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Vietnam’s Industrial Real Estate Sector Holds Potential For Growth

With labor costs rising and regulatory requirements increasing in China (the current Factory of the World), Vietnam is rising as a manufacturing hub and is poised to continue doing soas the country’s advantages of being geographically located close to China and relatively lower production costs entice multinationals as well as Chinese manufacturing companies to relocate production facilities to Vietnam enabling them to serve the enormous and lucrative domestic Chinese market while reducing costs. In 2017, Vietnam’s manufacturing output rose 14.4% and 44% of FDI investment into Vietnam were channeled towards the manufacturing and processing sector according to data from the Vietnam Foreign Investment Agency (FIA).

Pie chart showing 2017 Foreign Direct Investment (FDI) into Vietnam by industry (% share). In 2017, 44.2% of FDI into Vietnam went into the Manufacturing and processing Sector, 23.3% into Power production and distribution, 8.5% into Real estate and 24% into other sectors.

The trend is likely to continue. China’s labor force is dwindling, (the country’s working age population, defined as those between 16-59 fell by 5.5 million last year to 901.99 million according to the National Bureau of Statistics), wages are rising (according to a study by Euromonitor, manufacturing wages in China have risen steadily over the past decade and are now on par with high-income economies such as Portugal and Greece), and changing policies (such as the government’s effort to move to high end manufacturing) have made regulations more stringent and subsidy programs reduced.

However, with China boasting top-notch infrastructure, a large talent pool, and extensive sourcing options among other reasons, the Middle Kingdom still retains its appeal as a manufacturing base for multinational and Chinese manufacturing companies; the trend is not of abandoning China altogether but either of moving production towards China’s interior where wages are lower, or of supplementing Chinese production facilities with outsourced facilities (particularly for labor-intensive, low-end manufacturing operations such as product assembly) from lower-cost countries such as Vietnam, a production model known as China+1.

For China, the world’s largest exporter, exports account for about 19% of the country’s economy. The United States is the single largest export destination of Chinese-made products absorbing about 20% of Chinese exports in 2017, and Asian countries such as Hong Kong, South Korea, Japan, Vietnam and India collectively account for about 45% of China’s exports. Unsurprisingly, the vast majority of China’s factories are strategically located in the coast, in areas such as Shanghai, Shenzhen, Ningbo, Qingdao, Guangzhou, and Tianjin where the majority of China’s key ports are located such as the Port of Shanghai, Port of Shenzhen, Port of Ningbo, Port of Qingdao, Port of Guangzhou and Port of Tianjin which are among the world’s busiest and largest ports. Much of China’s export products are transported via sea through these ports which are the origin points of key shipping routes such as the Pacific route, one of the world’s busiest shipping routes, which goes through the Pacific Ocean.

Thus, relocating to inner provinces may make sense for some manufacturers such as those with substantial domestic sales or for those with major exports to countries such as Central Asia or Europe as goods can be transported via a growing rail system which is part of China’s ambitious “Silk Road” logistics network. Chongqing for instance, an inland Chinese province which is gaining prominence as a hub for railroad shipments across Central Asia and Europe, has lured the likes of Hewlett Packard which shifted production to Chongqing as part of China’s Go West initiative and transports products such as motherboards and laptops to Europe via the China-Duisburg rail line which connects China to Germany. The railway line which originates in China, crosses Kazakhstan, Russia, Belarus and Poland before finally entering Germany, a distance of over 10,000 kilometers taking about 16 days to complete, considerably less than the 3 months or so transport time for container ships. Add in the lower transport cost, and the rail option beings to look very favorable for companies such as HP. Duisburg-China traffic has reportedly quadrupled since the service was established in 2011.

For others however, such as Intel, the Chine+1 production model whereby some production facilities are relocated to another country to supplement existing Chinese manufacturing bases may make more sense. Vietnam’s close proximity to China (port city Hai Phong in northern Vietnam is about 865 km away from Shenzhen, considerably closer than Vientiane which is 1,200km away, Bangkok which is 1,700km away, Jakarta which is 3,300km away, and Kuala Lumpur which is 3,025km away) low wages, relatively young population (the median age is 30), and improving infrastructure (including ports enabling access to Vietnam’s East Seam, one of the major shipping routes in the world), make it an attractive option for manufacturers migrating away from China. According to the World Economic Forum’s latest Global Competitiveness Index, Vietnam ranked 79th out of 137 nations in terms of infrastructure, ahead of Southeast Asian peers Philippines, Laos and Cambodia.

Bar chart showing the World Economic Forum's Global Competitiveness Index, 2017-2018 Infrastructure score for selected Southeast Asian nations. Singapore ranks highest with a score of 6.5, followed by Malaysia (5.5), Thailand (4.7), Indonesia (4.5), Brunei (4.3), Vietnam (3.9), Philippines (3.4), Laos (3.3) and Cambodia (3.1)

This opens an opportunity for Vietnamese industrial real estate in the years to come. Vietnam’s industrial real estate market is at a nascent stage of development, and as Vietnam continues to grow its position as a new industrial powerhouse, the market holds considerably potential to expand as well. In 1986, just 335 hectares of land in Vietnam were dedicated to industrial parks. By 2018, this had grown to 80,000 ha a CAGR of over 18%.

Northern Vietnam in prime position to benefit from China+1 production model

Considered to be the ‘Number 1 option’ for manufacturers looking to move away from China, Northern Vietnam is poised to be among the biggest beneficiaries of the China+1 production model, which should drive demand for industrial property in the area. The China+ 1 model has been noted to be a major reason for Vietnam’s growing presence in global electronics supply chains with manufacturers such as LG, Samsung, and Nokia to name a few, maintaining substantial manufacturing operations in northern Vietnamese provinces such as Haiphong. This explains why manufacturers of computers, electronic and optical products account for the largest occupiers of industrial property in northern Vietnam according to JLL.

