Commercial Real Estate in Vietnam
Issue 25 - Nov 06



In one of the first issues of RFP Magazine, we featured a project profile on how fire engineering helped Vinaconnex get around the fact that the Vietnamese
fire code only regulated buildings up to a height of 30 storeys, when its building was 36. That article was evidence of the fact that at that time, only a few years
ago, development in Vietnam was limited to say the least. Things are definitely changing. More and more companies are establishing a presence in Vietnam,
and they all want information from a country that a Jones Lang LaSalle report rated at the bottom of its transparency index.

Ghaleb Cabbabe, Business Development Director, Archetype Group, one of Vietnam’s largest architecture, engineering and project management companies, says that the lack of information in the market about Vietnam makes it extremely difficult for new entrants to make informed decisions. His company has worked a long time to develop its own database of clients but he says there are no real directories or other centralised sources of information, particularly not in any language other than Vietnamese. This is why he stresses that developers, investors and other companies coming to do work in Vietnam should always look for a local partner.

Often new developers come to the market with international architects, who are not aware of Vietnamese regulations or geographic and climactic considerations. Cabbabe says that as a result, buildings are often designed to the more costly specifications that are required in the architects’ home countries. For example, unlike Japan or Hong Kong, in Vietnam designing for seismic resistance or hurricane wind factors is not required, while reinforcement to cope with the soft soil is. For the Pacific Place project, which is Hanoi’s largest commercial and retail development, Archetype had to deal with the complexities of designing and constructing a building with five basements, a first for Vietnam. It had to take into account the problems of soft soil, a fact often not appreciated by foreign architects or contractors. Although foreign contractors, such as France’s Dragages, are entering the market, Archetype still often works with local contractors, such as Cotec, who in most cases are very capable and aware of local conditions and practices. This is why Cabbabe believes it is necessary to appoint a local consultant, who can advise at the early stages on how budgets are most effectively allocated. Importing materials is expensive and a local partner can
assist with the selection of other partners and source good quality local materials after the design review stage.

Developers, investors and other companies coming to do work in Vietnam should always look for a local partner.

The local consultant will also help with submissions and compliance - regulations are only published in Vietnamese, so it is impossible to check them properly without a partner with the local language capability, who
has seen them implemented in the past. Quirks in regulations and policy make approvals submissions to local authorities complex, says Cabbebe. For example,
some projects in Ho Chi Min City (HCMC, also known by its former name “Saigon”) have been stalled because the government is in the process of developing a town plan to control the effects of the increasing foreign
and local investment pouring into the city. As more applications for the construction of high-rise buildings are being submitted, the local governemnt is in the process of deciding whether they will be permitted in certain areas. At present, there are no zoning regulations and companies submitting designs for
approval need to negotiate with local authorities as to the permitted extent of their development on an ad hoc basis. This means the number of floors permitted in
a building, gross floor area (GFA) and its plot ratio can vary from building to building. Two buildings side-byside might be subject to different restrictions.

local partners
Other than being advised to work closely with local architecture and engineering firms, international developers are required by law to have a local partner,
who will normally bring the right to use or develop land to the relationship. Previously, the local partner was required to have a 51 percent share in the venture but there has been a recent change to this rule. (See legalities section in next month’s issue of RFP). Due to recent policy changes, the government has put time limits of as little as six months to a year on the right to use land. If the right has not been exercised in that period, it may be withdrawn. This puts local developers and land owners, who do not have the funds or expertise to develop the land, in a position of having to seek investors, developers or partners quite urgently.

The lack of information in the market about Vietnam
makes it extremely difficult for new entrants to make
informed decisions.

