Commercial Property: Office and Retail Space in Vietnam

Posted by Written by Minh Nhat Dao Reading Time: 6 minutes

Alongside a booming economy comes a huge demand for office and retail spaces. In this article, we look at the current state of office and retail space in Vietnam.

The commercial real estate market in Vietnam has witnessed a proliferation of new offices and retail openings in Hanoi and Ho Chi Minh City (HCMC). The two cities welcomed multiple new retail spaces and grade A and B projects, showing positive signs of recovery after two years of stagnation. For example, in 2022, Hanoi recorded a surge in office supply, exceeding 1.6 billion square meters of net leasable area (NLA), with grade A office buildings taking up 37 percent of the total supply.

However, the market is still in its early stages of development, with most assets concentrated in Hanoi and HCMC.

In comparison to other significant regional office markets, Vietnam’s two major cities still boast a modest amount of available grade-A office space. There are a combined 820,000 square meters in Hanoi and HCMC, according to Cushman & Wakefield. Meanwhile, Tokyo has 10 million sqm, Seoul has 4.3 million sqm, and Singapore has 2.6 million sqm.

Understanding the growth opportunities, long-term challenges, and government initiatives may help firms leverage the considerable potential of the Vietnamese commercial real estate market moving forward.

Vietnam’s commercial property market analysis

The commercial real estate market in Vietnam is currently estimated to be worth US$16.52 billion and is anticipated to reach US$33.83 billion by 2028, rising at a CAGR of 15.42 percent over five years, from 2023 to 2028, according to market advisory firm Mordor Intelligence.

Despite energy scarcity, inflation, and intense geopolitical turmoil around the world, Vietnam’s economy is still expected to grow. According to The Investor, foreign investment in the real estate sector is a big contributor to the positive performance of Vietnam’s economy. In addition, in recent years there has been a surge in demand for high-end office and retail spaces.

Office real estate

According to commercial real estate investment firm CBRE (see report), Hanoi and HCMC’s rents in Q4 2022 seemed to be leveling off after sharp increases over the preceding few years, showing only slight growth in rents compared to pre-Covid-19.

By the end of 2022, the total supply of Grade A and B office spaces was 1.6 million sqm of NLA in Hanoi. Asking rents in Hanoi also saw upward trends, reaching US$28.7 and US$14.5 per sqm, respectively.

In the fourth quarter of 2022, HCMC, although lower in grade A and B supply, experienced stronger growth in office stock and asking rents. In particular, the city had an additional 41,382 sqm of new NLA from three grade B office buildings. Furthermore, grade A and B office buildings in HCMC pushed up rents by 7.4 and 2.2 percent, to US$45.9 and US$26 per sqm, respectively.

Retail real estate market

The retail market in Vietnam also saw a positive performance in stock supply and asking rents. Hanoi had an additional 54,500 sqm of new NLA from two new projects, Vincom Mega Mall Smart City and The Zei, bringing the total supply in Hanoi to 1.07 million sqm.

HCMC added a new 35,000 sqm NLA from the Thiso Mall project bringing the city’s total to 1,096,628 sqm. In the coming years, from 2023 to 2025, Vietnam is expected to welcome a boom in supply from several new projects, significantly boosting the retail supply in Hanoi and Ho Chi Minh City.

Outstanding investment hotspots in the years ahead

West of West Lake, Hanoi

Infrastructure, west of West Lake in Hanoi, is being developed to become Hanoi’s new center. According to the government’s vision outlined in Decision 423/QD-TTg, the western region of Hanoi is set to house the administrative centers of various ministries, central government agencies, and embassies.

In addition, the formation of residential clusters, along with a wide range of public facilities, has contributed largely to the development of the Tay Ho area, serving the needs of the international elite communities. Several large-scale commercial projects west of West Lake Hanoi are currently in progress to meet the rising demand for higher standards of living.

Major commercial projects, including a Samsung R&D center, Lotte Mall Hanoi, 5-star Shilla hotel, and the Tonshin project, are transforming the area. The introduction of these new commercial properties is expected to supply over 72,000 sqm of NLA in retail and 45,500 sqm of NLA in office space when complete. In light of this, west of West Lake Hanoi is likely to become an attractive investment hotspot for property developers, both domestic and foreign.

