HO CHI MINH CITY MARKET
HOCHIMINH CITY – 04 January 2017 –
Despite being lower than the target level, Vietnam’s 6.2% GDP growth in 2016 is still in the top rankings amongst other Asian countries. In 2016, in addition to the pick-up in consumer CPI which was mainly caused by increase in prices for medical services and education, the inflation rate was no longer at the historical low seen in 2015. However, the inflation rate only increased by 1.83% y-o-y, which is within the safe, manageable range defined by the government. This year, in the context of the instability in international economies, Vietnam’s gold and oil prices will pick up along with the appreciation of the US dollar. However, this short term instability may not affect the country’s economy in a significant way. With the TPP on hold, attention is shifting to the ongoing negotiations for the RCEP (Regional Comprehensive Economic Partnership). The RCEP will involve 3 billion people in 16 countries and 28% of global trade and will present to Vietnam, as well as other developing countries in ASEAN, unprecedented opportunities to improve their countries’ economies.
Regarding the real estate market, in 2016, the Government and other related parties have issued or planned policies that may affect the whole market in many sectors. Most notably, the State Bank of Vietnam announced the 06/2016/TT-NHHH circular which will force developers to reduce their dependence on bank credit funds and, as a result, some developers may have to resort to other channels such as domestic investment funds, foreign investors and investment funds. This circular will pose challenges for small-scale developers in all segments of real estate. Other policies that are still under-consideration include taxing second houses or prohibiting the practice of using condominiums for commercial purposes. Should these policies be passed, the country’s real estate market could experience major changes. On a positive note, real estate credit is increasing healthily and strongly. According to the HCMC Real Estate Association (HoREA), property credit was up 14.2% over the past year while bad debt stayed at only 2.6% and may fall even lower in coming years when the bad debts of some ailing banks are acquired by the State Bank of Vietnam. Moreover, both FDI and overseas remittances strongly increased in 2016, which will support the real estate market in coming years.
2016 ended with a busy quarter. 9,145 units were launched in 28 projects across the city including 18 new projects. Total new launches in 2016 reached 37,419 units, a decrease of 10% y-o-y. The market is adjusting itself to a more balanced position where it welcomed a bigger proportion of mid-end units (48% in 2016 compared to 40% in 2015 in HCMC) and a smaller proportion of high-end units (30% in 2016 compared to 38% in 2015 in HCMC). In terms of location, the HCMC condominium market continues to expand to the East and the South. The East area took the lead from the South thanks to infrastructure improvements including Metro line no. 1, the Hanoi Highway extension, the HCMC-Long Thanh-Dau Giay Express Highway and the approval of the Long Thanh airport project.
In the last quarter, the number of sold units reached 11,941, an increase of 52% q-o-q and 11% y-o-y. 2016 recorded a total of 35,008 sold units, a decrease of 4% y-o-y. The number of sold units almost matched the number of new units offered for sale with the majority of new units coming from new projects. The mid-end segment continued to perform well with more than 15,270 units sold in 2016, accounting for more than 40% of total units sold. The average sales price in 2016 was recorded at US$2,104 psm, an increase of 4.6% y-o-y. Price improvements were seen in almost all segments though most notably in the mid-end segment.
Looking forward, Ms. Duong Thuy Dung, Director of the CBRE Research and Consulting department, noted: “Buyers are nowadays better-informed and more demanding, and they look for not only a home but also a community. On-time delivery is not enough; new projects should also have good facilities and offer a lively community.”
Supported by sound macroeconomic factors including positive GDP growth, a stable exchange rate and high inflow of FDI to Vietnam and especially to real estate from Korea, Japan and Singapore, the condominium market is expected to remain upbeat in the coming year. A total of 43,861 units are expected to be launched in 2017. Out of this total 1,627 will be luxury units from six projects at the heart of HCMC, which are expected to offer better brand positioning. The high-end segment will still account for a notable proportion of the market with over 13,000 new units.
In 2017, the market is expected to focus more on the mid-end and affordable segments, with nearly 40% of 2017 new launches being in the affordable segment. Local developers and their joint ventures have been very active in adjusting their products to meet market trends. Specifically, VinGroup plans to launch two affordable projects in District 9 and Binh Chanh District. An available land bank, improvements in connection roads and high demand in these segments are key drivers.
It should be noted that an increasing interest rate, the announcement of circular 36 and the end of the VND30,000 billion house mortgage package will reduce demand and sales momentum in the middle segments (mid-end and high-end). Improvements in infrastructure continue to support first-home buyers by providing easier connection between the CBD and suburban districts.