International companies, who have good local partners, are able to keep ahead of, and help drive, demand, agrees Wolfgang Gerlach, Senior Director, Head of Automation & Drives, Siemens AG Represenation. As part of Siemens’ company philosophy worldwide, working with local partners, who can speak the language, know the culture and have their own established networks, is very important. However, Gerlach says that Vietnamese businesses equally appreciate foreign expertise. Gerlach notes that the construction market is still developing. While the quality of building works is improving, usually the systems that are inside the building are only considered after construction. However, there is still demand for intelligent, up-to-date solutions, says Gerlach. Standards are set to improve as international investment continues to flood in, particularly from Korea, Singapore and Taiwan, into all sectors including factories, commercial and hospitality projects and residential

HCMC currently accounts for around 40 percent of the nation’s construction, with the northern capital Hanoi and the area around Danang in the centre of Vietnam accounting for another 15 percent each. There are around 120 both public and private industrial parks, which are located on the peripheries of the cities,
with a similar proportional split. Some of these are also internationally suppported and are seen as significant regionally. In September, for example, Singaporean
Prime Minister Lee Hsien Loong visited Vietnam to attend the tenth Anniversary celebrations of the Vietnam-Singapore Industrial Park (VSIP) in Binh Duong
province and met Vietnamese Prime Minister Nguyen Tan Dung to sign a commitment letter to launch VSIP II Vietnam.



With 120 existing and 30 more planned, at an average of 20 to 30 companies in each park, there are literally thousands of buildings under construction in these
parks. Siemens currently has 200 projects under construction and many more are being undertaken via their partner distribution network, Gerlach acknowledges the huge potential of this market.

foreign investment
The Vietnamese government welcomes foreign investment that will offer knowledge transfer to the population and provides few investment obstacles for
companies who do so, says Gerlach. A less favourable view might be taken of companies who are viewed as wanting simply to exploit cheap labour or resources. Companies who have invested both inte llectual and financial capital include Intel, Nestle and Canon, which has set up one of its biggest printer factories in the country. Specific industry sectors tend to be clustered
in different areas - in the Mekong delta there are a number of food and beverage manufacturers, while near the port oil and gas companies reside.

Not only does the government welcome skills improvement through foreign investment, the population at large is very open to international ideas and ways of
operating, having been strongly influenced by European companies in the past, says Gerlach. As such, Western approaches and products are viewed positively. The government has already made huge investments and is looking to develop the F&B, cement, oil and gas sectors, and is keen to build up its OEM capabilities through cooperation with foreign partners. For companies who are ready to act, current tax policies encourage entry now. Many companies, who used to operate in Vietnam through partners or distributors, are now re-entering the market
under their own name.

Siemens sees the benefits of training staff to support its own future growth. Of its
200 odd employees only a handful are foreign experts. However, it is from this group of people that training centres are born and knowledge then snowballs. Gerlach believes it is important to foster this snowball effect because currently knowledge is not growing at the rate of investment or growth of industry. After these initial investments, say over the first four to five years, companies should expect to see their margins improving as their highly trained staff see the value in staying with the company.

According to Gerlach, the situation in Vietnam differs to the way international
organisations viewed development in China over the past ten years. The size of the Chinese economy meant that many companies felt they had to be there and expand rapidly, whether they were seeing returns or not. Vietnam’s more modest size, only 80 million people, and the experience of companies in China means that a more measured approach is likely to be taken, says Gerlach. Even so, the government is geared up for rapid expansion, 96 percent of the population can read and write, and even though only eight million live in HCMC, the country’s biggest city, new urban planning will put in place infrastructure to accommodate ten million until 2020.

Not only does the government welcome skills
improvement through foreign investment, the
population at large is very open to international ideas
and ways of operating.

real estate realities
Much of the expansion will be funded from money coming in from abroad. Eighty
percent of Chesterton Petty Vietnam’s business is conducted with foreign companies or joint ventures. While more sophisticated services are beginning to be offered, for example, when Chesterton Petty initiated a consultancy
project with a Vietnamese company last year, many still believe the international consultancy services are too expensive, so most of the work that Chesterton Petty
does is straight forward management or leasing.

