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How do foreign firms enter Vietnam’s industrial property market?
07/08/2019 17:50 | Source: Tuoi tre Online
Foreign investors are actively seeking opportunities to invest in Vietnam's industrial real estate market through three main strategies: direct land acquisition, joint venture with local partner, and direct acquisition or sale and leaseback.

Over the past 20 years Vietnam has established itself as one of the Southeast Asia’s brightest manufacturing hotspots. A research by JLL reveals that in 1986, there was 335-ha of land dedicated to industrial parks. The figure quickly reached 80,000-ha last year. This strong 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. 

Because of the current trade tensions between US and China, many experts believe that Vietnam will benefit as enterprises look to redirect their supply chains away from China towards lower-cost Southeast Asian countries. At present, 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 speeded up the decision making process and urgency for businesses to relocate to Southeast Asian countries. 

Vietnam’s industrial property market
Over the past 20 years Vietnam has established itself as one of the brightest manufacturing hotspots in Southeast Asia region

With the current context, JLL says there is an increasing number of foreign investors who are actively looking for investment opportunities in industrial sector in Vietnam, with three following market entry strategies:

1. Direct land acquisition from industrial park operators

This has been the traditional way to acquire industrial assets in Vietnam since industrial park operators subleases the land to various tenants for remaining tenure. Besides, investors can also acquire directly from the government. For example, in 1994, Amata Corporation, a Thai industrial estates provider, who obtained the land from the Vietnamese government and established the 342-hectare Amata City Bien Hoa in the Southern province of Dong Nai.

2. Forming strategic joint venture 

Foreign investors have formed 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 Vietnam's Becamex IDC Corp. 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 infastructure for nearly 900 enterprises with a total investment of $14 billion.

Most recently, in May 2018, the launch of BW Industrial Development, which is a joint venture between global private equity fund Warburg Pincus and Becamex IDC Corp, is also another good example for this strategy. With more than 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 the country. 

3. Direct acquisition or sale and leaseback of operating industrial assets 

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 to acquire the Grade A warehouse unit for VND 725.1 billion (approximately $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. Stephen Wyatt, Country Head of JLL Vietnam, said: “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.”

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, according to JLL. 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.  

Other key challenges that Vietnam is facing include insufficient supporting infrastructure despite overall spending on infrastructure is relatively high when compared to other countries. Lots of 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. 

In order 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, Wyatt pointed out. In addition, more skilled labour force and incentives for innovation in terms of communication and technology must be taken into consideration. 

By Thuy An