Woes delay investment in industrial property

Industrial property has, on the whole, enjoyed decent growth despite this year’s wider issues. Photo: Le Toan

Trang Bui, senior director of markets for JLL Vietnam, told VIR that while COVID-19 has brought disturbing changes to life and the economy, it has also “opened up a strong growth opportunity for the e-commerce industry”.

With a young and tech-savvy population, and the strong growth of smartphones and 4G networks, Bui said, Vietnam has always been among the fastest-growing e-commerce markets in Southeast Asia.

The growth rate of retail e-commerce in 2020 was stable at 18 per cent, with retail sales reaching $11.8 billion, according to the Vietnam E-commerce and Digital Economy Agency under the Ministry of Industry and Trade.

This agency also predicted that the e-commerce boom in 2021 would be even more robust, far beyond the $12 billion, creating many opportunities for domestic groups to build new business campaigns.

The National E-commerce Development Master Plan for 2021-2025 notes that up to 55 per cent of the population will participate in online shopping by 2025, with the value of buying goods and services online on average reaching $600 per person per year.

Revenues of the business-to-consumer e-commerce model increased by 25 per cent/year, reaching $35 billion, accounting for 10 per cent of the total retail sales of consumer goods and services nationwide.

“The explosion of e-commerce and third-party logistics in recent years can be seen as a magnet for attracting significant interest from investors investing in the logistics and industrial real estate market, including warehouses, supply chains and production facilities,” shared Bui.

Meanwhile, JLL forecasts that the volume of investment in logistics and manufacturing in the Asia-Pacific region will increase from $25-30 billion in the 2019-2020 period to $50-60 billion in 2023-2025. Many foreign logistics service providers and e-commerce operators are also making great efforts not to miss the opportunity to penetrate the Vietnamese market.

Vietnam has an industrial development orientation under the model of three economic regions in the north, central and south to promote vertical growth throughout the country. The country now has a total of 57,800 hectares of industrial land and nearly 5.2 million square metres of ready-built warehouses and factories nationwide, according to Bui of JLL.

In the second quarter of 2021, there have been new investment deals, typically Boustead Projects acquiring a 49 per cent stake in KTG Bac Ninh Industrial Development JSC in Yen Phong Industrial Park for about $6.9 million.

The market also welcomes many new investors entering the market such as GNP Industrial, Frasers Property Vietnam, and ESR Cayman Ltd.

Cainiao P.A.T Logistics Park invested by Cainiao Logistics, an arm of Alibaba, also is offering high-quality warehousing accommodation in one of the fastest-growing areas in the south, Long An province, with a total land area of around 24 hectares and entire warehouse floor space for lease is around 110,000sq.m.

“The attractiveness of logistics and industrial properties will only increase in the eyes of investors. Many investors are starting to increase their ratio of logistics assets as they seek to allocate capital to assets that are less competitive and generate steady income,” Bui said.

Short-term impacts

The cloud of the COVID-19 pandemic has affected supply chains and operations in the manufacturing sector, making labour shortages for factories due to restrictions on movement. Logistics connections meanwhile noted disruption in product delivery when goods were forced to be classified into essential and non-essential categories.

The logistics system, supply chain, distribution, and retail channels are under a lot of pressure on meeting social security policies and ensure that services are operated efficiently.

Sectors such as fast-moving consumer goods, e-commerce, pharmaceuticals, and cold storage will have a lot of demand for additional warehouse space next to urban areas. On the other hand, some sectors, such as automobiles, heavy machinery, and chemicals can seek short-term leases far from the central areas.

Moreover, from the beginning of 2021, the price of many construction materials has increased by about 25 per cent compared to the same period of last year, and the domestic steel price has risen sharply.

The increase in the price of steel and construction materials have disrupted the progress of construction because of the capital increase. The investors and the contractors must re-calculate the construction cost if the project continues. This will reduce the supply of industrial real estate, factories, and warehouses in the short term, directly affecting rents with the possibility of an increase in the coming time.

According to Nguyen Cao Tri, general director of BlueScope Lysaght Vietnam, the reducing supply of steel and constantly fluctuating prices in the past time are due to the imbalance between demand and supply capacity.

“The demand of other countries increased dramatically after being affected by the pandemic, especially the high purchasing demand from the United States, reflected in the unprecedented difference in steel prices between the America and ASEAN markets. Meanwhile, another important reason is the reduction of production output and export restrictions from China, one of the main sources of crude steel in the world, to limit the negative impact of emissions to the environment,” said Tri.

“To cope with the instability of construction material prices, especially steel prices, manufacturers need to implement solutions to limit risks such as diversifying sources of supply, changing the way to operate their production, and diversifying options for customers with suitable solutions in both short and long term,” he said.

Tri added that logistics warehousing needs higher standards with a diversified model, such as multi-floor warehouse and sustainability factors across all phases.

Caution urged

Bui of JLL notes that investors need to be cautious, scrutinising investment portfolios before deploying capital for real estate investments.

“However, the massively accelerating demand for e-commerce and pharmaceutical services has ensured that logistics and industrials remain a stronger growth asset class than other real estate asset classes in 2021,” she said.

“We have seen that the number of core investment funds accessing this industrial and logistics market is increasing, thereby increasing the possibility of many large-scale mergers or leasing transactions in the coming time. To achieve future growth targets, Vietnam needs to continue to maintain a reasonable level of investment in infrastructure, focusing on the development of both the expressway system and the utility network, including renewable energy,” she explained.

Tran Huynh, COO of KCN Vietnam, confirmed that the remarkable increase of construction materials has delayed the construction progress of many projects, forcing many landlords to adjust their rental expectations and impact the financial return of developers, investors, and end-users.

Vietnam’s industrial property has been a shining star in the real estate market despite the COVID-19 pandemic. The sector has enjoyed impressive growth fuelled by continuous foreign direct investment and global supply chain diversification and kept its heat during the first half of 2021 with the total merger and acquisition deals value exceeded $3 billion.

Figures from VNDirect released that although Vietnam’s industrial land price rose sharply since 2019, the country still offers an average price of $108 per sq.m per lease term in mid-21, the second-lowest price in the region after Myanmar.

In Vietnam, wages in manufacturing (on average of workers and engineers) are much lower than in China and Malaysia. Meanwhile, only Indonesia has better electricity prices than Vietnam for business. In addition, manufacturers in industrial zones (IZs) also enjoy many incentives, such as tax exemption and reduction and visa exemption.

Besides the low operation costs, Vietnam cut its corporate income tax to a 20 per cent flat rate in 2016, from 22 per cent previously, for all domestic and foreign companies to bolster its attractiveness as a manufacturing hub.

In the first half of 2021, Vietnam established 25 new industrial zones, added 7,300ha industrial land area, the highest reported figure since 2015.

As of July 2021, Vietnam has more than 390 IZs established, with a total industrial land area of 80,900ha (an increase of 9.9 per cent compared to the end of 2020). Of which, 286 IZs with 57,300ha industrial land area are in operation, 108 IZs with 23,600ha are under construction, ensuring future supply.