Good Morning Vietnam!
A new day is dawning on one of the world's fastest-growing economies.
In the midst of an unparalleled economic boom, Vietnam is a growing — and thriving — nation. The increasing presence of modern five-star hotels, residential high-rises, and beautiful resorts entices tourists from around the globe. However, tourism is not the only draw: The country’s flourishing economy and developing business climate attract myriad international business and real estate investors. Whether viewed as a dragon, a tiger, or the last urban development frontier, Vietnam currently is one of Asia’s hottest commercial real estate markets.
Vietnam’s largest market, Ho Chi Minh City, is drawing interest from global investors seeking office, hospitality, retail, and high-rise residential investment opportunities.
Drivers of Economic Growth
For 10 years following the end of the Vietnam War, the country’s economy floundered. In 1986, the Sixth Party Congress approved a broad economic reform package that introduced market changes and dramatically improved the country’s business environment. Since then, Vietnam has become one of the fastest-growing economies in the world, posting in excess of 6.5 percent gross domestic product growth per year since 1990.
In recent years, government policies have undergone significant changes to ensure Vietnam’s smooth transition into the World Trade Organization in 2006. Governmental support for the adoption and implementation of international standards also has led to the establishment of Permanent Normal Trade Relations with the U.S. Also in 2006, Standard & Poor’s upgraded Vietnam’s foreign currency rating from -BB to BB and its local currency rating from BB to BB+.
Currently, the country’s manufacturing sector is growing at a robust rate close to 11 percent per year. The services sector is generating consistent, strong performances each year driven by retail and tourism industry growth. Low labor costs and attractive tax incentives have encouraged companies, especially those from Singapore, Taiwan, South Korea, and Japan, to consider locating in Vietnam.
Solid economic development growth and long-term political stability bodes well for Vietnam, making it an increasingly attractive location for international investment dollars. Through August 2007, foreign direct investment in Vietnam soared 50 percent to $7.5 billion. It is expected to top $12 billion this year, with 75 percent of the investment in new projects. Approximately $40 billion of foreign direct investment applications currently are under review, about 40 percent of which relate to the real estate and tourism sectors, according to Vietnam’s Ministry of Planning and Investment.
Vietnamese real estate developers are building new commercial and residential projects at an unprecedented rate. Some industry observers believe the rapid development will glut the market, but at this time there is no end in sight. In Ho Chi Minh City, Vietnam’s economic center and largest city,
overseas developers and investors have been scouring the city for opportunities and seeking information on available land.
The Keangnam Group of South Korea recently broke ground on the Keangnam Hanoi Landmark Tower in Hanoi, Vietnam. Estimated for completion in 2010, the project will include Vietnam’s tallest building and the 17th tallest worldwide. The complex includes one 70-story tower and two 47-story buildings with a five-star hotel, shopping center, offices, and apartments. The Kumho Asiana Group, also from South Korea, is investing in a trade, culture, and exhibition complex in Hanoi worth $2.5 billion.
Real estate speculation has pushed up prices beyond the reach of most Vietnamese investors. A square meter of street-front land in the central business districts of Hanoi and Ho Chi Minh City now costs about $5,000, while a square meter of apartment space costs between $300 and $1,000 or more. These prices are far beyond the reach of average national incomes, which range from $1,500 and $2,000 per year. In fact, Hanoi ranked in 32nd place, ahead of other major cities such as San Francisco, Chicago, Miami, and Toronto, in a 2006 cost-of-living survey by Mercer, a U.S. human resources consultant.
Monies from oil-producing countries are beginning to flow into the Vietnamese real estate market. These investors not only target the logistics industry, such as container ports, but also seek investment opportunities in new residential areas of Hanoi, Ho Chi Minh City, and the country’s central region. About 20 investors from Dubai, Qatar, and Bahrain currently are seeking investment opportunities in Vietnam, according to CB Richard Ellis Vietnam.
The Kingdom Hotel Investment Group of Prince Alwaleed bought the Vegas tourism project from the Magnum Investment Project in the central city of Danang, Vietnam. The group plans to invest $65 million to build a 150-room hotel and 15 villas on 38 acres of land, which is scheduled to open in 2011 under the Raffles Resort brand.
In addition, DP World officially has entered Vietnam through a port project in Ho Chi Minh City with a total investment of $230 million.
