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Regularly released content on the state of the real estate and infrastructure industry are produced by our subject matter experts and shared on their blogs. A selection of them can be found below.

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ASIA PACIFIC WATCH

With the global media gaze recently on Hanoi as it hosted the second Donald Trump-Kim Jung Un summit, this month’s Watch examines Vietnam, a country we rarely cover closely given its higher country risk in our RARE framework. Going forward, might some stronger drivers and potentially higher returns justify the risk? Numerous sources have claimed that Vietnam could be the country that wins most from the China-U.S. Trade War, as more Chinese firms move south and set up in Vietnam to escape higher tariffs. China’s GoerTek which assembles wireless earphones for Apple, and Zhejiang Hailide New Material, a major polyester producer, have recently announced plans to set up/expand operations in Vietnam in order to evade the threat of higher U.S. tariffs. But even if the Trade War is resolved, there has been a clear trend for Chinese production to set up in Vietnam, which has a skilled/well-educated workforce and where wages in the largest cities are around one third of wages in Shanghai and half the wages in manufacturing hubs of China’s Guangdong Province. But the biggest source of foreign direct investment in Vietnam is South Korea, accounting for around a third of FDI in Vietnam last year. Samsung is the single biggest corporate investor in Vietnam, while OKTA (the Overseas Korean Traders Association) reports that more than 7,000 Korean companies operate in the country. Vietnam has also just ratified the CPTPP (Comprehensive and Progressive Agreement for TransPacific Partnership) and is in the final stages of securing a Free Trade Agreement with the EU. The country’s outlook will thus be heavily dependent on the global trade environment notwithstanding its emerging domestic drivers.

GDP GROWTH TO MODERATE TO 6.1%

Vietnam has enjoyed a strong 6.5% average annual real GDP growth rate since 2001 and the Oxford Economics base case scenario expects that pace to moderate slightly to 6.1% p.a. for the coming five years. It has though suffered from two recent spikes of high inflation when economic challenges forced it to weaken its currency. Hence Vietnamese interest rates have been at comparatively high levels and mortgage rates are currently in the low double digits. Oxford expects the policy rate to move from the current 6.3% to 6.8% by 2023 and sees a healthy CPI averaging 4% p.a. in the five-year outlook. Although agriculture and domestic consumption remain sizable drivers of economic growth, the country’s outlook is increasingly dependent on manufacturing and export trade.

MARCH 2019

21,385.16

2.9%

Nikkei 225

28,633.18

2.5%

Hang Seng

2,940.95

13.8%

Shanghai Composite

111.8

2.7%

Yen/Dollar

Data points through end of February 2019. Change represents month-over-month change.

GDP AND CPI HISTORICAL AND FORECAST TRENDS

Note: Forecast trends are based on the ‘base case’ scenario as of January 2019. Source: Oxford Economics

PRINCIPAL CONTRIBUTORS:
Shane Taylor
Juliet Cha
HOW LOW CAN THE DONG GO?

High currency volatility is often cited as a reason for avoiding certain emerging markets. In the case of the Vietnamese Dong, it is less an issue of volatility but rather its continued weakening which has precluded many international institutions from investing there. Overall, Vietnam’s economic fundamentals are solid and indeed its demographic drivers are promising (the national population is over 96 million and it has two cities – Hanoi and Ho Chi Minh City – each with populations greater than 7 million). However, part of its competitiveness is derived from its persistently weakening currency and although Oxford expects it to broadly stabilize for the coming five years at between VND 23,000 to 24,000 per USD, this is still well down from the pre-GFC average exchange rate for 2007 of VND 16,077.

VIETNAMESE DONG PER USD
Note: Forecast trends are based on the ‘base case’ scenario as of January 2019.
Source: Oxford Economics
LAND SALES SOAR AS STOCK MUST BE BUILT

Vietnam’s institutional investment-grade stock is small and thus it makes up a tiny share (less than 1%) of a market-weighted APAC core property allocation. But that stock will be boosted in coming years if the recent surge of sales of development sites (USD 1.2 billion last year alone) sees new pipelines of prime stock successfully deliver. The average annual transaction volume of standing assets across Vietnam for the period 2011-2018 was only USD 455 Million (RCA). Although shopping center sales dominated in 2013, most recent years see offices as the most-traded sector. Hotels are certainly an important share of the Vietnamese investment universe – understandable given its growth in tourism: there were over 15 million foreign tourist arrivals in 2018, up 20% YoY.

TRANSACTION VOLUME BY SECTOR
Note: Transactions include properties and portfolios USD 10 million and greater. Development sites/land sales are included.
Source: Real Capital Analytics 2018
OFFICE VACANCY RATES AROUND 5%

The white-collar services sector is small compared with the other APAC markets we cover more regularly, but as the country modernizes further, is sure to grow in importance. Around a third of office space absorbed in Hanoi last year (for leases greater than 1,000 SqM) was by co-working operators (CBRE). Still, rental levels (on a USD basis) remain well below pre GFC levels. Ho Chi Minh City (HCMC) enjoys low office vacancy across all grades and has seen a more impressive rental uplift: 2018 was especially strong with Grade A and B office markets delivering 15.8% and 10.8% YoY growth respectively (CBRE). Over 630,000 SqM of new office space is forecast to deliver by 2021 with nine office towers completing this year alone in HCMC.

PRIME OFFICE VACANCY RATES AND RENTS
Note: Grade A offices.
Source: CBRE ERIX
SHOPPING CENTRE RENTS FLATTEN

The Shopping Center vacancy rate in the Hanoi CBD at the end of 2018 was below 1% (CBRE) with vacancy in the suburban malls a little higher. Rental growth has been recorded in the prime retail assets of Vietnam’s capital since the GFC, albeit with rents flatter in the past three years. However, sixteen new projects set to deliver in 2019 may challenge these conditions. For Ho Chi Minh City, vacancy of 3% in the CBD and around 9% in the suburban areas (CBRE) has kept rental growth in check. An additional nine new projects set to deliver this year and next will likely give retail tenants plenty of choices for their space expansion plans. Brands from Taiwan and Hong Kong have been notable among retail expansions in Vietnam lately.

SHOPPING CENTRE RENTS
Source: CBRE ERIX
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This information is for our clients and investors only. Please note that the content of this report is for informational purposes only and should not be viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy and Research Team of CBRE Global Investors and are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public information that we consider reliable, but we do not represent it as accurate, updated or complete, and it should not be relied on as such.

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