The market is expected to maintain a high absorption rate in the 2017-2019 period. The absorption rate for the affordable segment, which has historically ranged from 40% to 45%, is expected to reach nearer to 60% in 2017. As for the high-end segment, the high level of new launches and stricter legislation in funding may become impediments to sales momentum.
The luxury segment is forecast to maintain its current high absorption level at more than 50%. Limited land bank in the CBD for residential projects is a key factor that enhances the appeal of luxury projects. As prices of luxury projects in HCMC are still low compared to other cities in South East Asia, this segment is still attractive to the local well-off as well as to foreigners, whose home ownership rights in Vietnam were considerably relaxed in 2015.
In terms of price outlook, the luxury segment is expected to see a significant improvement of 7% y-o-y in 2017 thanks to the introduction of unique products with special designs and prime locations. In contrast, the affordable and mid-end segments will be relatively stable with a modest improvement of about 3% as buyers in this segment are sensitive to price changes. The high-end segment is expected to see price improvements of about 4% y-o-y.
Notes on CBRE condominium ranking criteria:
The asking price for land plots surged strongly this year, particularly in active areas including Thu Duc District, District 9, Binh Tan District, Binh Chanh District, District 12, etc. Asking selling prices in these locations were up an average of 20%-40% y-o-y. The main reason for the increase in asking prices is the completion of some under-construction infrastructure projects and thus, improved connectivity. However, it should be noted that these increases were was only in asking prices and may not reflect the true level of demand in the market.
Compared to land plots, the increase in selling prices of ready-built units was less significant. In 2016, HCMC welcomed 3,062 units from 13 new projects, a surge of 40% y-o-y. This set a new record not only for new supply but also for selling prices for the ready-built villa/townhouse market in HCMC. Suburban districts such as Thu Duc District, Go Vap District and District 12 which have seen limited activities for some time reported selling prices up by 15% y-o-y thanks to newly launched projects. Selling prices in District 9 increased by more than 10% y-o-y while District 7 was up by 2.5% y-o-y. In contrast, selling prices in District 2 decreased by almost 3% y-o-y due to new products in inferior locations targeted to lower budgets (Citibella and Palm Residences). In terms of absorption, the city sold 2,304 units in 2016, similar to 2015. The majority of sold units were in new projects.
In Q4 2016, the market welcomed two new projects: LaVila in Nha Be District (238 units) and The Pegasuits (69 units) in District 8. These two projects were almost sold out within a few months. In addition, Merita Khang Dien and River Park in District 9 with 307 units had soft launches and will be officially launched in 2017.
Looking forward to 2017 and beyond, with strong momentum from the current market, big developers are expanding their coverage to untapped locations and so we do not expect to see direct competition between them. However, as the absorption rate in these new markets is not guaranteed, we expect to see more small-scale projects coming online first to test the market. In addition, these new products will be less likely to be positioned towards the top-end of the price range and the average selling price will be diluted if new high-end projects to be launched in District 2 are excluded. In other well-established areas of District 9, Nha Be District and District 7, due to a lack of significant new projects, both selling prices and the absorption rate are expected to be stable for the next two to three years.
In 2016, HCMC welcomed five new shopping centres, one in the CBD and four in non-CBD areas, adding more than 192,000 NLA sm, an increase of 50% y-o-y. These new openings have introduced to the local market many new international brands in various categories from high-end fashion to restaurants, cafés and supermarkets. According to CBRE Research, 17 new popular international brands entered the HCMC market in 2016, triple the number in 2015. Zara with its first flagship store in HCMC was the most significant entry in 2016. Following the success of Zara, H&M and 7-eleven are two big names also considering expansion in Vietnam. Throughout the year we witnessed strong expansion of both local retailers, such as Vincom and Co.opMart, and foreign retailers, such as Aeon, Lotte, Ilahui Miniso, etc.
In Q4 2016, there was no new supply. As a result, the vacancy rate improved by 52 ppts q-o-q and by 197 ppts y-o-y to 6.8%. The vacancy rate improved most in the retail podium format thanks to the renovation of Oxygen Mall, previously known as The Vista Walk. In other retail formats, the vacancy rate was stable.
In terms of asking rental rates, in spite of only one new opening in the CBD area in 2016, the Saigon Centre Phase 2, average rents of Ground Floor & First Floor increased by 15.4% y-o-y. Prime locations, limited supply and the influx of many new brands are factors that leveraged the rental rate. Meanwhile, the average rental rate in non-CBD areas was flat in 2016; the rental rate increased by merely 1.2% q-o-q and 0.1% y-o-y.
