2Q19: Limited office supply in Hanoi while demand stays healthy in HCMC
Green and sustainable office concepts are making way to become an inevitable trend of future completions.
Despite a notable new supply entering the market, the occupancy rate in 2Q19 just recorded a slight decrease of 98 bps q-o-q and 67 bps y-o-y to 95.5%. This implied that demand on the market was strong and sufficient enough to absorb new supply.
In 2Q19, the HCMC office market welcomed 42,754 sqm of new supply from seven Grade B&C buildings, bringing the total HCMC office stock to 2,231,000 sqm (including Grade A, B and C).
While the non-CBD sub-market has continuously recorded new supply since end-2018, the supply of Grade A and Grade B in the CBD remained restricted with no new supply recorded in seven consecutive quarters. Deutsches Haus Ho Chi Minh City is the newest building in the CBD, completed in 4Q17.
Grade A and Grade B average rents continued to rise in 2Q19, to USD 28.5 per sqm per month, up 2.5% q-o-q and 5.2% y-o-y. After a period of steady growth, Grade A rent in 2Q19 rose at a slower pace, at 1.2% q-o-q. Meanwhile, the average rent of Grade B sharply increased by 3.5% y-o-y, mainly driven by the acceleration in CBD rents.
In 2H19, the market is expected to welcome a wave of new completions, which may result in a decrease in overall occupancy rate. Flexible space is expanding, concentrating in citywide office clusters.
In the short term, demand is set to pick up on the back of positive economic prospects. However, the prevailing global economic uncertainty may compress office demand. Besides, the enriched new supply coming on stream in the next three years will put some pressure on the performance of the existing supply. Accordingly, developers should be flexible in leasing strategy to capitalise on the market.
The occupancy rate of the Hanoi office market fell slightly to 92.3% due to new opening buildings entering the market. During 2019, 21,500 sqm of office space was newly absorbed, with nearly two-thirds credited to Grade B office square.
Leasing activity was mainly involved in Grade B buildings, especially those in the outer parts of the city, owing to insufficient supply in the CBD area. One of the most notable deals was recorded in Truong Thinh Building in Cau Giay, an outskirt district, with 1,100 sqm taken up by a single tenant.
A new Grade A building in the CBD, Thai Holding Tower in Hoan Kiem (25,000 sqm), came on stream in 2Q19, the first Grade A building to complete since 2016 in the Hanoi office market. Additionally, following two quarters with no new supply, the Grade B segment recorded 30,600 sqm newly added to the basket, the majority located in the non-CBD are. At end-2Q19, the total supply of Hanoi office space stood at approximately 1,986,000 sqm, with Grade B contributing up to 60% of the total stock.
Thanks to stable demand, paired with limited supply, Grade A office space enjoyed the highest upswing with a growth of 4.1% q-o-q and 5.7% y-o-y. However, the rent contraction in the Grade B segment of 2.8%, a result of lower-than-average rent in new buildings in non-CBD, offset the former increase and kept the overall market rent unchanged compared to the same period in 2018. In the CBD area, owing to limited supply, average rent in the sub-area recorded significant improvement of 3.9% q-o-q and 3.5 % y-o-y.
For 2H19, the office market is expecting more completions, all located in non-CBD districts. The buildings are concentrated on Cau Giay and Nam Tu Liem districts, the two rising office clusters of Hanoi. Thus, the average rents in the non-CBD area will remain stable or increase moderately. Meanwhile, the buildings in the CBD may still enjoy a better rise, which in turn continues to help the overall market rents inch up.
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