Dearth of offices squeezes firms

More and more Vietnamese firms are entering the race to find prime office space in the capital

It means that a total of 101,695sqm of Grade A office space in the surveyed area is occupied, or approximately 98.7 per cent of city’s total Grade A office space. The overall vacancy rate of Grade A office buildings in Hanoi was 1.26 per cent at the end of the quarter.
Although these figures are impressive and show how tight the market is, they do not fully reflect the real market situation. Further interpretation reveals that the vacant Metropole Business Centre will no longer be in the market, as it is being converted into hotel rooms. Therefore, the real occupancy rate in March was 99.7 per cent.
This thirsty market had been waiting for two new prime projects, the Opera Business Centre and Pacific Place. As soon as these projects were put into operation in March, the 18,820sqm leasable area was quickly absorbed, leaving a mere 300sqm vacant in Pacific Place, which is also expected to be taken up soon.
The first quarter also witnessed very high occupancy rates in the Grade B office sector, at 99 per cent on average. Total Grade B office space in the city is about 142,509sqm, of which 141,309sqm was occupied, leaving 1,200sqm in the Hoa Binh International Centre vacant.
Emerging tenants have no other choice than switch to Grade B instead of Grade A office space. A large stock of Grade B office space is expected to come on stream this year. However, it is forecast that the market will quickly absorb the new supply. As a result, vacancy rates in the next quarters will drop.

Rental rates on the boil
Grade A office buildings rents in the first and forth quarters of 2006 signify a rising momentum, with around 5 per cent increases on a quarter-to-quarter basis. The average asking rent of Grade A office space in the first quarter was $34.4 per square metre, per month as at year-end inclusive of service charges which range between $5 to $8 per square metre, per month.
The average asking rent of Grade B office space in Hanoi was $22.3 per square metre, per month at the end of the quarter, inclusive of service charges of $5 per square metre, per month.
The tightening of Grade A and B office supplies is being further exacerbated by the emergence of Vietnamese companies’ demand.
With Grade A office occupancy hovering at around 100 per cent and demand on the rise for top quality space, it is forecast that rentals will increase at least 10 per cent until the group of new Grade A office buildings, currently under construction, are completed and come on stream in 2008.

Future projects on the horizon
The areas of demand in the Grade A sector are likely to maintain a generally high rate of occupancy over the next one to two years and this is likely to maintain rents at their current levels. Much depends on broader economic issues and given the already high occupancy levels, an increase in foreign direct investment (FDI) could result in greater demand and thus upward pressure on rent levels during this period.
It is clear that there is a significant amount of Grade B office space due to come onto the market in the next few months. Big dips in the average occupancy rates must be expected due to the relatively small amount of total office space and the impact that the new projects will have on the figures as they enter the market. It should be noted that many of the new projects are not well located and may not influence the upper end of the market. The effect on rent levels will depend upon the general economic situation and the quality of these buildings, as many are locally developed and managed. It seems likely that there will be a downward pressure on rentals. In total, we estimate that Hanoi will welcome a new supply of 51,634sqm in office space this year, 72,600sqm next year, 92,138sqm in 2009 and 182,000sqm in 2010.
A relatively large amount of new Grade A office supply will appear in the next few years. The demand for Grade A offices is quite high, but no large empty office space is available. The Grade A office market is driven by multi-national companies coming to Vietnam and existing multi-national companies who want to increase their office space for further business expansion.

A rosy market outlook
The Grade A office leasing market in Hanoi is expected to remain under upward pressure until at least 2008, when a substantial quantum of new supply is expected to arrive, given strong demand from both local and multi-national corporate tenants, across all sectors. Despite the introduction of two new Grade A properties in early 2007, rents in the Grade A buildings in prime locations are expected to drive upwards in the next two year up to the completion of new developments.
We do not expect any downwards pressure on Grade A office rentals until the commencement of leasing and pre-leasing of the bulk of the supply, which is scheduled for completion in late 2008. However, we expect that Grade B office developments will experience slight downward pressure on rentals, given the substantial quantum of new Grade B developments coming on line in 2007.
These include Viglacera on Tran Duy Hung street, VIT on Kim Ma, providing more than 62,000sqm of new supply. It is expected that this new supply will satisfy the Grade B market in the short term.
However, they will not restrain the upward trajectory of Grade A office market rents during this interim period.
Taking a deeper look into the supply side of the market, we expect more high grade office projects to be invested in the long term.
There are market signals that more foreign and also local investors, closely eyeing the promising market prospects, are seeking opportunities or have set up initial plans to develop high grade office buildings in Hanoi. However, there are few chances of acquiring a prime location of sufficient size in the central business district for office building development. Market supply, therefore, is still limited especially for high grade projects in prime locations.
A number of macro factors are effectively boosting demand and serving to drive the Grade A and B office market in Hanoi. Robust economic growth, the strong influx of FDI into Hanoi, the country’s WTO membership and the expected expansion of the economy have consequently lead to the expansion of not only multi-national corporations, diplomatic missions, non-governmental organisations, foreign enterprises but also local companies.
Especially, with the rapid increasing number of FDI projects and the volume of accumulative capital, businesses are booming in Vietnam in all sectors and become a strong driving force for the property industry in Vietnam. Foreign investment, whether directly or not to the property industry, is surely a thrust to the office demand in Vietnam in coming years.
Notably, market demand not only grows in terms of quantity but also evolves towards a higher-quality demand, catching up with the international standards of professional working space and services.