Three strategies to enter Vietnam’s industrial property market
Over the past 20 years Vietnam has established itself as one of the brightest manufacturing hotspots in Southeast Asia
Vietnam, 06 August 2019 – According to JLL’s research, in 1986, there was 335-ha of land dedicated to industrial parks. In 2018, the figure reached 80,000-ha. This phenomenal growth can been attributed to Vietnam’s strong economic growth, its orientation towards export driven economy, numerous Free Trade Agreements (FTA’s), Economic Zones creating a favourable business environment and a young, plentiful, relatively low-cost workforce.
The current trade tensions between US and China, has led most commentators to believe that Vietnam will benefit as companies look to redirect their supply chains away from China towards lower-cost Southeast Asian countries. In China, labour costs and industrial land prices have been on the rise as the country moves up the value chain towards domestic consumption, services and higher value exports. Labour costs in Vietnam are now roughly a third of China, which has encouraged companies to move over the past few years, however, the trade war has accelerated the decision making process and urgency for businesses to relocate to Southeast Asia.
Stephen Wyatt, Country Head of JLL Vietnam said “Vietnam’s strong growth in industrial sector is not only because of US – China trade war. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU – Vietnam Free Trade Agreement (EVFTA) demonstrate Vietnam’s willingness for further international integration, creating new opportunities as tariffs will be reduced and create more motivation for Vietnam to reform its business environment.”
With the current context, JLL observes that there is an increasing number of foreign investors who are actively looking for investment opportunities in industrial sector in Vietnam. There are three market entry strategies that investors typically follow.
The first strategy is direct land acquisition from industrial park operators. This has been the traditional way to acquire industrial assets in Vietnam as industrial park operators (e.g. VSIP) subleases the land to various tenants for remaining tenure. The investors can also acquire directly from the government. A good example for this strategy is Amata Corporation, an industrial estates provider from Thailand, who obtained the land from the government and established Amata City Bien Hoa, a 342-ha of lease area industrial park located in Dong Nai Province, in 1994.
The second strategy is forming strategic joint venture with reputable local partners who have access to land bank and can assist foreign investors on local permits/licenses obtaining process. One of the best examples for this strategy is a joint venture in 1996 between two industrial developers, supported by governments from both countries, Sembcorp Development Companies from Singapore and Becamex IDC Corp from Vietnam. The collaboration saw the establishment of Vietnam Singapore Industrial Park, with a total of 9 projects across the country with a total land fund of more than 8,600 hectares, providing manufacturing infrastructure for nearly 900 enterprises with a total investment of 14 billion USD.
The launch of BW Industrial Development – a joint venture between global private equity fund Warburg Pincus and Becamex IDC Corp – in May 2018 is also one of the recent cases. With over 200ha of projects under development and initial investment of more than $200 million, BW Industrial is the largest “for-rent” industrial and logistics developer in Vietnam, according to their announcement.
Within the same month, Sembcorp Infra Services (SIS), a subsidiary of Sembcorp Development, announced that CRE Asia agreed to invest US$6.2 million into SIS in exchange for 30% interest while Sembcorp Development will hold the remaining balance. The new capital from CRE Asia, together with bank borrowings, will fund the development of an additional 30,000 square metres of warehouse space in VSIP Hai Phong.
Another typical market entry strategy for investors is either direct acquisition or sale and leaseback of operating industrial assets with stabilised income. The sale and leaseback of Unilever warehouse in VSIP 1, Binh Duong Province in the last quarter of 2018 is one of the examples. According to their press release, Mapletree Logistics Trust entered into a conditional asset transfer agreement with Unilever International Company Limited (“Unilever Vietnam”) to acquire the Grade A warehouse unit for VND 725.1 billion (approximately US$31.1 million). Upon completion of the acquisition, the property will be leased to Unilever Vietnam for 10 years with annual rent escalations.
Despite being one of the hottest destinations for industrial sector in the Southeast Asian region, finding investment opportunities could be challenging for investors. “Strong demand coupled with US – China trade tensions drove the land price to a new level. In Q2 2019, the average land price for Southern industrial market is approximately at US$95 per sqm per lease term, an increase of 15.8% y-o-y. This could create a gap between the vendor’s and investor’s expectations,” commented Stephen
“Finding a reputable partner to form joint venture could also be a challenge as not only the partner has access to strategically located land bank and feasible projects, but also strong expertise in the local market knowledge as well as having long-term commitment, respect for partners. Therefore, before entering a deal, building trust is very important. The Investor relies on the preliminary information with the commitments from the Vendor while the Vendor relies on the track record, financial and expertise capability from the Investor. Given the lack of transparency in the market, the listing companies are more preferable from both sides because the company as well as financial and legal information is publicly transparent and accessible,” said Khanh Nguyen, Senior Director of Capital Markets at JLL Vietnam.
Some other key challenges that Vietnam is facing is insufficient supporting infrastructure despite overall spending on infrastructure is relatively high when compared to other countries. Many infrastructure projects in Vietnam face delays due to land compensation and funding. The cost border trading cost and time, consisting of documentary and border compliance costs, are also quite high and inefficient as compared to most of its regional peers. To attract more foreign investment and stay ahead of the curve, especially in the context of industrial 4.0, Vietnam would need to improve its infrastructure network and process of cross border trading. Furthermore, more skilled labour force and incentives for innovation in terms of communication and technology must be taken into consideration.
We expect industrial sector to remain the hottest sector for the remaining two quarters of 2019 and that there is a continued strong interest from foreign investors looking for opportunities to invest in Vietnam. The lack of high specification, modern logistics warehouse space, and strong demand from regional occupiers are supporting the potential growth of this industry. The rapid growth of the middle-income population creating more disposable income and a growing obsession of with e-commerce will put significant demand on logistics facilities. Quality of the assets, rental growth, deal size and remaining land tenure are the key crucial factors for investors to determine their investment decisions, Khanh Nguyen concluded.
JLL (NYSE: JLL) is a leading professional services firm that specialises in real estate and investment management. Our vision is to reimagine the world of real estate, creating rewarding opportunities and amazing spaces where people can achieve their ambitions. In doing so, we will build a better tomorrow for our clients, our people and our communities. JLL is a Fortune 500 company with nearly 300 corporate offices, operations in over 80 countries and a global workforce of 83,500 as of March 31, 2018. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.