Tougher market for office for lease in coming time

With many projects currently on hold or without an expected date for obtaining development approval, it is impossible to accurately forecast the delivery of new supply of office for lease, which will put a strain on financial underwriting for new projects, according to real estate experts.

The limited supply is caused by the suspended state of hundreds of real estate projects over the last three years due to lack of administrative procedures and difficulties in land clearance and compensation.

During the last three years, Ho Chi Minh City People’s Committee has issued approvals for 130 projects. However they have not been officially implemented due to lack of administrative procedures caused by the overlapping of the current official system with the local authority-level legal system.

Some projects which have been approved but contain a small section belonging to public land have also been forced to halt for review.

Among those are the 41 storey Saigon One Tower, the Spirit of Saigon, the 36 storey building Lavenue Crown and the 46 storey building JSC Tower.

Companies are finding it difficult to base themselves in Ho Chi Minh City's CBDs because of increasing land prices and limited supply. Photo Le Toan.

Although the city People’s Committee has committed to paving the way for many of the schemes, progress remains sluggish.

Together with the stagnation of a range of ventures, land prices in major cities are set to be increased from 2020, causing a strong impact on the market.

The new land price bracket for the 2020-2024 period proposed by many cities and provinces show a very high average increase, in some places by up to 95 per cent.

The land price list is developed every five years, applied to calculate land use fees, charges in land management and land use, fines for administrative violations in real estate, compensation, land use value, and more.

Ho Chi Minh City is considering three options for bumping up land prices. The first is keeping the minimum price unchanged and doubling the maximum price compared to the current price; second is keeping the minimum price unchanged and increasing by around half the maximum price compared to current rates; the third is maintaining the minimum price and increasing the maximum by a third. The solution has yet to be chosen; however some experts said that the second option was the most reasonable.

“Limited office supply in Ho Chi Minh City is not only causing rents to increase, but making the development of new offices a riskier proposition for developers,” said Alex Crane, managing director of Cushman & Wakefield Vietnam.

“Consequently, the market outlook for 2020-2025 has become more difficult to forecast in terms of supply and competition,” he expected.

The increase of land price will be bring more difficulties for developers trying to make land clearance and compensation, and those that want to take merger and acquisition deals to expand their project portfolios.

Due to the increase of land prices, high-end schemes are being flushed out while mid-range development, which should normally be 80 per cent of an entire office market inventory, is no longer viable in the city centre. The effect is that neither Grade B nor Grade C buildings can be developed to a significant, large scale in these areas and will be forced further from the city.

Changing tendencies for space

Meanwhile, Crane cited that due to the limited space in the central business districts (CBDs), high-end office buildings are expanding to locations where demand is soaring remarkably.

“Non-CBD office spaces are ideal for the back-office of different sectors such as finance, IT, and processing companies. I think we’ll see a shift to more large-growth industries in these areas as downtown becomes uncompetitive in terms of rents for these firms. Those might be anything from consumer-driven and fast-moving consumer goods to e-commerce and insurance, which are all big tenants,” said Crane.

Oliver Brazier, managing director of BRG Capital Investment Management, said that the Ho Chi Minh City and Vietnamese office market in general is entering an interesting period.

“There’s a lot of demand to be fulfilled, whereas some of the other markets are already very mature. It is also already very expensive and the underlying economic growth is not the same,” Brazier told VIR.

“The Vietnamese office market is modernising, moving away from C class and B- class office space to more modern equivalents. Vietnamese market generally is growing very, very fast, but also there’s a change in quality,” he added.

Some new projects that are hitting their early pre-leasing targets and forecasts include the Sonatus Building, Lim Tower 3, and E-Town 5.

Meanwhile, OfficeHaus - being developed by BRG Capital, will be the latest test for non-core market development to try and achieve an aggressive pre-lease target of more than 70 per cent before opening.

Tougher competitiveness

According to figures released by Cushman & Wakefield Vietnam, the result of high land costs is that every new development in the core areas will have to strive to achieve Grade A or premium rent pricing to account for high land and construction costs, but only the top 10-20 per cent of occupiers can afford or are willing to pay for Grade A premises at prime rents.

The risk is that developers – hit with high land and construction costs – will oversupply the market with premium products while being forced to accept Grade B or C rents. In this case, only the fittest developers will survive in the long run.

In Ho Chi Minh City right now, Grade B+ projects, flaunting column-less floors between 1,200 and 1,500 square metres are in the most favour.

New Grade B supply is forecasted to have a positive take-up rate with their current pre-leasing performance due to a lack of Grade A stock coming into the mix.

In the short term, no new Grade A projects are expected to be delivered in 2020, which will cause rents to increase.

According to Crane, rents are expected to peak at circa VND1.8 million ($76.50) per square metre per month in 2020 from their current average of VND1.3 million ($55.30).

According to forecasts from Grade A developers, the potential pipeline for new Grade A development in 2020-2023 is 740,000 sq.m, a 192 per cent increase in the current inventory.

For the next two years, developers and investors will be required to constantly monitor assessments of the competitive landscape. Likewise, occupiers will be encouraged to plan early for any critical dates coming up.

It is expected that rents will continue to increase for the next few years until significant new Grade A supply comes through, which may not be until 2022 or beyond.

Competitive advantages for developers will be established by those who can best understand their occupiers, added Crane of Cushman & Wakefield, as well as forecast the competitive landscape, assume and implement incentive packages early, and ultimately deliver pre-commitments 3-6 months prior to opening day.

“Speed and flexibility will be vital in order to position developments, make adjustments to designs, and stay relevant to the competitive landscape and occupier demand,” Crane said. “With the market maturing rapidly and occupiers’ expectations for design and quality constantly rising, these margins can be tight and make or break the success of a project or developer.”