Vietnam's fledgling cold storage market entices investors: Cushman & Wakefield

Cold storage in Vietnam has been an attractive investment channel over the past few years, with many companies looking for opportunities to enter this market. The Investor talks with Trang Bui, General Manager of Cushman & Wakefield, about the landscape of this field.

More customers are shifting to e-commerce, especially for purchase of food, and to better quality, organic food over health concerns in the pandemic time and post-pandemic. How will it impact Vietnam’s cold storage chain?

The Covid-19 outbreak has a significant impact on Vietnam’s cold chain logistics industry and cold storage logistics warehousing in various markets.

The home confinement period, through social distancing necessity, has spurred an explosion in online shopping during the period. People under the lockdowns increasingly shop online from their homes for fresh food items and home delivered meals. Many people who had never fully embraced online shopping before Covid-19, such as the older generation, must quickly adapt to and adopt this mode of purchasing.

The resulting greater utilization of online shopping, especially for daily necessities, further boosts online purchasing volume of fresh food and medicinal goods and products

Vietnam’s e-commerce market size is expected to reach $15 billion by 2025. The country is the second fastest growing e-commerce market behind Indonesia, according to an e-Conomy report by Google and Temasek. This strong growth has set high demand for e-commerce logistics.

What are other factors that will beef up the country's cold storage supply chain in the coming years? Will major transport infrastructure projects play a significant role?

Coupled with the spike in online retail and food delivery services, cold storage logistics has gained traction in recent years due to the growing opportunities for pharmaceuticals and vaccines imports and exports. The growing middle class with disposable income has more demand and access to quality and fresh organic products. As a result, the demand for cold storage increases, creating investment trends in cold supply chains and new development opportunities.

Cold storage is generally concentrated in clusters, mostly in industrial parks or near rivers and seaports. The two main branches of the domestic market are commercial and self-operated cold storage. The cold storage sector is more developed in the southern region, mostly due to the development of seafood and agriculture industries. Long An province has a high concentration of cold storage as it is well-linked to Mekong Delta as a food source. In addition, the province is near Ho Chi Minh City, which provides a huge population catchment.

The supply side of the cold chain for agriculture consists of three main channels. They are the import of finished food, seafood products and chilled fruits and vegetables in the domestic market. New free trade agreements, for example the deal with Europe, remove tariffs and trade barriers, stimulating food imports. Seafood cold storage supply is driven by the re-export market that has been growing in recent years. Domestic value chains are long and diverse, which result in constraints for both foreign and local manufacturers in building direct sales channels.

In the southern key region, Ring Roads 3 and 4, the highway to Moc Bai border gate and development of Cai Mep Port, Long Thanh International Airport and Hiep Phuoc as a city port for luxury commodities are all underway. Such major developments will bolster the sector in the coming years.

Why is the cold storage market in Vietnam still fledgling and fragmented, while there is so big demand for this service?

The cold chain market in Vietnam is still nascent and fragmented, valued at about $169 million in 2019. Given the boom in the sector in anticipation of the vaccine delivery, growth in seafood processing and consumer demand, it is expected to reach a value of $295 million by 2025, which translates into about 12% growth on an annual basis.

The management of the cold chain domestically is sub-par, which leads to inefficiency in meeting the demand and higher costs. In the medium to long term, infrastructure development is key for cold chain supply, including specialized logistics centers, and multi-modal connectivity.

Cold storage facilities make for promising industrial real estate in terms of profit margin, but the difficulty is huge capital costs. Please elaborate on this argument of Cushman & Wakefield in its recent report.

Cold storage has a much higher rental price than conventional dry warehouses. Depending on the type of cold storage equipment (chillers or freezers), rental rates can range from 50% to 100% or even higher. Warehouse rental rates for chilled and frozen products range from $45-90 per square meter. The rent for pharmaceutical storage is from $45-160 per square meter.

Companies compete on various parameters including warehouse capacity, number of pallets, fleets with modified and professional trucks, temperature range, network coverage and locations. Current occupancy rates of cold storage in HCMC and Mekong Delta are 95 percent, with the average rent being $0.88/pallet/day.

What is the taste among investors in the cold storage field in Vietnam, reflected in new projects and recent merger and acquisition (M&A) deals?

Cold storage generally concentrates in clusters, most of which are in industrial parks or within the zones of rivers and seaports. It is also essential to have stable and sustainable power supply. The adoption of Industry 4.0 will also help save operational costs and energy that will increase operational efficiency. This will help improve the return on investments in this sector.

More M&As are expected as more funds and fee developers in logistics real estate space offer build-to-suit solutions for specialized warehousing. Over the medium term, we will also see more warehousing facilities in tier 2 areas, as well as on demand cold storage to serve the evolving market. Cushman & Wakefield forcasts that by 2025, there would be over 500,000 pallets added to the market.

What is your advice to foreign investors who are eyeing to step into Vietnam’s cold storage market or expand their presence, to achieve success?

According to a Cushman & Wakefield report, there is already many liquid assets in emerging and developed markets in Asia. Wise investors are still eager to find opportunities to enter this niche, through new investment projects or M&A.

The cold storage market is expected to experience explosive growth alongside the latest advancements in vaccine development. Even after the pandemic is over, this growth rate will continue to be sustained by several factors, including increasing consumer demand for perishable foods and the advent of new and more advanced pharmaceuticals. While the industry is nascent and still considered a niche market, perhaps that will change in the next few years and become a key sector.

Due to the scarcity of each type of specialized cold storage, demand is likely to exceed supply, so the possibility of price increases will be higher. Although the investment cost in cold storage equipment is increasingly expensive due to the cost of installing insulation materials and machinery, the high rental price is a strong motivation for investors to be willing to build new cold storage projects. Investors and property owners can also consider converting ordinary warehouses into cold storage to exploit the difference in rental fees.

We also forecast that many M&A deals will take place, with investors who enter the market at the early stage before this asset class becomes popular receiving higher capital returns.