Slim Pickings in Vietnam’s Real Estate Commercial Market

Published as a cover story in the Vietnam Economic Times February 2007. Mr. Daniel Fancey, Senior Manager of Corporate Services at CB Richard Elllis (Vietnam) takes a look at what office real estate space exists in the country’s major centres.

With Vietnam officially becoming a member of the WTO at the end of 2006, demand is high for office space and commercial real estate in a market with little quality supply. Surprise awaits newcomers as the lack of availability forces rents to a much higher level than elsewhere in South East Asia. The strong demand in commercial real estate is also due to successful Vietnamese companies that are upgrading to higher quality office space. Hanoi and Ho Chi Minh City are the main office locations, but other cities in the country are moving forward as well. Da Nang, in particular offers real estate space in new real estate developments for the growing demand in the international standard office space.

Ho Chi Minh City Real Estate

Ho Chi Minh City possesses only five Grade A buildings offering just above 73,000 square metres of office space – 28 per cent of the total office stock. All located in District 1, these Grade A buildings are full and the occasional available space is currently offered at a minimum of $32 per sq m per month (inclusive of service charges) an 8 per cent increase form a year ago. New supply in Grade A commercial real estate space will come online in 2008-2009. Until then, companies in need of expansion have to consider Grade B and C or decentralised alternatives. Foreign companies entering the real estate market are quickly snapping up the voids created when such movements occur.

A limited new supply of quality commercial real estate space in 2007 is of Grade B quality at monthly rates ranging from $25 per sq to $30 per sq m (inclusive of service charges), dpending on location and features. Occupancy in the 11 Grade B buildings in Ho Chi Minh City commercial space is at its peak. Of the new buildings, the 9 Dinh Tien Hoang buildings offer an excellent column-free floor plate of sufficient size for medium and large size companies.

There are numerous small buildings comingon to the commercial real estate market, typically with 1,500 to 2,000 sq m of useable space. They may become a viable alternative for large occupiers as a single-tenant option only if they offer a good location and an acceptable quality level. It is critical for real estate developers of such buildings to understand the needs of an international clientele in order to ensure adequacy in terms of space, tenant management and retention. This real estate commercial market segment may not succeed in influencing the quality office market by eroding the demand for larger buildings with international standard features.

Hanoi Commercial Buildings

Hanoi was on centre stage in November with the APEC meeting and the official announcement of Vietnam becoming the WTO’s 150th member. Demand for commercial office space in the capital is high and new quality real estate supply is scattered in and around the city centre. The capital is the logical address of many multi-national companies, diplomatic missions, international organisations and growing number of global-savvy Vietnamese companies.

The total leaseable stock of Grade A building commercial space in Hanoi stands at 84,000 sq m in nine buildings, that ended the year at full occupancy. An additional 22,000 sq m is coming online in Hanoi in 2007 with Pacific Place and the Opera Business Center. Nevertheless, monthly rentals are at $30 per sq m and up (exclusing service charges and VAT) in Grade A commercial buildings due to strong demand for high quality space.

The opening of the HRS Building and Hoa Binh International Towers pushed the Grade B sector stock close to 145,000 sq m from the previous 115,000. The sector in commercial real estate in Hanoi ended the year with a vacancy rate of about 8 per cent due to the new supply. Several new commercial buildings are under construction, like North Asia Tower, Viglacera Tower, VIT Tower, and Kinh Do Building and The Manor, all of which will add another 65,000 sq m to the commercial real estate market in 2007. Most of these new commercial buildings already have more than 60 per cent commitments from tenants with monthly rentals in the $15 to $20 per sq m range depending on the features and the location’s attractiveness, with most being in the city’s new clusters.

New Grade B commercial real estate supply in Hanoi will relieve some of the pressure on average rentals in Hanoi, but strong demand for quality features and location will remain the driver of any increases.

Da Nang Real Estate

The fourth largest city in Vietnam is clearly moving forward and tremendous change has been seen in recent years. Quality infrastructure, an international airport, port facilities, and industrial zones, proximity to major heritage sites and famous beaches for tourism all contribute to impressive GDP growth of 13 per cent over the last five years in Da Nang.

Total commercial real estate office space in Da Nang doubled in 2006 and the year ended with nearly 20,000 sq m of supply. Occupancy is at 96 per cent and demand is increasing, notably from the financial insurance and education secotrs, as well as from major distributors involved in central Vietnam and transport and logistics companies.

Located on the busiest street in Da Nang, just five minutes from the airport, Vinh Trung Plaza (VT Plaza) is currently under construction and will bring 6,000 sq m of international office space at the best location in the city in Q2 this year.

The IndoChina Riverside Tower will add more than 6,000 sq m of international standard commercial real estate office space in a high-quality mixed used development in the middle of 2008.