VIETNAM'S property market, underpinned by strong economic fundamentals, will remain a bright spot among the regional markets. In 2007, its economy continued to attain one of the highest growth rates in South-east Asia, with GDP growth of 8.48 per cent. This was largely bolstered by foreign direct investments which topped US$20.3 billion in 2007, up from US$9.9 billion in 2006. The top nationalities to invest in the country were Malaysians, Singaporeans, South Koreans, Japanese and Taiwanese. Moving forward, new market players are likely to come from Russia, India and the Middle East.

Private real estate capital from regional and global investors has been pouring into Asia in recent years and Vietnam, which is considered a strong emerging market, will be on the radar screens of many regional investment funds. With the slowing US economy, developing countries have become the next best target for funds and investment houses to spread risk and diversify their portfolios.

There are still rich opportunities for investment and growth, especially with Vietnam's entry into the World Trade Organisation and the subsequent deregulation process.

Offices

The office sector saw strong demand, with barely any vacancies as space is quickly snapped up by tenants. There is a long waiting list for prime office space and vacancy rates currently average less than 2-5 per cent across the major areas of Ho Chi Minh City and Hanoi. Average rentals have surged by over 25 per cent and 33 per cent year-on-year, to stand at US$50 and US$55 per sq metre per month for Grade A buildings in Ho Chi Minh City and Hanoi, respectively. This is clearly a landlord's market. The tight supply situation is likely to ease with the completion of new prime office buildings. But due to construction lag, it is likely that tight supply will persist at least until new supply comes on stream in late 2009 and 2010.

Retail

The retail sector has also been active and will be interesting to watch, particularly with the deregulation of the local majority partnership rule. The total space available in the market is about 113,500 sq m. It is expected that the retail space available will double to 250,000 sq m by 2009. In both Ho Chi Minh and Hanoi, occupancy levels are extremely tight at 98 per cent and 95 per cent, respectively. The lack of prime retail space has caused the widening gap between average and prime retail space which stands at US$50-US$80 psm per month and US$120-US$180 psm per month in Ho Chi Minh City, respectively and US$25-US$30 psm per month and US$50-US$80 psm per month in Hanoi, respectively.

Now is an opportune time for local retailers to expand, as competition is still restricted with regulations in place. This is set to change with deregulation slated to take effect on Jan 1, 2009 when wholly-owned foreign subsidiaries will be allowed to operate in the country. This will no doubt herald the entry of new foreign retailers. There will be expansion at all levels of retailing from luxury brands to food and beverage as well as supermarket operators to big box retailers. Ho Chi Minh City's retail sector alone is forecast to be in the region of US$16.5 billion by 2010.

Residential

There is active construction activity in the Vietnam residential market. About 100 projects are under construction or are in the planning stages and a large number of these are expected to come onstream over the next three to four years. A significant number of these new residential projects are being undertaken by foreign developers, particularly from Indonesia, Malaysia, Singapore and South Korea. Some of these big names include Kumho Asiana and Daewon from Korea, Keppel Land, CapitaLand and GuocoLand from Singapore and Ciputra from Indonesia. Prices of high-end residential properties in Ho Chi Minh City and Hanoi have escalated by over 30 per cent year on year to around US$3,000 to US$5,000 psm and US$2,000 to US$3,000 psm in each of the cities, respectively.

Meanwhile, the under-supply situation and increasing influx of business travellers and expatriates have pushed the average occupancy of prime residential properties to about 90 per cent. This trend is expected to persist till new supply comes onstream.

Industrial and logistics

An improving legal environment, particularly with the adoption of investor-friendly policies such as the recent extension of land leases from the previous 50 years to the current 70 years, places Vietnam in one of the top positions for consideration by investors looking for long-term investment opportunities in this region.

On top of a more accommodating legal environment, the development of infrastructure will pave the way for a well-developed industrial and logistics sector which has been one of the star performers in terms of FDI injections.

Currently, approved FDI projects account for nearly 50 per cent of industrial investments, reflecting possible increases in demand for industrial space in Vietnam. Although not as sophisticated as other regional industrial markets, the rapidly improving Vietnamese industrial sector, backed by a young, well-educated population, is set to challenge its regional rivals when manufacturing firms seek suitable production bases.

In the key northern and southern economic zones, there are currently just over 20,000 ha of industrial land available. The current rental for 30-year leasehold industrial land stands at around US$35-US$80 psm while occupancy rates at most industrial parks range from 70-90 per cent. With most of the industrial parks experiencing high occupancy and rapid leasing activity, the government hopes to develop additional industrial space to reach some 70,000 ha by 2015.

Investment Quality grade investment properties available for transaction are lacking as reflected by limited en-bloc investment deals over the past few years. In the near term, it is likely that investors will look to other investment modes which work hand-in-hand with their investment and portfolio strategies such as development and joint-venture partnerships with strong local entities. With the lack of properties available for investment, investors are having to take on more risks by going into development rather than putting equity into completed or partially completed projects.

Hospitality-tourism The hospitality-tourism market is another interesting sector and can be lucrative for a developing country. Demand in this sector has largely been driven by business travel as well as increasing domestic and international tourists. Today, hotels in both Ho Chi Minh City and Hanoi achieve average occupancies of 80 per cent. However, during peak times these can often hit 100 per cent which in turn drives room rates to as high as US$300-US$500 per night from an average of US$100-US$220 per night.

There is still limited supply of quality hotels in the country. Vietnam still offers much beach front and resort development potential. Locations expected to receive attention in the next few years include Phu Quoc and Ha Long Bay and the smaller untouched provincial beach towns.

Vietnam's sound economic fundamentals will continue to attract more capital.Its advantage compared to regional markets - particularly closest neighbour Thailand - is its political stability and a strong economic outlook.

Heng Hua Thong is executive director, DTZ Debenham Tie Leung (SEA) Pte Ltd

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