Just five years ago, investing in Vietnam could be a bit of a gamble.
But today global brands from Louis Vuitton to Starbucks and Asian brands such as Japanese retailer AEON are rapidly expanding in the communist country as they vie for a piece of increasing numbers of foreign visitors and a growing middle class.
It’s a marketplace which is set to develop further after the government relaxed rules on investment by foreign firms, foreign buyers and Vietnamese living overseas – the Viet Kieu.
“Although it is not clear yet how much impact the change will have, it is very clearly a major step in the right direction,” Rahul Parrab, who represents law firm Baker & McKenzie in its Ho Chi Minh City office told the Investor.
“It gives foreigners the confidence to make a long term investment in Vietnam without worrying about red tape or whether it will be taken away from them.”
Recent sales events for projects exclusively targeting foreigners and Viet Kieu in Ho Chi Minh City and Hanoi drew high levels of interest with deposits placed on 112 apartments in two hours, according to a Reuters report.
Meanwhile construction is underway in Ho Chi Minh City on Landmark 81, Vietnam’s tallest skyscraper, which will dwarf the buildings around it at 470 meters when it opens in 2017. It’s just the latest piece of the city’s growing skyline: the Bitexco Financial Tower, Vietcombank Tower and Saigon One Tower are all over 40 storeys high and have been finished in the past five years.
All the efforts are paying off. With its construction industry booming and major infrastructure investments in play, Ho Chi Minh, has been named the world’s most improved city in JLL’s City Momentum Index.
A tale of changing cities
It’s not just Ho Chi Minh City that investors have their eyes on: the whole country is attracting attention. In recent years Vietnam has appealed to a diverse range of investors ranging from Singapore’s developers such as Capital Land, Keppel Land and Mapletree, Global Private Equity firm, Warburg Pincus and more recently sovereign wealth fund, GIC.
The largest transaction in the second quarter of this year was the acquisition of four projects from Indochina Land Holdings 2 Ltd by Gaw Capital Partners for a reported $106 million, which included the Hyatt Regency in Danang. Considerable investment has also been committed from regional conglomerates, such as South Korea’s Samsung – which has become one of the country’s largest investors in the manufacturing sector. Samsung is leading the investment charge with plans to invest up to $20 billion by 2017.
“We are seeing a lot of foreign investors and developers are trying to get a foothold in the country. That is coupled with the fact that Vietnam is considered quite favorable compared to many other Southeast Asian markets, which are closer to the top of the property cycle. Vietnam is pretty much rising from a low base and emerging as an investible market,” says Stephen Wyatt, Country Head of JLL Vietnam.
Office rental rates are now expected to rise for the first time in five years in 2015, supported by an economic growth rate that is hovering around a seven year high – one of the highest in the Asia Pacific region.
With a limited supply of Grade A offices, rental rates will probably start to rise by the end of 2015 and growth may reach between 5 and 10 percent in 2016, JLL predicts.
Rebuilding after the global financial crisis
Like many countries in the region, Vietnam was badly impacted by the global financial crisis. Lending slowed as state-owned banks were crippled by bad debts. Rising inflation and soaring interest rates brought the real estate market to a near standstill. Activity started to pick up again throughout the country in the final quarter of 2013 as lending rates improved.
“With its capital crisis of 2010-2012 behind it, Vietnam has seen particularly strong growth in the last two years,” says Wyatt.
Lower wages, a relatively young working population and tax breaks have led companies such as Samsung, Microsoft and LG Electronics, some of which already have factories in China, to set up manufacturing facilities in Vietnam.
“There are not necessarily downsizing in China but they are just not expanding so much there. Vietnam has become the next best option,” says Wyatt.
The formation of the ASEAN Economic Community later this year is expected to support growth. The Vietnamese government has been actively wooing investors as it pursues trade agreements with numerous countries. Growth in the country’s industrial real estate sector in the next two to three years will be driven by trade agreements that are being negotiated and due to be signed in the next six to 12 months, says Wyatt.
In May, it concluded a free trade agreement with South Korea, which is the country’s leading source of foreign direct investments. A major agriculture, seafood, textiles and electronics exporter, it is expected to sign FTAs soon with Russia, Belarus and Kazakhstan. Importantly, it is nearing completion of the Trans-Pacific Partnership agreement, which involves 12 countries and is one of the primary goals of the trade agenda of the U.S’s Obama administration.
For now, the signs are looking good for Vietnam. “Vietnam is ahead of its time in some ways compared to Thailand and Indonesian and it is definitely a good time to be looking at investing in the country,” says Wyatt.