels in both Hanoi and Ho Chi Minh City with vacancies at the lowest points for the majority of projects in the CBD. This will drive average rental prices higher in 2018.

The market will continue to see tenants move from downtown to the outskirts, turning them into new centres. New hubs for technology, telecommunications, and commercial companies are beginning to take shape in the south and the east of Ho Chi Minh City. Meanwhile, some new commercial leasing models like co-working space will affect the office market in Ho Chi Minh City in particular and in Vietnam in general.

“These models have great potential for development due to new businesses’ rising demand for office space. Also, the younger generation of workers prefer working in more open and communal settings, so 2018 will be the most exciting year for this segment,” Trang said.