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How do foreign firms enter Vietnam’s industrial property market?

How do foreign firms enter Vietnam’s industrial property market?

Foreign investors are actively seeking opportunities to invest in Vietnam's industrial real estate market through three main strategies: direct land acquisition, joint venture with local partner, and direct acquisition or sale and leaseback.
19:00, 18/08/2019

Challenges

Despite being one of the hottest industrial hubs in Southeast Asia, some challenges remain ahead, JLL will help address the issues.

“Strong demand coupled with US – China trade tensions drove the land price to a new level. In Q2/2019, the average land price for southern industrial market is approximately at US$95 per sqm per lease term, an increase of 15.8% on year. This could create a gap between the vendor’s and investor’s expectations,” commented Stephen.

Finding partners to form joint ventures, it could also be a challenge as not only the partner has access to strategically located land bank and feasible projects, but also strong expertise in the local market knowledge as well as having long-term commitment.

Therefore, before entering a deal, building trust is very important as investors rely on preliminary information with the commitments from vendors while vendors rely on the track record, financial and expertise capability from investors.

Given the lack of transparency in the market, the listing companies are more preferred from both sides because the company as well as financial and legal information is publicly transparent and accessible.

Insufficient supporting infrastructure, spending on infrastructure is relatively high when compared to other countries but many infrastructure projects in Vietnam face delays due to land compensation and funding.

Cost and time are also quite high and inefficient as compared to its regional peers. To attract more foreign investment and stay ahead of the curve, especially in the context of Industry 4.0, Vietnam would need to improve its infrastructure network and process of cross border trading. In addition, more skilled labor force and incentives for innovation in terms of communication and technology must be taken into consideration.

Above all, Vietnam’s industrial sector remains potential as high specifications, modern logistics warehouse space, and strong demand from regional occupiers are supporting the growth of this industry, JLL emphasized.

The rapid growth of the middle-income population creating more disposable income and a growing obsession of with e-commerce will put significant demand on logistics facilities. Quality of the assets, rental growth, deal size and remaining land tenure are the key crucial factors for investors to determine their investment decisions, it concluded.

Industrial real estate is one of segments in Vietnam drawing foreign investment.

Industrial real estate is one of segments in Vietnam drawing foreign investment.

Over the past 20 years Vietnam has established itself as one of the Southeast Asia’s brightest manufacturing hotspots. A research by JLL reveals that in 1986, there was 335-ha of land dedicated to industrial parks. The figure quickly reached 80,000-ha last year. This strong growth can been attributed to Vietnam’s strong economic growth, its orientation towards export driven economy, numerous Free Trade Agreements (FTA’s), Economic Zones creating a favourable business environment and a young, plentiful, relatively low-cost workforce.

Because of the current trade tensions between US and China, many experts believe that Vietnam will benefit as enterprises look to redirect their supply chains away from China towards lower-cost Southeast Asian countries. At present, labour costs in Vietnam are now roughly a third of China, which has encouraged companies to move over the past few years. However, the trade war has speeded up the decision making process and urgency for businesses to relocate to Southeast Asian countries.

Stephen Wyatt, country head of JLL Vietnam, said “Vietnam’s strong growth in industrial sector is not only because of the US-China trade war.” The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU – Vietnam Free Trade Agreement (EVFTA) demonstrate Vietnam’s willingness for further international integration, creating new opportunities for investors, he added.

Stephen Wyatt, country head of JLL Vietnam.

Stephen Wyatt, country head of JLL Vietnam.

With the current context, JLL says there is an increasing number of foreign investors who are actively looking for investment opportunities in industrial sector in Vietnam, with three following market entry strategies:

1. Direct land acquisition from industrial park operators

This has been the traditional way to acquire industrial assets in Vietnam since industrial park operators subleases the land to various tenants for remaining tenure. Besides, investors can also acquire directly from the government. For example, in 1994, Amata Corporation, a Thai industrial estates provider, who obtained the land from the Vietnamese government and established the 342-hectare Amata City Bien Hoa in the Southern province of Dong Nai.

2. Forming strategic joint venture 

Foreign investors have formed strategic joint venture with reputable local partners who have access to land bank and can assist foreign investors on local permits/licenses obtaining process. One of the best examples for this strategy is a joint venture in 1996 between two industrial developers, supported by governments from both countries, Sembcorp Development Companies from Singapore and Vietnam's Becamex IDC Corp. The collaboration saw the establishment of Vietnam Singapore Industrial Park, with a total of 9 projects across the country with a total land fund of more than 8,600 hectares, providing manufacturing infastructure for nearly 900 enterprises with a total investment of $14 billion.

Most recently, in May 2018, the launch of BW Industrial Development, which is a joint venture between global private equity fund Warburg Pincus and Becamex IDC Corp, is also another good example for this strategy. With more than 200ha of projects under development and initial investment of more than $200 million, BW Industrial is the largest “for-rent” industrial and logistics developer in the country.

Within the same month, Sembcorp Infra Services (SIS), a subsidiary of Sembcorp Development, announced that CRE Asia agreed to invest US$6.2 million into SIS in exchange for 30% interest while Sembcorp Development will hold the remaining balance. The new capital from CRE Asia, together with bank borrowings, will fund the development of an additional 30,000 square meters of warehouse space in VSIP Haiphong.

3. Direct acquisition or sale and leaseback of operating industrial assets 

The sale and leaseback of Unilever warehouse in VSIP 1, Binh Duong Province in the last quarter of 2018 is one of the examples. According to their press release, Mapletree Logistics Trust entered into a conditional asset transfer agreement with Unilever International Company Limited to acquire the Grade A warehouse unit for VND 725.1 billion (approximately $31.1 million). Upon completion of the acquisition, the property will be leased to Unilever Vietnam for 10 years with annual rent escalations.

Despite being one of the hottest destinations for industrial sector in the Southeast Asian region, finding investment opportunities could be challenging for investors. Stephen Wyatt, Country Head of JLL Vietnam, said: “Strong demand coupled with US – China trade tensions drove the land price to a new level. In Q2 2019, the average land price for Southern industrial market is approximately at US$95 per sqm per lease term, an increase of 15.8% y-o-y. This could create a gap between the vendor’s and investor’s expectations.”

Finding a reputable partner to form joint venture could also be a challenge as not only the partner has access to strategically located land bank and feasible projects, but also strong expertise in the local market knowledge as well as having long-term commitment, respect for partners, according to JLL. Therefore, before entering a deal, building trust is very important. The Investor relies on the preliminary information with the commitments from the Vendor while the Vendor relies on the track record, financial and expertise capability from the Investor. Given the lack of transparency in the market, the listing companies are more preferable from both sides because the company as well as financial and legal information is publicly transparent and accessible.

Other key challenges that Vietnam is facing include insufficient supporting infrastructure despite overall spending on infrastructure is relatively high when compared to other countries. Lots of infrastructure projects in Vietnam face delays due to land compensation and funding. The cost border trading cost and time, consisting of documentary and border compliance costs, are also quite high and inefficient as compared to most of its regional peers.

In order to attract more foreign investment and stay ahead of the curve, especially in the context of industrial 4.0, Vietnam would need to improve its infrastructure network and process of cross border trading, Wyatt pointed out. In addition, more skilled labour force and incentives for innovation in terms of communication and technology must be taken into consideration.

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