Two pressures of industrial real estate 2024

Forecasting the industrial real estate market next year, experts and research say that this is still a segment that maintains a stable development direction, with some bright spots, but there are 2 pressures gradually emerging.

First is the declining profit outlook. Accordingly, operating asset capitalization rates are under deflationary pressure due to high financing costs, short land tenures and competition from other markets with significantly lower rents in the Asian region.

Capitalization rate is a common measure in real estate investment, assessing the profitability and potential return on investment of a project. "Capitalization rates in Vietnam are currently increasing from 9% to 12% due to the increased supply of high-quality ready-built factories and warehouses across the country," said Alex Crane, CEO of Knight Frank Vietnam.

In its Q3 market report, JLL said that in the ready-built warehouse segment alone, over the next year, landlords will have to continue to offer more flexible and attractive lease terms to improve asset performance.

The second pressure is price competition compared to neighboring countries such as Thailand. The rental price of industrial land in the suburbs of Bangkok is currently at 82-164 USD/m2/lease term. This figure is much lower than that in the suburbs of Hanoi (80-250 USD/m2/lease term) and the suburbs of Ho Chi Minh City (95-280 USD/m2/lease term).

According to Mr. Crane, global minimum taxes and high logistics costs will be obstacles in attracting manufacturers to invest in Vietnam. Despite signing many bilateral and multilateral FTAs, rising labor and construction costs also partly affect Vietnam's cost advantage.

"Industrial and processing real estate are still key markets in Vietnam, but will face many challenges in attracting investment and filling up ready-built space in 2024," he predicted.

In the long term, experts are optimistic about the industrial real estate segment. The reason is that Vietnam's economy could grow by about 4.7% to 5% this year, according to the International Monetary Fund (IMF) and HSBC. As of November 20, the total newly registered, adjusted and contributed FDI capital of foreign investors reached 28.85 billion USD, up 14.8% over the same period in 2022.

Vietnam also has one of the strongest infrastructure spending commitments in the region. The data center market is also poised for transformation, depending on the easing of regulatory barriers and power infrastructure.

According to Savills Vietnam, Vietnam's data center market is among the fastest growing in the world. The country currently has 28 data center projects with a total capacity of 45 MW, from 44 service providers. The size of Vietnam's data center market is forecast to reach 1.04 billion USD this year.

In addition, the trend of acquisitions in the industrial and logistics real estate sector is expected to continue for many years to come. "That will bring many good opportunities for both tenants and foreign investors in both the short and medium term," Mr. Crane said.

In 2023, according to data from real estate consultancy Knight Frank (UK), the occupancy rate of industrial parks in Vietnam is positive. In the suburbs of Hanoi and Ho Chi Minh City, it is currently 78% and 92%, respectively. As a result, industrial land rental prices will increase sharply in the period 2022 - 2023, reaching 14% in the suburbs of Hanoi and 58% in the suburbs of Ho Chi Minh City.

Along with that, the ready-built factory and warehouse segment has been developing vigorously. This sector has attracted strong foreign investment capital since 2018, with the number of investors increasing 5 times. In the suburbs of Ho Chi Minh City alone, the supply of ready-built warehouses reached 2.1 million square meters, contributing to creating a market that favors tenants.

In the last three months of the year alone, the southern region is expected to welcome more than 460,000 square meters of ready-built warehouses, developed by BWID, LOGOS, Emergent Capital Partners and Cainiao, according to JLL. According to Knight Frank, the average rent for ready-built factories and warehouses is about $4.5/square meter/month in the south and $4.7/square meter/month in the north.