Pie chart showing Northern Vietnam industrial property, key occupiers by sector (%). By sector, the biggest occupiers of industrial property in Northern Vietnam were Computer, Electronic and Optical Products 25%, Machinery and Equipment 15%, Fabricated Metal Products except Machinery and Equipment 12%, Rubber and Plastic Products 7%, Chemicals and Chemical Products 6%, Other 35%.

According to CBRE Vietnam, rents in the northern region of Vietnam are expected to increase by 2% in 2018 and 1.5% in 2019 and 2020 while the vacancy rate is expected to drop to 19% in 2020 from 22% in 2018.

The North key economic zon (NKEZ) comprises seven cities/provinces; Hanoi, Hai Phong, Bac Ninh, Hai Duong, Hung Yen, Vinh Phuc, Quang Ninh. Of the seven provinces, Hai Phong and Bac Ninh boast the highest number of industrial parks in the country; according to JLL, as of March 2018, these two provinces accounted for 46% of total industrial land in Northern Vietnam and given their geographically advantageous location of being close to Vietnam’s seaports, these two cities are likely to continue seeing greater supply of industrial land.

Vietnamese city Hai Phong (located in northern Vietnam, 865 km away from China’s manufacturing hub of Shenzhen and about 100km away from Vietnam’s capital Hanoi) is increasingly emerging as a manufacturing and logistics hub with its increasing number of industrial zones (such as the VSIP Hai Phong Industrial Zone, the Nomura-Hai Phong Industrial Zone, and the Trang Due Industrial Zone), growing presence in Vietnam’s port system, and its direct rail line, the Kunming-Hai Phong railway, which connects Vietnam with China, with a transport time of about 9 hours.

Such economic merits have helped the city notch a 14.01% GDP growth rate in 2017, the highest since 1994, and twice the national average of 6.81%. During the first six months of 2018, exports turnover reached US$ 9.3 billion, a 25.34% increase compared to the same period in 2017. With numerous infrastructure developments taking place, from highways and bridges to port expansion projects, the city is actively working to increase grows its appeal as an alternative for manufacturers looking to shift production to Southeast Asia, potentially benefiting Hai Phong’s industrial property market.

Haiphong, already known for its existing port (which however is not a deep water port) is set to further strengthen its position as a rising logistics hub with its new Lach Huyen International Gateway Port (also known as the Hai Phong International Gateway Port) which was opened in May 2018; the new deep water port can handle around 300,000 20-foot equivalent units (TEUs) currently, and capacity is expected to expand going forward enabling the port to handle between 2 million TEUs and 3 million TEUs by 2019. Haiphong’s existing port handled 4.10 million TEUs in 2016 according to data from the World Shipping Council. Coupled with the new port’s capacity, Haiphong will be able to handle about 5 million TEUs, placing Haiphong on the same level as Vietnam’s leading port Ho Chi Minh City in south Vietnam which handled 5.99 million TEUs in 2016 according to data from the World Shipping Council.

Southern Vietnam

With its relatively well-developed infrastructure and favorable investment policies such as tax breaks, industrial property in southern Vietnam (the area surrounding Ho Chi Minh City which includes popular investment provinces such as Binh Duong, Long An and Dong Nai) have long been Vietnam’s industrial growth engine and remain as favored destinations for investors in Vietnam. Companies maintaining manufacturing operations in Southern Vietnam include Samsung, and Intel.

Companies adopting a China+1 production model may find southern Vietnam to be less appealing compared to northern Vietnam, particularly for time-sensitive manufacturing operations that require speedy transport of components between Vietnam and China.

Others however find value the area’s merits such as close proximity to Ho Chi Minh City, which boasts Vietnam’s largest commercial port – the port of Ho Chi Minh City, and Vietnam’s highest-earning consumer base (according to a 2017 report by VietnamWorks, employees in HCMC earn the highest average salaries in Vietnam at about 38% higher than the national average). This explains why a fair proportion of industrial occupiers in Southern Vietnam are in consumer-related businesses such as apparel, textiles and food processing.

Pie chart showing Southern Vietnam industrial property, key occupiers by sector (%) as follows: Machinery and Equipment 15%, Textile and Apparel 11%, Fabricated Metal Products (except Machinery and Equipment) 9%, Rubber and Plastic Products 9%, Chemicals and Chemical Products 8%, Food Processing 7% and Other 41%.

Yet, there is still potential for expansion. Southern Vietnam is general the preferred “launch market” for consumer products companies and as the country’s middle class population expands, demand for warehousing, distribution centers and manufacturing facilities should grow thereby driving industrial property demand. Already enjoying strong occupancy rates (occupancy rates in HCMC, Dong Nai and Bunh Duong Binh Phuoc stood at 77%, 85%, 88% and 85% as of June 2018 according to JLL) strong economic growth and continued growth in manufacturing activity is expected to continue driving industrial property demand with JLL forecasting industrial property in southern Vietnam to enjoy higher occupancy and rental growth over the next few years.

This year, US private equity investment firm Warburg Pincus formed a JV with Vietnam’s state-owned Investment & Industrial Development Corp (known as Becamex IDC, one of the largest industrial real estate developers in Vietnam owned by the government of Binh Duong province in Southern Vietnam) to develop industrial properties in Vietnam. The JV, known as BW Industrial Development JSC, was seeded with eight industrial property development projects across five cities in the North and South of Vietnam, including Binh Duong, Dong Nai, Hai Phong, Hai Duong and Bac Ninh. Warburg Pincus owns 70% of the JV.