As demand for office space continues to outpace supply, what does this mean for the Ho Chi Minh City Office Market?

VIETNAM, 10 December 2017 – With lack of supply and increasing rents in the existing CBD, and the completion of a major infrastructure within Thu Thiem, we anticipate large head office requirements will start to consider Thu Thiem as a viable alternative to the existing CBD.

Since 2015, Ho Chi Minh City (HCMC) office performance has exceeded expected demand with impressive net absorption across all segments of commercial office buildings. 2017 witnessed 4 new large scale Grade A and Grade B buildings entering the market of which three recorded an occupancy rate of over 70% upon opening.

According to JLL report, average occupancy rate of Grade A office buildings in the HCMC achieved greater than 94% occupancy. In the Grade B office sub-market occupancy rates are higher than 94%. This showed an extremely high demand in the market for both mature and new buildings in both Grade A & Grade B office submarkets.

The short term limited Supply and subsequent rising rental rates we believe will continue to drive further investment into HCMC and Vietnam's office market segment from existing developers and new market entrants – the challenge now is, where to invest?

Given rising demand, land scarcity issues have been at the forefront of challenges keeping developers awake at night. "Our developer clients are not concerned about whether they will fill up their buildings, the biggest concern is 'How can I find my next project? And how soon can I complete it as quickly as possible?'' says Trang Bui, Head of Markets in Vietnam of JLL. Subsequently, we have seen the tables turn and the HCMC office market is currently showing signs of approaching a landlord market - this has been characterized by landlords confidently raising rental rates. CBD rental rates approach the record high rental levels experienced in 2006 to 2017.

The average rent in the Grade A sub-market recovered strongly over the past two years along with high demand and even higher quality new buildings being completed. The average Grade A rental rate is currently US$38.9 /sqm/month.  In addition, Grade B rents also continuously rose year on year particularly in newly developed Grade B buildings which recorded rates US$10 USD /sqm/month higher than those in more mature buildings (built pre – 2010) already on the market. The average Grade B rental rate is currently US$22.3 /sqm/month.

"Average tenant sizes have now doubled as companies continue to expand and new entrants enter the market. Just from its own brokered transactions, JLL has recorded the average tenant size in Ho Chi Minh City to double versus the same period last year up to 500 sqm – 600 sqm," said Trang Bui.

Emerging segments such as 'E – Commerce' are propelling office demand to new heights not experienced in Vietnam before. Subsequently, JLL recorded and concluded the largest single broker transacted CBD transaction in HCMC history of 9,000 sqm in the 'E-Commerce' segment to a new entrant in a recently completed Grade A office building in 2017. Segments such as Co-working, Logistics, Sourcing and Manufacturing related enterprises have also been a driving force behind the rapid absorption rates being experienced in the HCMC office market and we expect this trend to continue right through 2018 to 2019.

With limited land bank and CBD opportunities for developers, many have been looking beyond the traditional CBD and toward the future. One such example is the Thu Thiem NUA ear-marked as the future new CBD of Ho Chi Minh City. According to JLL report, the master plan of the Thu Thiem NUA is aimed to alleviate the pressures being faced in the existing CBD. The 657-hectare site located on the banks of Saigon River's opposite side, facing the existing CBD, will comprise 176 land parcels with approximately 3.2 million sqm (GFA) residential space and 3.4 million sqm (GFA) of commercial space, the total site will eventually accommodate a residential population of 145,000 and employee population of 217,000. Thu Thiem will be home to a number of major head offices and will become a vibrant destination combining residences, offices, shopping centres, hotels and serviced apartments.

Much like what was experienced in similar markets such as with Kowloon in Hong Kong, Pudong in China and Bonifacio Global City in the Philippines, JLL believes early adopters and large spaces users migrating across the river will benefit from a first mover advantage in terms of opportunity, location and visibility. We expect initial hesitation will eventually be overcome by the medium to longer term benefits such as cost competitive rental rates, low density open areas, infrastructure and easier connectivity to the growth corridor of HCMC,

However, market factors aside, challenges do exist largely regarding the paucity of support for infrastructure development and lack of preferential policies/ incentives to encourage further investment into the new urban area. Nonetheless, JLL firmly believe it is also observed that in the above cases, it took time for the initial steps to be accomplished and once the infrastructure development begins takes shape, the market will respond.

As growing pains continue, it is HCMC's ability to develop a true "smart city" perhaps through the Thu Thiem NUA that could be the solution developers and office space users have been looking for to curb the current level of limited supply. With 35% of main infrastructure already complete, perhaps a new 'Thu Thiem skyline' ​could be the solution to our challenges.