Demand continues to increase in Ho Chi Minh city
In Ho Chi Minh city, CBRE forecasts that the year 2017 provides a good benchmark for the upcoming office market in terms of expected supply and market performance in 2018F – 2020F because of stable predicted growth in the economy and the city’s ever-improving infrastructure in the form of metro lines.
The lack of available land in the central business district (CBD) likely means a focus on developments in previously ignored fringe CBD areas to keep up with demand for office space over the next three years.
One notable example is the plan to progress Phase 2 of the Viettel Complex in district 10 following the success of Phase 1. Also, the first Grade B office building in the Thu Thiem New Urban Area - Thaco Building, despite offering only 7,000sm net lettable area, is likely to set a trend for new office developments in this area.
The projected rental growth rate of two per cent per annum in 2018F – 2020F is a result of continuing appetite for quality supply despite the already high baseline ($38 psm per month for Grade A and US$21psm pm for Grade B).
In addition, the trend of relocation to better quality space would also further support rental growth prospects. Healthy economic growth is also expected to encourage tenants from sectors such as IT, logistics, etc. to be bolder with their relocation and expansion plans to better and newer buildings.
New supply in 2018 will be limited to two Grade B office buildings, including Viettel Phase 2 and the Thaco building. With no new supply added in Grade A segment, rental growth for Grade A buildings are projected to be at two per cent. Further supply will be added in 2019 including one new Grade A building and no more than four new Grade B buildings.
Rental rates for both grades are expected to increase in 2019, though the increase is anticipated to be lower in Grade A due to new supply coming online during the year. Looking beyond 2020, CBRE forecasts that the Ho Chi Minh city office market will gradually shift to higher quality where higher-profile buildings and tenants dominate office space.
Slower supply growth make Hanoi market more positive
In Hanoi, the year 2017 ended with many positive signals in the Hanoi office market. With moderate supply growth and healthy demand from both traditional and emerging sectors predicted, we expect that market performance will further improve in 2018.
The level of supply growth has been reduced from 10 per cent per annum on average during 2012 – 2016 to five per cent in 2017 enabling the market to absorb existing vacant space.
As a result, in 2017 the market witnessed an increase in asking rents in both Grade A and B for the first time in the last ten years. It was also notable that average occupancy rates of Grade A buildings remained at 91 per cent at the end of 2017 where the lowest level of vacant space was observed since 2011.
Looking ahead, total supply is expected to increase by between 4 - 8 per cent per annum in 2018 – 2019 before accelerating from 2020 onwards. Limited new supply will foster further improvement in Grade A performance, especially in 2018 when no new project is scheduled to be completed.
CBRE expects that Grade A’s rental growth can reach 3.5 per cent y-o-y while occupancy rates will increase to 96 per cent by the end of the year. Given limited Grade A supply over the past three years, especially in the CBD, existing tenants in Grade A buildings in the CBD tend to renew current contracts.
For Grade B, a higher level of new completions, especially in the West, remains a major challenge for this asset class.
In upcoming years, it is expected that the pricing range of Grade B will be larger. New buildings which have good locations, large floor plates and good management will command higher rents than the market average while others will have to rely on a competitive pricing strategy to sustain occupancy.
Therefore, CBRE anticipates that there will be no significant changes in Grade B rental rates in Hanoi in 2018. Vietnam remains an attractive investment destination providing positive economic growth and lower labour costs in comparison with regional peers which boost the leasing demand from foreign tenants.
Both local and international banks and tech companies have been actively seeking new locations to expand their networks in recent years. These industries will continue to drive market demand in Hanoi.
Sustainable demand from traditional sectors combined with the rise of new sectors of logistics, education and co-working are expected to be key drivers which will boost net absorption.