Savills publishes annual whitepaper on industrial real estate sector

John Campbell, director, head of Industrial Services, Savills Vietnam

What have been the most significant recent trends in Vietnam's industrial real estate sector?

Vietnam's industrial real estate sector has undergone substantial transformation over the past two decades, mainly due to diverse foreign investment.

Twenty years ago, investments primarily focused on low- to medium-value sectors such as plastics, textiles, food and beverages, and machinery and equipment. However, in the past five years, there has been a notable shift towards higher-value industries, including electronics, electrical equipment, computers, and phones.

The evolution of foreign direct investment (FDI) in Vietnam's manufacturing sector has had a significant impact on the industrial real estate landscape.

Before 2018, most foreign manufacturers entering the Vietnamese market chose to sublease land from industrial parks (IPs) and construct their own facilities. This approach required substantial upfront investments in land acquisition and construction, often involving long-term commitments, that could be burdensome for companies looking to assess market viability.

The rise of a new wave of FDI, particularly in high-value industries such as electronics and technology, has created a need for a different approach to industrial real estate. To address to the evolving requirements of these investors, a new model of industrial real estate has emerged: ready-built factories and warehouses.

Since 2018, the industrial real estate market has expanded its product offerings beyond traditional land leasing to include built-to-suit, ready-built, and hybrid storage facilities. This evolution has been partly driven by the changing preferences of foreign investors, particularly from the European Union (EU).

The EU-Vietnam Free Trade Agreement (EVFTA) has sparked interest from European manufacturers looking to set up operations in Vietnam. An increasing number of these companies are choosing flexible rental solutions offered by firms such as BW Industrial Development, KCN Vietnam, and KTG Industrial.

Have you noticed any particular trends emerging for 2024?

When we compare 2024 to the early years of Savills Industrial's presence here (2017-2018), a significant shift is evident. Back in 2018, most ready-built factory leases in the south were relatively small, typically ranging from 1,000 to 5,000 sq.m, with very few exceeding 5,000 sq.m.

However, the landscape has changed. As more companies choose to rent rather than buy, we are now seeing much larger leases, often reaching 20,000 to 25,000 sq.m, with longer lease terms of 10 years or more compared to the usual 3 or 5 years.

Not only are we seeing increase in the number of ready-built factory deals, but they are also on a larger scale. Another notable change is heightened competition among developers. In 2018, the market was less competitive. Although BW Industrial was a pioneer, domestic players such as KTG Industrial and KCN Vietnam had emerged early on. Today, the competition is much more intense with foreign and domestic players.

How can the government further develop the country's infrastructure to meet the increasing demand for industrial real estate?

Infrastructure development in the south has immense potential for the region's future growth. Although these projects are long-term investments, the tangible progress made so far is inspiring confidence and attracting additional investment.

However, it is important to recognise that these projects require significant time and resources. The government needs to maintain a balanced approach, ensuring that the benefits are maximised while minimising any potential negative impacts.

The Vietnamese government has made considerable strides in initiating infrastructure projects to attract high-value manufacturing industries. Developments like Long Thanh International Airport and the metro system in the south will undoubtedly enhance the region's connectivity and competitiveness.

While the north offers its own advantages, such as a strong industrial base and well-developed infrastructure in certain areas like Haiphong, the south's strategic location and ongoing infrastructure investments position it as a key hub for future growth.

Vietnam has made significant progress in improving its logistics infrastructure; however, there are still areas where further advancements can be made. One such area is customs clearance, where delays and bureaucratic hurdles can affect the efficiency of import and export operations.

To address these challenges, streamlining customs procedures and accelerating clearance times could significantly enhance Vietnam's logistics performance. This would benefit both domestic and foreign businesses, making the country more attractive for investment and trade.

What steps can the Vietnamese government take to encourage more investment in e-commerce and logistics?

One of most critical actions any government can take to facilitate logistics is to invest heavily in infrastructure and ensure that projects are completed on time and efficiently. Infrastructure serves as the backbone of logistics, encompassing everything from customs procedures to intermodal transport, roads, and airports.

Another key factor is ensuring that sufficient land is available for logistics and e-commerce businesses. Some IPs in Vietnam are designated for manufacturing only, which can pose challenges for logistics and e-commerce companies seeking suitable land. To address this, it is important to develop parks that are flexible enough to accommodate both manufacturing and logistics operations.

While it is possible to submit a request to the authorities to change the land-use designation, this process can take several months and may vary depending on the specific province. Such delays can be problematic for investors who require quick decisions.

Many IPs that were zoned in 2007-2008 were primarily designated for manufacturing, possibly due to a lack of emphasis on logistics and e-commerce at that time. However, the rapid growth of these sectors has underscored the need for more diversified land use within these parks.

Future master plans for new IPs should allocate sufficient space for logistics and warehousing. Additionally, considering the significant growth of e-commerce in Vietnam, it is essential to provide suitable locations for distribution centres.