The only way is up for investment

Foreign businesses face a desperate fight to find office and living space in Ho Chi Minh City

Shortage might be the best word to describe the current real estate market. Whether it is hotel, serviced apartment, retail or the office segment, demand is outstripping supply as a result of high economic growth, strong investment and tourism, and conspicuous domestic consumption.
The supply of luxury residential units in Hanoi and Ho Chi Minh City has remained fairly static throughout 2006. Notable additions include Hanoi’s Elegant Suites which was leased within four months of opening with only one or two units remaining. Vacancy rates are slightly higher in Ho Chi Minh City than Hanoi which has few units available, mainly due to natural turnover of expats.
“As the property management company of the largest number of high-end units in the country we have seen the demand continue to rise in 2006 and we expect this to continue into 2007,” said Martin Roumens, general director of Chesterton Petty Vietnam.
“Demand is especially strong from new companies entering Vietnam for the first time with many new Asian expatriates coming to Vietnam,” he said.
While Ho Chi Minh City will see limited new serviced apartments, Hanoi will have a significant amount of new options next year, mainly from the West Lake area with Syrena Apartments releasing 171 apartments and Skyline Building 88 apartments onto the market. In the downtown area, the Pacific Place will complete 180 units in the first quarter, followed by Atlanta with 52 units. The biggest supply will be the Somerset Hoa Binh with 206 units managed by the Ascott Group.
“We expect over 400 new units in total before second quarter which will have an impact on the occupancy rates, but this will adjust with the high demand so rentals will not be affected,” said Roumens.
However, rents will be under downward pressure when more apartments for sales are completed, which will reappear on the leasing market as buyers seek to earn returns off the back of strong demand. In Ho Chi Minh City, the Indochina Tower and Pasteur Court will provide a relief to expatriates who are finding few vacancies in existing buildings.
While local developers are cash-strapped and have launched few significant residential projects this year, foreign developers are making hay while the sun shines. Keppel Land launched 101 villas at Saigon Riviera, Indochina marketed 210 apartments at River Garden and more are expected soon as developers such as Daewon and CapitaLand have already received licences for residential developments.

Buoyant office market
Rising demand on the back of limited new supply is pushing up occupancy rates to 100 per cent in Hanoi and Ho Chi Minh City. Both cities are experiencing a severe shortage of Grade A office space and rents tend to rise, up to $38 per square metre in Ho Chi Minh City and $36 in Hanoi, inclusive of service charges but exclusive of VAT.
Secondary buildings are benefiting from demand from tenants seeking to move out of the now expensive city center locations. E. Town 2, which is due for completion in weeks, has leased more than half of total 27,000sqm in office space. Tenants are also expressing strong interest in the 17,000sqm Pacific Place, the only grade A office space completed in Hanoi early next year.
Demand is expected to grow further as local and foreign companies expand operation and new companies enter following the country’s entry to the World Trade Organization. However, rental growth can only last for two or three years and Neil Thurston, associate director of Dragon Capital, said rents could steadily decline between 2008 and 2010 when a significant number of buildings are completed.
A dozen of large-scale office buildings are currently under construction and each could supply floor space equivalent to the existing Grade A office space in each city. Of particularly note is the 100,000sqm Bitexco Financial Tower and 77,000sqm Vietcombank Tower. Small local developers are building offices to satisfy smaller occupiers, including the 20,000sqm Sailing Tower in Ho Chi Minh City and 17,000sqm VIT Tower in Hanoi.
Demand from banks is rising as they aggressively expand to meet higher economic growth and conspicuous increase in consumption. Some banks are building their own offices, including the BIDV completing a 33,000sqm Grade A building in Hanoi in 2008 and VP Bank leasing the 20,000sqm Fideco Building in the second city.

Time could not be better
According to Chesterton Petty Vietnam, an army of foreign and local investors and developers have been studying Vietnam’s real estate market, with particular emphasis on Hanoi and Ho Chi Minh City but also secondary cities such as Haiphong and Danang. More significant projects are expected to make public in the next two years with several projects amounting to more than $100 million in investment each. These will include all sectors such as new five-star hotels, retail, offices and apartments with highly experienced, financially capable developers.
Chesterton Petty chairman Alastair Orr-Ewing said the country was also attracting significant interest from funds and international investors with as much as $1 billion burning a hole in investors’ pockets.
Three funds dedicated to real estate have been raised, including the $205 million VinaLand, managed by VinaCapital, the $42 million Indochina Land I and the recently closed $265 million Indochina Land II, both managed by Indochina Capital.
These funds have concluded a number of high-profile investment deals such as the acquisition of Hilton and Sofitel Metropole hotels in Hanoi. However, as the opportunities to acquire stake in existing buildings are small, these funds are taking development risks, acquiring sites for building residential, office, shopping and hotel complexes in Hanoi, Ho Chi Minh City and central Vietnam.
“The competition to find suitable investments is driving prices up and yields down,” said Orr-Ewing. “With encouraging economic data, high rents and occupancy levels and little truly international standard development on the immediate horizon real estate investment looks promising for the right products and makes a good story for investment committees.”
He added: “This could not be a better time for profit taking by existing owners - the vital statistics may never look this good. Although current high incomes on existing developments may be tempting we think that things may not look so good in a few years time and at that point there may be better opportunities for re-entering the market.”
Another noticeable trend is the resumption of long-delayed real estate projects, inluding the $125 million Times Square, $223 million Kumho Asiana and $468 million Saigon Happiness Square. These projects will ease the demand for offices, hotels and apartments in Ho Chi Minh City.
Orr-Ewing said both in Hanoi and Ho Chi Minh City there were many planned new projects in all sectors and in the medium term this was almost certain to lead to over supply, taking the shine of this dazzling market.
“Good news for tenants at least who now face some of the highest rents in Asia outside of Hong Kong, Japan and Singapore - but probably not for at least another three years,” he said.




No. 792/December 18-24, 2006