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A controversy over office rent forecast
Cushman & Wakefield recently forecast office rent would tumble by half in HCMC in the next one or two years. This is actually good news for tenants, especially those searching everywhere for affordable space at buildings in the downtown area to locate their offices.
But this forecast has sparked a controversy among major foreign real estate management, and consulting firms. They described this forecast as impossible. Office rent will remain high in years to come despite a slight downward adjustment induced by new office building projects.
How will office rent move?
At least three foreign property management and consulting firms in Vietnam, namely CB Richard Ellis (CBRE), Savills and Jones Lang LaSalle, have shrugged off Cushman &Wakefield's projection.
They share a view that office rent will remain firm or drop slightly rather than sharply because of high demand.
"We do not think rent will fall quite as dramatically as some are suggesting, particularly in the Grade A office sector," says Brett Ashton, managing director of Savills Vietnam.
He says there is office space available here but supply is not redundant to cause the rent to plunge as forecast by Cushman & Wakefield.
Toby Dodd, general manager of Cushman & Wakefield in Vietnam, says office rent in Vietnam will stabilize at US$30 per square meter for Grade A, US$20 for Grade B and US$10 at Grade C. These are the same as in regional cities such as Thailand's Bangkok, Indonesia's Jakarta, Malaysia's Kuala Lumpur and the Philippines' Manila.
"That's why I believe office rent in Vietnam will be lower", Dodd told the Daily after a seminar on real estate investment held in HCMC earlier this month by the European Chamber of Commerce in Vietnam (EuroCham) last week.
CBRE Vietnam's managing director Marc Townsend describes such a decline as a "collapse" if the office rent will go that way. But he concedes the current office rent is "extremely expensive" and is at least twice that in those cities.
"We do not see rental collapse," Townsend says, attributing the expensive rent to the biggest problem in relation to getting access to cheap land and infrastructure in Vietnam.
He also points out inflation, high construction cost and the "extremely difficult" chance of getting a license as other reasons. "That's the reason why Vietnam rents for hotels, serviced apartments and retail are more expensive than in the cities of the same size of population or less."
Ashton says the rent will depend much on the quality and location and management of each building. However, it will take time for the rates to come down though Savills predicted Grade A rents will reach US$100 per square meter by the end of 2008.
Townsend reveals the Kumho is looking to break a number of records in the rental market.
Ashton estimates the supply of Grade A offices currently stands at 75,000 square meters in HCMC and me latest rents, based on the most recent new leases in Grade A buildings, equate to some US$97 per square meter, inclusive of service charges, but exclusive of value-added tax.
Jones Lang LaSalle Vietnam says the limited supply has led the average net rental of Grade A space to rise to a new high of US$79.3 per square meter per month at the end of the second quarter of 2008, a quarter-on-quarter increase of 26% and a year-on-year rise of 94%.
Ashton says Savills believes Grade A rents over all, including existing buildings will settle at US$65-75 per net square meter next year. Meanwhile, the Grade B office rent will stand at around 35-45 per square meter given the expected new supply coming to market and Grade C at US$20-25 per square meter.
Andrew Brown, general director of Jones Lang LaSalle Vietnam, assumes the office rent will enter a period of stabilization in this regard. "Then we expect pricing especially for premium end office space will remain at current levels and or show some further moderate levels of growth off existing levels".
High demand vs undersupply
Townsend is seeing an undersupply because there will not be too much new office space of Grade A to be put into service in the near future. "Two or three large new buildings will go online in District 1 in the next 18 months".
He demonstrates there will be 31,562 square meters at the Kumho project, 27,660 square meters at the Centec Tower and 15,600 square meters at the Sailing Tower.
According to Jones Lang LaSalle Vietnam, the central business district (CBD) expects no new stock of Grade A office building until the Kumho Asiana Plaza and Centec Tower are completed. The company furthers the current supply is generated from expired leases of tenants that vacate space to move to less expensive buildings.
Savills figures show HCMC has 510,000 square meters across all grades and locations while there is 375,000 square meters of Grade A and B space in Hanoi.
Ashton says the office market last year was the exception, not the norm for HCMC. "Over the past 10 years, HCMC has seen an average of 25,000 to 30,000 square meters of office take-up per year. Last year, the take-up was 120,000 square meter, or four times the average".
Talking about the future supply, Ashton says the Kumho and the Centec Tower will represent a rise of 73%, and more competition will occur. "This means existing buildings will have to come down somewhat from current asking prices and all Grade A buildings will have to compete more fiercely given the new buildings coming to market," he says.
Brown of Jones Lang LaSalle Vietnam says the fundamentals of the HCMC office market remain healthy with limited supply and robust demand, especially for better quality office premises.
But life will likely be tough for the offices of Grade B and Grade C. "The mid and lower quality grade buildings in the market are likely to experience more fluctuation given greater choice and supply levels," Brown says.
Jones Lang LaSalle Vietnam predicts 119,000 square meters of new Grade B office space to be put into the market in HCMC in the next 12 months, giving potential tenants more options for lower-rent space.
Market trend and outlook
Ashton says supply and demand are the biggest decisive factors for office rents along with location and quality. Vietnam has registered more than US$47 billion in foreign direct investment in the year to date, and foreign firms will need to set up offices and the associated suppliers will see increases in their business over the medium term.
"Assuming Vietnam continues to increase its rate of committed capital from FDI, then demand will pick up again," he says. He elaborates the FDI companies generally take smaller office space when starting out while existing firms in Vietnam are waiting out the current economic uncertainty and a fall in rents before committing to a new building.
Townsend says CBRE sees sizeable new tenants in Vietnam and the potential for the Grade A office space because Grade B and Grade C buildings do not have big space.
"Definitely, many multinationals are not able to expand because the existing buildings are full... You see big multinationals are looking for bigger column-free space of 1,000-1,500 square meters at new buildings where there are better facilities," Townsend says.
Ashton says there are companies moving to the suburbs and other non-prime locations for larger floors, a better surrounding environment and lower rents. "For many companies, rent is the second largest outgoing after salaries, so the ability to reduce this cost helps the bottom line profits of a firm. At the current CBD rates, this makes even more sense".
Townsend says many companies try to stay in CBD to maintain their advantages. However, few tenants in quality office buildings are local companies, according to Jones Lang LaSalle Vietnam. Demand for Grade A office space for both renewals and new take-ups mainly comes from foreign companies operating in such industries as finance, and insurance, ICT and software, real estate, consumer goods and offshore sourcing.
Ashton notes much will depend on the overall economy in the next six months. "The banking sector needs a soft landing and needs to start lending again. Inflation must come down and lending rates with it because many local companies rely on bank loans to finance growth.
Ashton says if the economy goes that way, then demand will pick up and remain steady over the next 24 months though companies are taking a wait-and-see attitude at the moment.
VNN
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