- Green Growth
- Your Consultant
|The weakening local currency has added a new dynamic to the southern property sector’s outlook|
With more office space coming online, improved services and a greater awareness of true Grade A quality, 2011 promises to be a competitive and defining year for the market as a whole, writes Christopher Currie, associate director, Office Services, CB Richard Ellis.
The laws of gravity rang true for the Ho Chi Minh City office market as it was ranked second to Singapore in the list of fastest decreasing office markets over the last 12 months, according to a recent CBRE research paper (CBRE Global Office Rents - Global 50 Index - Fastest Changing).
From the heady days of early 2008 (when Grade A rents spiked as high as $70 per square metre per month excluding management charge and VAT) 2009 saw them tumble back to earth by on average around 30 per cent as a relative glut of new supply came to the market.
The Grade A market stock increased by around 75 per cent with the introduction of two new projects in 2009 and as these new landlords stared into the abyss in mid-2009 so the rents came down and incentives came to the table. Current monthly asking rents across the grades are in the following ranges for most buildings (base rent only excluding management charge and VAT per square metre): Grade A - $30-$40, Grade B - $20-$30 and Grade C $20.
In spite of the global downturn in 2009, the Ho Chi Minh City office market recorded a record positive absorption of 154,000 square metres as Vietnamese companies came to the party and upgraded to the more affordable Grade A&B stock.
Upward trend in 2010
Over the last year CBRE has seen monthly office enquiries pick-up to levels last seen in early 2008 as companies increase headcounts and turn bullish.
As at the end of the third quarter 2010, the Ho Chi Minh City office market had just under 1.5 million sqm of office space split (Grade A - 241,000sqm, Grade B - 585,000sqm and Grade C - 655,000sqm) with overall vacancy at around 15 per cent.
The next 24 months will see another one million square metres come online so that by the end of 2012, total supply could be around 2.5 square metres.
CBRE has registered positive absorption for the first three quarters of 2010 at 194,000sqm and so if this continues, total absorption for the year could reach around 250,000sqm. This increase is attributable to the positive GDP, lower rents, more flexible leasing terms and in general the positive sentiment towards Asia as a whole.
Demand in the market has been mainly circulated around the banking, insurance, oil and gas and education sectors but as we finish the year, most companies CBRE speaks to are increasing or planning to increase headcounts in 2011.
After being starved of new supply for so long, the new stock is now generally better quality in terms of floor efficiency and M&E and so CBRE sees signs of a shift from old to new as larger tenants grab the opportunity to consolidate fractured offices and plan ahead. For the existing landlords, a greater emphasis is being placed on the service levels/ management and in accommodating the needs of their larger tenants as they fend off the hungry new landlords.
Property management, parking, back-up power, IT, longer operational hours, floor efficiency, net floor measurements and a more flexible lease in terms of expansion/ contraction/ termination, continue to rank highly on tenants wish lists. In most cases and for the right covenant, landlords are flexible on these softer lease terms.
At present, pain thresholds from the 2010 landlords being tested so a further bump down in rents is on the cards through the last quarter of 2010 and into the first quarter of 2011 through lower base rents and increased incentives. The medium term outlook for rents is still fairly cloudy as even with 2.5 million square metres, Ho Chi Minh City office market is less than half of other regional centres.
One new trend hitting the market is the introduction of Vietnamese dong denominated lease agreements. As the US dollar has appreciated against Vietnamese dong have slid, so the tenants with dollar denominated lease agreements have had to bear this hidden cost. Now that the tables are turned, landlords are looking to introduce currency revisions each time rents are paid subject to percentage movements to protect their positions. This is a big change in the office market and it will be interesting to see how stringently this is enforced and also how the market finds a working balance, if the currency continues to slide.
The market has also seen another interesting issue evolve through buildings that have sold or 'strata-titled' portions of their office space. The strata-title tenants or (sometimes) investors have invariably had different leasing objectives to the landlords and as the building comes to market for lease, CBRE has been quoted different rental rates and commercial terms within the same building. This has given some landlords yet another headache to contend with as they try to maintain a certain level.
The traditional northern decentralised areas of the city have filled up close to capacity and now areas to the south in Phu My Hung and the west, District 11, provide the options for tenants seeking larger floor plates at lower rents
As the market continues to mature, so CBRE see a more transparent leasing process, higher service levels, net floor measurements and grading segmentation with clearer definitions of what is 'true' Grade A and what is not.
Every landlord certainly likes to think of their building as being 'Grade A' whereas in truth, there is only a handful. CBRE sees industry guidelines used in other markets being adapted locally and being introduced throughout 2011 to give a clearer picture for the market.
This year ahead promises to be another interesting one for the Ho Chi Minh City office market as more supply continues to come on stream and the new landlords do battle to fill their buildings. While difficult to predict exactly what will happen to rents, there appears to be more downward pressure as current supply is expected to outstrip current demand.