Commercial Property Markets
The office leasing market in Ho Chi Minh City created a fever in 2006 and continued to be hot in 2007 as many businesses needed space to open representative offices, conduct transactions, or upgrade operations.
Currently Ho Chi Minh City has 60 office buildings with a total floor area of more than 300,000 square meters, or 3.2 million square feet, according to a recent survey. This number only meets about 70 percent of the area’s demand. “If you want to rent an office, you must plan for it one or two years in advance,” says Marc Townsend, managing director of CBRE Vietnam.
The average office lease rate in Ho Chi Minh City is $43.98 per square meter per month, or $4.08 psf per month, higher than other notable cities such as Liverpool,England; Amsterdam, Netherlands; Warsaw, Poland; Sofia, Bulgaria; and Shanghai, China.
Ranking 14th among markets with the highest office rental rate growth, Ho Chi Minh City posted a 33 percent growth rate, behind Abu Dhabi, United Arab Emirates (102.9 percent), New Delhi (79.1 percent), and Singapore (53.6 percent), according to CBRE.
Hanoi has no class A office space available. Tenants who want to lease office space must look for class B space. However, even class B space is scarce, as 99 percent of the existing 142,000 square meters of class B space in Hanoi is occupied.
Hospitality continues to boom in Vietnam, which now has 25 five-star, 64 four-star, and 135 three-star hotels totaling 45,000 rooms. Accor Hotels dominates the country with the largest number of city hotels under management. Besides Accor, other large hotel management companies active in Vietnam include Six Senses BVI, Life Resorts, Swiss-Belhotel International, and Starwood Hotels & Resorts. There has been no new hotel construction in the past few years. Room rates at five-star hotels averaged $115 per day while monthly occupancy rates reached over 84 percent for the first half of 2007.
In the retail sector, Vietnam ranked as the world’s fourth most attractive global retail market, following India, Russia, and China, according to A.T. Kearney’s 2007 Global Retail Development Index. One of the key factors driving enthusiasm about Vietnam’s retail potential is the abundance of young and increasingly sophisticated consumers. More than 70 percent of the population is under age 35, many have rising incomes, and their shopping patterns and preferences are evolving rapidly.
In addition, joining the WTO in 2006 made Vietnam a tempting target for global retailers. With new government regulations allowing foreign entry into the retail market within the next two to three years, large foreign retailers and supermarkets are likely to invade the highly fragmented market.
Previously, to invest in a Vietnam retail project, companies had to create a joint venture with a Vietnamese partner and foreign capital could not exceed 49 percent equity. But this January the capital limitation was abolished, and in January 2009 overseas companies no longer will need a Vietnamese partner to invest. Wal-Mart and Carrefour already have announced expansion plans in Vietnam. Global convenience store operators Casino, Parkson, and Metro Cash & Carry are already in the market, but each holds less than 3 percent of the market share. The Hanoi retail market has been highlighted with the entrance of brand-name retailers, including Esprit, Mango, and Estée Lauder.
Property Ownership Criteria
At this time, foreigners are not allowed to own property in Vietnam for their own personal use, but they can invest in property development projects. Currently foreign individuals and organizations investing in development projects to build for-lease commercial properties, including residential, are issued ownership certificates for the duration of their investment. Investors must transfer all ownership rights to the state upon expiration of their certificates. In addition, foreign organizations investing in development projects to build for-sale residential properties must transfer the ownership rights for all unsold properties to the state upon expiration of the investment certificates.
However, the Ministry of Construction is drafting a plan that will provide foreigners residing in Vietnam the opportunity to purchase homes, as long as specific conditions are met. Under the draft, foreign home buyers would be required to live and work in Vietnam, reside in the country for at least one year, and buy houses for residential use for themselves and their families while in Vietnam for work-related purposes in conformity with national regulations. More than 81,000 foreign nationals entered Vietnam to live and work between 2004 and 2006, according to the Ministry of Construction.
No longer viewed as just a tourist destination, Vietnam’s economic success is gaining attention worldwide. Major corporations such as McDonalds, which has completed market research and is expected to begin franchising in Vietnam this year, are moving in. Starbucks and 7-Eleven are making similar preparations for doing business in Vietnam soon as well. Like a train, Vietnam is moving fast toward its destination of becoming an economic powerhouse. Global commercial real estate investors should hop on now before they miss the opportunity.