Growing Pains: Investing in Industrial Real Estate in Vietnam – The Conundrum

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Foreign manufacturing investment in Vietnam is preferentially located in industrial real estate zones—areas specifically zoned for industrial property—whose developers have acquired, consolidated, and established clear titles to the land and installed utilities and infrastructure to support manufacturing investments. The great difficulty in obtaining clear title to land in Vietnam, government policies promoting manufacturing clusters and the advantages of ready-built infrastructure drive companies to invest in industrial space. 

Vietnam’s rapid economic development is anchored on converting previously agricultural land for industrial and commercial use. The complexities of acquiring, consolidating and converting hundreds, if not thousands, of small plots (the average agricultural plot size is around 2,000 – 3,000 m2 [0.2 – 0.3 Ha]), some of which are owned privately and others by the government, into an industrial real estate zone is a monumental task even for the most experienced developers with governmental support.  

Source: Ministry of Planning and Investment, 2020

Despite such complexities, the expansion of industrial real estate is key to further industrial development. Vietnam has 369 registered industrial real estate zones of which only 284 are in operation with the rest in some stage of development. The average industrial real estate zone occupancy rate is about 70%. There are industrial real estate zones all over Vietnam, but the largest concentration is in the Red River Delta, centered on the capital city of Hanoi in the north and in the Southeast around Ho Chi Minh City. These two regions combined account for 54% of all industrial property zones.

Industrial real estate zones are preferentially clustered in these regions because they possess attributes required for the successful operation of manufacturing facilities and service businesses:

  1. Proximity to the center of Vietnam’s major markets;
  2. High population densities with the largest pools of unskilled as well as skilled and managerial talent;
  3. Clusters of the most prominent universities and technical schools;
  4. Proximity to container ports and airports and supplier and vendor networks.

These attributes have led to surging demand for industrial real estate as companies seek low-cost suitable alternatives to China. While the Red River Delta and Southeast are home to the most zones, developers have not been able to keep up with demand, leading to an extraordinarily tight industrial real estate market. The average occupancy rate in the Red River Delta and Southeast is over 98%, driving up prices and constraining companies from finding an optimal location. This leads investors to short-list and negotiate with industrial zones in various stages of development, thereby creating risks and uncertainties—the very risks investors seek to mitigate by investing in industrial real estate zones in the first place.

Source: Ministry of Planning and Investment, 2020; investvietnam.gov.vn

Balancing Opportunity, Risk, and Uncertainty in Industrial Real Estate Investments

Short-listing an industrial real estate zone under development presents investors with both opportunities as well as risks. New industrial property zones and those under construction provide an investor with greater choices on plot location, geometry, size, infrastructure, and utilities access and availability of their industrial assets. Along with this opportunity comes a significant amount of risk because of Vietnam’s highly complex land regulations. Commercial and industrial property is often subject to regulations that are difficult to understand and difficult to implement.

Schedule Risk in the Industrial Real Estate Sector

The largest risk investors will face with zones under development is to project implementation schedules. All investment projects have schedule risks that must be mitigated, but these are largely within the investors’ control. Schedule risk is compounded when locating in a zone under development because of the regulatory uncertainties impacting their development schedule that nearly every industrial zone developer in Vietnam will encounter. Less professional developers may not be as forthright about the status of their land acquisition, necessitating additional time and expense for due diligence.

Completing the land acquisition for a zone typically takes 2-3 years if no significant issues are encountered in the process. Several developers have taken up to 10 years to complete this process. To manage cash flow, some developers purposefully acquire and convert land into commercial real estate and industrial property only when they have committed investors, a fact they may not reveal until after a formal commitment has been made and alternative locations have been eliminated wasting valuable time. Other zones may have acquired rights to privately-owned plots within the approved zone boundaries, but government-owned plots may not have been acquired. 

Regulatory Risk in Industrial Real Estate

Vietnam’s legal environment is constantly changing. Major new laws regulating the acquisition of land for industrial use, as well as for the construction of facilities, are typically revised once every five years and interim adjustments to implementing regulations are frequently issued. The recent promulgation of a new Law on Land by the Ministry of Natural Resources and the Environment (MONRE) has created such a conflict. Zones established when the old law was in effect were subject to one set of regulations guiding the acquisition of state-managed land from the government. The new Law on Land has changed some of these guidelines. Zones in the process of acquiring government land under the old law, but did not complete the acquisition, are finding they must restart the land acquisition process, thus significantly impacting their development schedules. Most industrial property zones are cobbled together from hundreds if not thousands of small government- and privately-owned land parcels zoned in multiple ways. Each type of land has its own rules for acquisition and conversion to industrial use. Changes in laws and regulations pertaining to one type of land may have an impact on an investor’s project schedule depending on its location within the industrial property zone.

Trust But Verify when Purchasing Industrial Real Estate

As with any major business decision, it is critical to do detailed due diligence on each short-listed site. Confirmation of legal status, compliance with the compensation and clearance process and the zone’s development schedule are key to any site selection. This is particularly important if you need to select a site in a zone under development as an industrial property or commercial real estate. Even the most reputable and experienced developers encounter obstacles in acquiring land and completing zone infrastructure and utilities due to unforeseen difficulties and regulatory change. Culturally, developers are not familiar with foreign investors’ need for transparency and hesitate to share these obstacles. So, building a good relationship as well as consistent communication are key. The only thing that is certain in Vietnam is uncertainty, so be prepared to spend time and resources to understand and mitigate risks to your project schedule and other factors.

What We Can Do

Tractus has been assisting companies to make informed decisions about where to invest and how to expand their business in Asia and beyond for over 25 years. Our partners and senior management leverage their experience running successful manufacturing and service businesses, bringing this commercial perspective to our client work. We have proven experience advising companies on their location strategy, helping them optimize their real estate portfolios, and identifying the optimal sites to support their company’s growth. We use a proven, integrated site selection, real estate and incentives negotiations methodology, comparing locations in a systematic and objective way that leads to a defensible result. Let us show you how we can support you to make your next assignment a success. 

Authors

Dennis J Meseroll is Executive Director based in the Bangkok office, while Tram Phan, Consulting Manager, and Ha Ngo, Analyst, are based in the Ho Chi Minh City office.


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