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Foreign investors eye industrial and logistics property

Released at: 15:29, 16/09/2018

Foreign investors eye industrial and logistics property

Photo: Viet Tuan

Vietnam's industrial and logistics property sector has seen a wave of foreign investors in recent years hoping to seize the opportunities from the country becoming a new regional manufacturing hub.

by Hong Nhung

The launch of the $200-million joint venture BW Industrial, between leading global private equity firm Warburg Pincus and Vietnam’s largest industrial real estate developer Becamex IDC, a few months ago put the spotlight on the country’s real estate market as it promises to result in breakthrough developments in the local industrial and logistics property sector. 

Foreign developers are increasing their investments in industrial real estate projects in Vietnam to seize the huge opportunities that will come if the country sees strong manufacturing growth in the near future. “With a sizable population and an increasingly diversified economy, manufacturing and domestic consumption have become the central areas of growth for Vietnam,” said Mr. Greg Ohan, Deputy CEO of BW Industrial. “We feel that our timing is just right to tap into these growth opportunities with the goal of taking Vietnam’s industrial and logistics value chain to the next level.” 

Foreign giants

With over 2 million sq m of industrial land and huge initial capital, BW Industrial is the largest supplier of “for-lease” industrial property and logistics services in Vietnam. The company’s plan is to create the logistics and industrial platform of choice for leading multinational corporations (MNCs), third-party logistics (3PLs) providers, and e-commerce companies. It was seeded with eight projects in five major cities in each of Vietnam’s strategic industrial hubs in the north and the south. “We plan to deliver Phase 1 of our ready-built factories, logistics warehousing, and Build-to-Suit (BTS) solutions nationwide in 2019,” Mr. Ohan told VET. “For existing assets, we are already running at over 90 per cent occupancy and have received strong interest in our Phase 1 developments nationwide.”

Before Warburg Pincus, many large investors such as Japan’s Kizuna JV, Chodai, Kobelco Eco-Solutions, and JESCO Holdings, as well as Singaporean developer Mapletree, had also sunk considerable amounts of money into industrial infrastructure facilities, particularly the construction of factories for lease. In late March, the long-standing Amata Corporation from Thailand received new investment registration certificates for a project in an industrial area in northern Quang Ninh province. The first phase of the project is currently in the process of development and is expected to be put into operation by the end of 2019.

With the 714-ha project, Amata will make its presence felt in the north, following on from the success of its first industrial project, Amata City Bien Hoa, in southern Dong Nai province and which was its first investment outside of Thailand. With 90 per cent occupancy, the 700-ha Amata City Bien Hoa has now attracted 165 investors from 21 countries and territories with more than $2.7 billion in investment capital, which created 49,000 jobs. “We recorded revenue of $18.7 million in 2017 and $11.5 million in the first half of this year, for a growth rate of 29 per cent year-on-year,” said Mr. Surakij Kiatthanakorn, General Director of Amata City Bien Hoa.

Another Amata project in Dong Nai is still under construction on a total area of 1,270 ha in Long Thanh district, of which 33 per cent of the total space is to be developed as a high-tech industrial park (IP) and the remaining 67 per cent as an urban community. Amata has also confirmed it will continue to expand its investment in Ha Long city in Quang Ninh province.

Mapletree, another long-term industrial and logistics real estate developer, made its first foray into Vietnam 13 years ago. The Mapletree Binh Duong Logistics Park, the company’s first asset in Vietnam and covering 68 ha, is a $110 million property that houses modern logistics space. It also features customized facilities that are tailor-made to clients’ requirements. Following the success of its first logistics park, it has steadily grown its presence and further developed two more such projects: Mapletree Logistics Center in VSIP I in southern Binh Duong province and Mapletree Bac Ninh Logistics Park in Vietnam’s north.

Given their strategic locations, the three logistics properties are attractive to 3PLs and manufacturers. “They had a portfolio occupancy of 100 per cent by the end of FY 2017, up from 96.4 per cent in the previous year, and then secured new and renewed leases representing 4.8 ha of net leasable area (NLA), with a positive rental reversion,” said Ms. Wendy Koh, Regional CEO, SEA, at Mapletree Investment Pte. “To cater to new demand for logistics solutions in Vietnam, we have begun developing the next phase of Mapletree Logistics Park in Binh Duong and Bac Ninh. The total cost for both developments is estimated at around $34 million. The project in Binh Duong is set to be completed in September while the new project in Bac Ninh is targeted to be completed by April 2019.”