Over the next three years, the city expects to welcome 500,000 sm NLA of retail space, 55% of which is under construction while the rest is under planning. Shopping centres will account for 75% of future supply and the remainder will be retail podium. Increasing future supplies in non-CBD areas (2017: Vincom Central Park and Su Van Hanh Shopping Centre and 2018: Crescent Mall Phase 2 and Riviera Point, to name a few) will dilute average rental rates, causing a decrease of 2% annually for the next two years. Not until 2019-2020, when new projects will be launched in the CBD (The Spirit Of Saigon and Tax Plaza), will average rents pick up again. If new projects are not considered, the rental rate in the CBD is expected to increase 2%-4% annually in the next two years while rental rates in the non-CBD areas will be flat in the same period. Regarding the vacancy rate, estimated substantial future supply in 2017 (180,000 sm under construction) and in 2018 (145,000 sm) will be likely to push the average vacancy up to around 8-11%. The vacancy rate is expected to go down again in 2019 thanks to limited future supply.
Regarding customers’ demand, people now put convenience as one of the top priorities in their shopping habits. As a result, 24/7 convenience stores, e-commerce, and modern residential retail podiums are expected to blossom in the next few years. Vincom+, a new retail format by Vingroup, is a good example of this trend. Vincom+ is similar to a mini-shopping centre locating at a residential building, with the majority of NLA allocated to supermarkets, food courts, entertainment and F&B. Looking forward, in addition to Thai retailers who have dominated the M&A market recently, Japanese, Korean, Chinese and other Western retailers are eyeing the Vietnam market due to its young population with modern lifestyles and increasing spending habits.
In 2016, CBRE noted that the average asking rent increased due to limited supply, and this was combined with strong net absorption and low vacancy rates for each quarter. Vacancy rates in 2016 for Grade A and Grade B office buildings are 4.0% and 2.8%, respectively. Grade A net absorption is recorded at 2,116 sm NLA while Grade B recorded 13,092 sm NLA. 2016 average rental rates are US$ 38 and US$ 21 for in Grade A and Grade B, respectively.
In Q4 2016, net absorption for Grade A and Grade B were recorded at 906 sm NLA and 285 sm NLA, respectively. This low net absorption from both Grade A and Grade B is reflective of the remaining limited supply being quickly absorbed before the next wave of new supply arrives in the near future.
The end of 2016 welcomed two newly completed projects: Mapletree Business Centre in District 7 and Ha Do Building in Tan Binh District. Tenants have already been in the process of fitting out in these buildings. This new 44,000 sm GFA will be fully in operation by January 2017. Q4 2016 also witnessed construction progress at SJC Tower and the Tax Center, two golden sites which had been inactive for some time. The projected completion year for these two sites is 2020, when they will add up to 83,000 sm GFA to the total supply.
Regarding office trends, co-working space is on the rise with Toong due to join the HCMC market in Q1, 2017 through partnership with CapitaLand. As of now, HCMC has recorded 10 existing co-working spaces. Two other large co-working space chains, Dreamplex and Up, are already on the move for expansion in the near future in HCMC.
Total supply in 2017 is expected to be 1,226,810 sm NLA, with Grade A accounting for 357,753 sm NLA and Grade B accounting for 896,057 sm NLA. Supply is expected to see a strong, steady growth with new spaces coming from both CBD and Non-CBD areas. On average, from 2017 to 2019, the market is projected to welcome 40,000 sm NLA per year.
The average asking rental rate is expected to enjoy an average stable growth of 1.5%, especially in the CBD area. The asking rental rate for Grade B is expected to become more competitive as new supply from both Grade A and Grade B enters the market.
CBRE forecasts the vacancy rate to stay relatively unchanged as the market steadily absorbs the new wave of both Grade A and Grade B supply in the period 2017 – 2020. On average, annual net absorption is expected to account for up to 86.4% of new supply.
Looking forward to 2017, the main drivers for leasing are expansion and relocation to newer buildings. Tenants in Grade A will continue the upbeat tendency of moving to newer buildings once their rental contracts have expired with tenants from Grade B quickly absorbing the available leasing areas left by Grade A tenants. Tenants will also expand their offices in the same building in which they are currently leasing or in newer buildings which they will relocate to. According to transactions recorded by CBRE, the highest demand for office space came from the Finance – Banking, Logistics and Technology sectors. As the startup scene continues booming in Vietnam, tenants will have a choice over traditional office spaces and business centers to co-working spaces. CBRE forecasts that older buildings will surrender old retail podium and difficult to lease office spaces to develop into either business centers or co-working spaces.