Want to bet on China+1? Try real estate
BUILD, and they’ll come. An 18.6 per cent post-pandemic vacancy rate means the adage is no longer true of office buildings in the US.
But it’s a different story half a world away in Vietnam. The real-estate industry nosedived last year in Hanoi and Ho Chi Minh City, too. But now, everyone’s waiting for a recovery, thanks to the country’s rising heft as the next factory to the world – a mini-China in the making.
Commercial real estate is bound to be valuable in an economy that has so little of it. Cushman & Wakefield estimates Grade A office supply in the country’s two major urban centres at 820,000 square metres (9 million square feet).
Yet, while the investment case is strong for the South-east Asian manufacturing powerhouse to start growing vertically, construction is mired in a crisis.
Last year’s government crackdown on bond sales by developers and the detention of a high-profile tycoon froze up credit, leading to the failure of nearly 2,000 property firms in just the first quarter of this year.
The worst may be over, however. Engineers are returning to Grand Manhattan, a 39-storey project in the heart of Ho Chi Minh City. Construction had stopped five months ago when No Va Land Investment Group ran out of funds after pouring concrete at floor 28.
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The resumption follows renewal of a loan from Tien Phong Commercial Joint Stock Bank after repeated interventions from Prime Minister Pham Minh Chinh to get the stalled real-estate industry moving again, Bloomberg News reported.
The timing couldn’t be more opportune. Even with the recent turmoil, putting money to work in Vietnam’s commercial real estate has been high up on the agenda of big-bulge Asian institutions: insurance and pension companies, and sovereign wealth funds.
CBRE Group’s 2023 Asia Pacific Investor Intentions Survey saw Ho Chi Minh City emerge as the third-most-attractive destination, right behind Tokyo and Singapore. This was the first time Vietnam’s most-populous city made it to the Top 3. Capital Hanoi came in at the ninth place, ahead of Seoul.
The property brokerage chalks it up to investors pursuing a “China+1” strategy. Beijing and Shanghai offer value after a 15 per cent drop in their office and retail property prices from the 2018 peak.
But VIP – Vietnam, Indonesia and the Philippines – look appealing, CBRE says, because of multinationals diversifying away from China. Such shifts give a boost to all kinds of real estate, from logistics and corporate offices to showrooms.
Last month, Apple chief executive officer Tim Cook officially opened the firm’s first two company-owned stores in Mumbai and New Delhi. It now makes almost 7 per cent of its iPhones in the country. Canadian pension funds are hunting aggressively in India, as is GIC, Singapore’s sovereign wealth fund. Mumbai came in at No 7 on CBRE’s survey on cross-border investment, ahead of Shanghai.
In general, though, Asian investors are wary of real estate right now because of high interest costs, an uncertain outlook for global growth and the risk of a contagion from mounting financial troubles in the US, where PacWest Bancorp has become the latest regional bank to wobble dangerously following the collapse of three rival California-based lenders.
There’s also the hangover from last year, particularly in China. By the end of 2022, Beijing’s draconian approach to containing Covid-19 infections had led to an impairment of a fifth of lender HSBC Holdings’ nearly US$17 billion commercial real estate exposure to the mainland.
A slightly bigger amount had turned sub-standard. Still, risks of defaults “could be fading on China’s reopening in 2023”, according to Bloomberg Intelligence analysts Francis Chan and Peter Lau.
Besides, plenty of opportunities in the region look reasonably safe from turmoil in the US. Singapore’s office market is resilient, and retail-focused real estate might do well as a return of tourists prompts malls to raise rents.
The end of Hong Kong’s pandemic-era isolation – in tandem with the mainland’s U-turn – has put the city back on the map. A weak yen is luring investors to Japan, where Singapore’s GIC bought a portfolio of logistics assets last month from Blackstone for more than US$800 million.
And then there is the search for supply-chain alternatives. Multinationals are seeking to reduce the risk of getting caught in the growing schism between Washington and Beijing, even though the threat of a US recession is complicating this shift.
Orders are still plunging at Vietnamese garment and shoe factories, but prospects are improving – particularly for electronics. Apple’s major contract manufacturer for MacBooks will set up a US$120 million plant in the northern province of Nam Dinh, becoming the first foreign investor in a new industrial park.
It’s just as well that Vietnam’s harsh credit conditions are easing as China+1 emerges as a key theme of Asian investing. No Va Land, which is bringing engineers back to complete Grand Manhattan, is trying to restructure its debt. Authorities seem to be in favour of such workouts to get funds flowing again into real estate.
After losing more than half its market value in 16 months, Vinhomes JSC, the country’s biggest listed property developer, has seen its stock climb 20 per cent since early March.
Short-term booms and busts are inevitable, but it’s way too early to worry about vacant offices and empty stores in Hanoi or Ho Chi Minh City. The median age of the population is 32 years, and only half of it would have urbanised by 2030. If Vietnam builds, someone will surely come. BLOOMBERG
The writer is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, The Straits Times and Bloomberg News.
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