By Michael Tatarski

After 22 years in Vietnam,
Neil MacGregor has seen the property market impacted by everything from international financial crises to rapid economic growth and even a global pandemic. His position at the country’s largest real estate services provider gives him a front-row seat to the challenges and opportunities of this market.

What are the biggest trends you’ve seen in the property market?

One big change over time is that we’ve seen more sophisticated investors, both foreign and local, as the market has matured, and that’s led to a growing focus on institutional-type investment themes. In general, investors are looking much more closely at the total returns that they’re achieving, the rental yields, and rental growth, not just capital gains.

The industrial markets have seen a dramatic shift from speculative subdivision-oriented development where investors came in, developed industrial zones, put in the basic infrastructure, and then sold the land to the end users. In the last five years or so, it’s shifted to a more institutional approach of developing ready-built factories, ready-built warehouses, logistics properties, and, more recently, niche products such as data centers and cold storage. These buildings are developed for lease to achieve a rental return, as opposed to just starting infrastructure and subdividing the land.

We’ve also seen a movement away from residential developers focusing purely on Hanoi and Ho Chi Minh City to consideration of the suburban areas surrounding those cities as infrastructure has allowed for that, but also as demand has moved outside the core city areas. At the same time, there was also the development of the coastal property, which was primarily tourism-led initially, and Da Nang was a big part of that with early holiday home developments.

This is a difficult period for residential property, especially in and around Ho Chi Minh City, but what opportunities are there for investors?

The fundamentals of the Vietnam market remain extremely positive. If you look within Southeast Asia, Vietnam really stands out for a number of different factors. For example, its urbanization rate is only around 37%, compared to 60% in China. So, there’s still a long way to go in that urbanization story, and the related demand for housing, retail, healthcare, education, and everything that comes with that. And of course, also providing the labor force for manufacturing, which is the heartbeat of the economy.

The other big one is demographics. We’re going to be in a demographic sweet spot for the next two decades. For a lot of our investor clients, that’s a massive contrast with their home markets, particularly Japanese, but also Korean, Chinese, European markets, and the United States. They are looking for a hedge against their home market’s aging populations and see Vietnam as a growth market thanks to the demographic story.

And there is the growth of the middle class, which will continue to create demand for housing away from the multi-generational family home. This shift in demand for housing has happened all over Asia, and it’s only just beginning in Vietnam. This trend has a long way to run in terms of creating demand for housing at the more affordable end of the market.

There are other fundamental factors. For example, the government has to invest in infrastructure, or the economy is going to grind to a halt. Since that investment has to happen, it will also feed into the real estate story more generally, and the residential and industrial markets specifically.

There is a lot of long-term opportunity for investors in the Vietnam market, but currently, it requires a slightly longer-term, less opportunistic, or speculative outlook than in the past.

That suits certain investors, who will be very excited that the current situation could present opportunities they’ve not seen previously to enter the market on their terms, establish a real presence for the long term and develop more sustainable projects.

How has your client base changed over the years?

One significant shift is from mainly foreign clients to majority Vietnamese. I would say that as much as 70% of our client base is now Vietnamese. It’s not to say that the foreigners aren’t extremely important, but there have been more Vietnamese clients out there seeking our services, everything from research, development consultancy, valuation, leasing, property management, sales, and investment advice.

That’s been a big change, and we’re very proud of the fact that we can work with Vietnamese clients toward more sustainable models and hopefully avoid some of the issues that have happened recently.

Where do you see the different real estate sectors going in the next few years?

When it comes to residential, interest rates would have to come down, at least for the secondary market to gain momentum. For the primary market, if project approvals start to come through and new launches start to happen, there should be more momentum given the strength of the underlying demand. But the secondary market will struggle until interest rates come back to at least where they were a few years ago.

On the industrial side, manufacturing orders are extremely slow at the moment, and that’s creating negative sentiment. But a lot of manufacturers have to plan three to five years ahead, and those are the clients that we’re typically working with. So, for those diversifying away from China into the Vietnam market, [we’re] assisting them to find the right location for their businesses, assess transportation costs, labor costs and access to labor… all of these other issues, [in order] to make that selection for their own long-term growth. Orderbook issues could drag on for a while, but in all likelihood, it will be less than 12 months. So, we’re trying to work with clients looking beyond that period.

We’re also very active in the hospitality sector, and we’re monitoring that recovery very closely. We’re encouraged that the government has issued a new decree around holiday homes and condotel products, which we hope will get further clarity and lead to property titles being issued for holiday home products. This would create a much more sustainable market going forward and allow for better management structures so people can trust those markets, versus some of the speculative projects released in recent years.

What themes will drive future real estate investment and development?

ESG (Environmental, Social, and Corporate Governance) is a massive theme and is something that isn’t just talked about. The government has made net-zero promises that they will have to start following through on, while global corporations also have to now start reporting on their ESG activities. So that means that corporate office tenants will only be able to move into offices with green certifications, and developers will now only develop sustainable office buildings.

It will have to be on the agenda for developers going forward. If you’re a listed developer in Vietnam, from January 2024 you will have to report on your ESG activity. This will open up opportunities for the more for- ward-thinking developers to reposition existing buildings that might otherwise become redundant.

Aside from the ESG agenda, I think there will be much more focus on ensuring products are fit-for-market and phased sustainably, instead of being rolled out on a purely speculative basis. Expect more focus on community-driven development, place-making, and a generation of stable long-term returns on investment.

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