Thu Thiem New Urban Area, Ho Chi Minh City

Another large-scale commercial project is Thu Thiem New Urban Area, which is anticipated to become the new central business district (CBD) of Ho Chi Minh City. According to the approved investment plan, Thu Thiem is expected to generate a total stock of 135,000 sqm of NLA in retail and 84,700 sqm of NLA in office leasing space by 2024.

With a wide variety of projects and public facilities underway, Thu Thiem NUA is poised to become an innovative urban area and drive enormous demand for leisure, recreation, and entertainment in the east of HCMC.

Prolonged challenges in Vietnam’s commercial property market

Low occupancy

In 2022, the grade A and B office market recorded positive net absorption of nearly 110,000 sqm (NLA) in Hanoi and HCMC, achieving solid leasing volume in the two regions. In addition, CBRE found that the majority of retailers in their survey expected sales performance to improve in 2023.

However, it is crucial to note that market trends may change drastically in the near future, especially regarding occupancy rates.

Take Hanoi’s office market for example. In the final quarter of 2022, grade A and B offices recorded a vacancy rate of 15.3 and 11.6 percent, respectively. However, CBRE forecasts that there will be erratic fluctuations in occupancy in the years ahead. Vacancy rates of grade A and B offices are predicted to increase considerably to around 30 percent for grade A and 20 percent for grade B, by 2024.

Changing tenant needs

Recent years have witnessed some significant trends changing the landscape of the commercial real estate market in Vietnam. One of them is decentralization. Tenants are now demanding high-quality buildings with competitive prices in secondary areas. Especially for the banking, finance, insurance, IT, and manufacturing companies, they are relocating their offices to non-CBD spaces to enjoy higher construction standards and facilities.

Furthermore, multiple grade B projects are under construction in non-CBD areas, contributing to Vietnam’s high-quality office pipeline. These buildings are set to surpass other older offices in the same segment in the CBD, with regard to quality and service. That said, landlords must understand the evolving needs of tenants to strategically renovate their buildings or change their pricing structure accordingly.

Increasing ESG requirements

Corporations are now putting environmental, social, and governance (ESG) issues at the forefront in the workplace. Workplaces now need a holistic approach to manage their operations in several aspects, including sustainability, employee well-being, inclusion, ethical values as well as productivity and collaboration.

In the retail market, tenants are also increasingly paying attention to ESG practices from commercial real estate firms. According to the operational intelligence platform Enertiv, retail tenants are now highly aware of their carbon footprint, energy consumption, and social impact as they need to disclose this information to their shareholders.

With ESG currently reshaping the office market globally, it poses difficulties for property developers to cater to the growing demands for commercial real estate while adhering to environmental, social, and governance standards.

Administrative red-tape

Investing in Vietnam’s commercial real estate can be challenging for first-time investors with legal entanglements accounting for 70 percent of the difficulties real estate firms have to face, according to Vietnamnet. Currently, Vietnam’s real estate is subject to nine laws and 20 administrative procedures, causing overlap and inconsistency among regulations.

However, on April 3, 2023, the Vietnamese government issued Decree 10/2023/NĐ-CP, revising various laws and land regulations to support real estate market development. The most important changes include bidding on land-use rights, extensions of land-use terms upon project termination, conversion of land-use purposes, and tourism accommodation ownership certificates. These notable amendments and supplementations should help ease the bottlenecks, which have thwarted the implementation of many commercial real estate projects and investment activities in Vietnam, according to Le Dinh Vinh the director of Vietthink a local law firm.

The future of Vietnam’s commercial real estate

Vietnam’s commercial real estate market is well-poised to grow substantially in the coming years, driven by booming supply from many large-scale projects. However, firms should be aware of the strict legal frameworks of the real estate sector in Vietnam. These can be challenging, therefore firms looking to invest in Vietnam’s real estate market should consult a knowledgeable local professional.

For support with legal and regulatory requirements in Vietnam, contact the legal experts at Dezan Shira and Associates.

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