While there are “strong rumours Vietnam will join” the World Trade Organisation, Martin Roumens, General Director, Chesterton Petty Vietnam, believes there
will not be a “light-switch” of companies rushing to setup in Vietnam. Large Japanese trading companies, such as Mitsubishi, have been in Vietnam for years
and other foreign companies in the banking, IT, telecommunications, engineering, infrastructure and oil sectors will continue to move in. Infrastructure plays
an important part in the activities of foreign companies, so the plan to move HCMC’s port closer to the mouth of the river and the networks that companies, such as Nortel, are setting up, will be watched closely by those assessing the market. Roumens also notes, a number of energy deals are taking place to further support growth, with French energy provider, Electricite de France working on its first nuclear power plant.

Innovative structures are being developed to create this infrastructure with active government involvement. For example, Korean giant POSCO, cooperating with
Vinaconnex, has a joint venture agreement to build a new freeway in return for the right to develop a large parcel of land.



Chesterton Petty was the only international real estate consultancy to stay in Vietnam through the troubles of the Asian financial crisis and is currently celebrating its tenth year there. Now its competitors are moving back. CB Richard Ellis and Jones Lang LaSalle have both recently set up offices in HCMC and Colliers International operates through a local partner. This trend is being enhanced by the tax breaks given to real estate companies when they enter the market.

Evidence that the market is moving quickly can be seen in one large industrial zone on the way to Hanoi Airport, says Roumens. Established six years ago, the first phase was slow to fill up, now demand has risen and the third phase is already well underway.

undersupply
Office space in Vietnam is in short supply. The total stock for HCMC and Vietnam is about the equivalent of what can be found in Hong Kong’s IFC2 building alone.
The latest prestigious development in Hanoi is the Archetype designed and managed Pacific Place, which is the biggest office tower and retail space to be built in the diminutive yet graceful city, and it has already begun pre-leasing. The building was originally owned by a Taiwanese company but now a French company is looking to fill the office and retail spaces with quality tenants. Chesterton Petty is aiming first to fill whole floors (1,100 sqm), then divide what remains of the 16,000 sqm of office space between the smaller space users. Finding tenants from the targeted sectors, embassies and other blue-chip companies, to fill the space should not be difficult, in an environment of less than two percent vacancy, there is a distinct shortage of space.

Innovative structures and public prive partnership
arrangements are being developed to create the
infrastructure required for economic expansion, with
active government involvement.

a blessed life
Mark Farquhar, Head of Corporate and Retail, Chesterton Petty says the interest in shop front, mixed-use and shopping centre space is so large that he “leads a blessed life”. To date, much retail activity has been based around hotels, with successful locations, such as the Sofitel Metropole Hotel Hanoi, garnering tenants the calibre of Louis Vuitton. Retailers now are re-entering the market with their own brand stores or exclusive distributors rather than working through dispersed distribution networks. There is word that the French Consulate trade office has a department dedicated to giving advice to these companies.

This activity, combined with the amount of new retail options in the pipeline, is helping to develop the market. Leasing agents and managers are beginning to recognise the value in managing tenant mix rather than simply filling space, says Farquar. Even new developments, such as Vincom City Tower in Hanoi, which has retail tenants such as Benetton and Elle, suffer from this problem. Steps are being taken to remedy the situation, which has seen in some centres anomolies such as a fish shop being located next to a high-end hairdressers, and when more large shopping malls and mixed use developments come onto the market, competition will force the change, says Farquar. Current developments include, Korean International Business Center Corporation’s Diamond Plaza a high-end development housing many international brands, and French group Casino have several hypermarkets, while Singapore’s Parkson Group and Germany’s Metro also have a presence.

Much of the new development in Vietnam has some foreign investment or partner.
However, developers first entering the market should do so carefully, says Roumens. As the market is still small, it is important to choose the right project. By starting with a ten to 20 million US dollar project and delivering it well, the market has the opportunity to get to know the way the developer works and the developer has the opportunity to discover the characteristics of the market for themselves. Once that developer’s place and reputation has been established, it can move on to bigger and more ambitious projects. Local developers are frequently given the rights to develop certain tracts of land but devoid of the financing and resources to do so, look for foreign partners to work with. The opportunities abound for companies in all sectors. RFP

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