New regional manufacturing hub

Real estate developers expressed concern about the US’s withdrawal from the TPP last year, fearing that foreign investors may reconsider their investment decisions in Vietnam. However, despite the absence of the US in the new CPTPP, Vietnam remains an attractive destination for foreign investors and the country is now considered a new world production center. Many multi-national groups are considering relocating their production to Vietnam, where labor costs are one-quarter of those in China. “The continued strong flow of FDI into Vietnam, plus the expansion of domestic businesses, means increased demand for workshops and great opportunities for real estate developers,” said Mr. Stephen Wyatt, Country Head of JLL Vietnam.

Hanoi industrial supply to 2020

Source: C&W, July 2018

HCMC industrial supply to 2020

Source: C&W, July 2018

Vietnam has become a hotspot for investment into manufacturing because of its low labor costs, young population, high growth rate, strategic position in the region, and stable policy environment compared to many neighboring countries, according to Mr. Alex Crane, Managing Director of Cushman & Wakefield (C&W) Vietnam. “The country is experiencing a shift to a two-tier market,” he said. “While we have just over 50 per cent occupancy across the entire industrial market, top tier IPs are at over 80 per cent occupancy and average asking rents at IPs in Hanoi and Ho Chi Minh City are heading upwards. The remainder of the market is somewhat stagnant and this is principally down to location and operation.” 

High demand, however, continues in key manufacturing and logistics segments but few occupiers are willing to compromise on park quality and location at the moment. “There will be a shortage of supply in good quality IPs in the next couple of years,” he added. “Almost all investors are now trying to enter the industrial real estate market thanks to the development of local manufacturing and distribution, exports and imports, and local consumption, whereas a few years ago very few would look at this segment.” 

Industrial real estate developers are using “clean land” funds and building workshops for lease in anticipation of a wave of foreign investors relocating to Vietnam. “As Vietnamese enterprises steadily improve their technical expertise, there are tremendous opportunities for BW Industrial to develop and provide the much-needed industrial properties to support such initiatives,” Mr. Ohan said. “All major IP developers in the northern and southern key economic areas are expanding to new phases. FDI is driving the manufacturing sector and demand for factories while the expanding domestic consumer market is driving the demand for increased logistics warehousing and the rising appetite.”

Limitations remain

While performance is good, challenges remain in infrastructure, according to Mr. Crane. The sector remains one of the most challenging to invest in due to the arduous land acquisition process and the lack of quality assets available. Price increases for premium parks will affect the competitiveness of exports and logistics costs in Vietnam are still very high compared to other markets. He said the advantage for some developers has been strong performance due to the lack of good supply. Complexities in the land law also prohibit some strong developers from either entering or being able to scale up their land bank and provide more quality space to the market.

Vietnam’s infrastructure plan is arguably more advanced than other Southeast Asian nations, with the government’s master plans clearly highlighting where improvements are required, but investment into and delivery of infrastructure is another matter entirely and this is perhaps where the government could focus more, he added. 

Compensation and site clearance are always major constraints for IP infrastructure investors, according to Mr. Kiatthanakorn from Amata, and affect investment progress and project efficiency. “Administrative procedures also impact on the investment attraction of Vietnam’s real estate market,” he said. “I think that bank interest rates for foreign investors in Vietnam are still very high compared to other countries in the region, which also may have an impact on their investment decisions.” 

One of the difficulties for Vietnam over the next few years, Mr. Wyatt believes, will be its ability to adapt and embrace the inevitable disruption and changes brought about by technology and automation, or Industry 4.0. Nevertheless, Mr. Crane argued that “we haven’t yet seen the third revolution completed in Vietnam, which is the age of computer and automation. Many factories and logistics firms are still pretty basic in terms of the robotics being used and the fact is that we are still led by low-skilled production.”

One of the major challenges for BW Industrial is to manage the balance between land availability and the scarcity of prime land as well as demand for land as close as possible to CBD locations. This is evident in the logistics sector when attracting warehouse space users to locations outside of traditional logistics hubs due to high and rising logistics real estate costs and limited availability due to the country’s very high logistics costs. “Thus, we expect and are starting to experience our strategic end users particularly in logistics looking to capitalize on future and improved infrastructure by moving from traditional locations and achieving rental and operational efficiencies,” he said.

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