Foreign investors show growing interest in Hanoi Grade A office

Hanoi’s Grade A office whose performance holds steady during Covid-19 and capitalization rate reaches up to 7% is gaining momentous foreign investor attention.

Capitalization rates for Hanoi Grade A office remain high

Demand for this real estate segment has remained stable despite impact of the Covid-19 pandemic while other real estate segments saw sizable decline, executives from Savills Vietnam has disclosed.

Ms. Hoang Nguyet Minh, Savills Vietnam Associate Director of Investment, attributed the sentiment to Vietnam’s increasing foreign direct investment (FDI) and growing demand.

"There are core factors that make Hanoi office one of the most attractive segments for overseas investors who are looking for sustainable investment in Vietnam real estate," Ms. Nguyet Minh said.

Hanoi’s economic growth rate of 3.3% in the first three quarters this year and the support of free trade agreements (FTA) will positively affect the market performance thanks to tariff commitments, high competitiveness, strong FDI and economic growth, Savills Vietnam explained.

The continuing US-China trade tensions will see more relocation of multinational manufacturing firms to Vietnam.

Hoang Nguyet Minh, Savills Vietnam Associate Director of Investment. Photo: Savills Vietnam

In addition, overseas tenants, particularly FDI enterprises are interested in high quality office space.

Overseas investors are experienced in developing international standard office buildings that meet foreign tenant requirements. This trend would help improve the occupancy rate when developments come into operations.

Compared to other kinds, office with typical 3 to 5-year tenancy agreements maintains steady cash flow. The occupancy rate of Grade A office in Hanoi is at around 90% for the past five years.

Another reason is high profit. Savills Vietnam said gross operating profit (GOP) is up to 30% for 5-star hotels and 50% for 3- and 4-star hotels in Vietnam but the rate for Hanoi office is up to 80%.

Growing interest in Hanoi office is driving up and the capitalization rate for Grade A office is 6-7%, according to the property consultancy.

Ms. Hoang Nguyet Minh said Hanoi is catching more investor attention from Singapore, Japan, and South Korea for several reasons, including rents in Hanoi office are lower than that in Ho Chi Minh City.

Grade A office rent in Hanoi’s central business district (CBD) is average US$43 per square meter (sqm) against US$60/sqm in Ho Chi Minh City.

The occupancy rate remains high while effective containment of Covid-19 has reassured investors that Vietnam is safe shelter for their investment. In the pandemic, transactions of Grade A office have been stable.

Matthew Powell, Director of Savills Hanoi. Photo: Savills Hanoi

Mr. Matthew Powell, Director of Savills Hanoi, emphasized that Hanoi remains an attractive market compared to other regional cities that have witnessed occupancy drop. Hanoi’s office occupancy rate reached 94% in the first three quarters this year, down 1% on-year, just behind the figures in Singapore and Ho Chi Minh City. This shows signs of strong post-pandemic recovery.

In the next two years, approximately 192,000 sqm from 17 projects will enter Hanoi office market, with the majority is Grade A supply in central parts. Notable projects include Century Tower to be launched in the fourth quarter this year, Vinfast Tower and BRG Grand Plaza in 2021, and Lotte Mall Hanoi in 2022.

The supply will also be from apartment building podiums. This together with extensive future supply may cause pressure on the average occupancy and rents for the next two years.

In the long-term, office developers should improve health, safety, and operational standards while effective management and more sustainable and greener design are also factors that will help investors gain more success, the executives said.